National Taxpayer Advocate Calls Out IRS On International Information Return Penalties

National Taxpayer Advocate Calls Out IRS On International Information Return Penalties

In a blog post on May 21, 2024, National Taxpayer Advocate Erin Collins called for the IRS to cease its systemic assessment of international information return penalties and for Congress to amend the Internal Revenue Code to provide taxpayers with a prepayment forum in U.S. Tax Court to challenge the assessment of these penalties.

Collins pointed out that, contrary to expectations, these penalties disproportionately affect lower- and middle-income individuals and small to midsize businesses. An array of penalties may be assessed against U.S. persons in connection with failure to report certain foreign assets and activities, including the receipt of gifts from a foreign person over a certain amount, ownership of foreign business entities or trusts, and the transfer of money or property to certain foreign persons. Taxpayers often don’t even know they have these information reporting requirements and are shocked when they receive penalty assessments from the IRS that may be completely out of line with any unreported taxes at issue.

While the IRS can abate these penalties if taxpayers have reasonable cause for failure to file, the IRS often doesn’t immediately consider these requests for abatement before assessing them. Instead, taxpayers are often left with the long, torturous, and expensive process of attempting to get these penalties abated after assessment.

Collins notes:

By systemically assessing penalties when taxpayers willingly come forward and file their late returns, the IRS discourages voluntary compliance. When taxpayers know that voluntarily filing is going to result in a crushing penalty that is going to be difficult and costly to challenge, how many taxpayers decide not to file and hope the IRS doesn’t find them?

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TAS Tax Tip: Why Do I Owe A Penalty And Interest And What Can I Do About It?

TAS Tax Tip: Why Do I Owe A Penalty And Interest And What Can I Do About It?

There are many reasons why the IRS may charge penalties on your tax account. The IRS is legally required, under IRC § 6601(a), to charge interest when you fail to pay the full amount you owe on time. Interest may also accrue on penalties. Interest, and any applicable penalties, will continue to accrue until you pay your balance due in full. Here are some of the most common penalties, information on why they may have been charged, and how to request penalty abatement (removal) if applicable.

First let’s talk about some common penalty charges on individual accounts, along with interest, and why the IRS charges them.

Common penalties include:

  • Failure to file – you didn’t file your tax return by the return due date or extended due date if an extension to file is requested and approved.
  • Failure to pay – you didn’t pay the taxes reported on your tax return in full by the due date of the original tax return. An extension to file doesn’t extend the time to pay, so you must pay your taxes by the original due date of the tax return even if you have requested an extension of time to file your tax return. In addition, the IRS may charge a failure to pay penalty if the IRS sends a request for payment and you fail to pay on time.
  • Failure to pay proper estimated tax – you didn’t pay enough taxes due for the year with your quarterly estimated tax payments, or through withholding, when required.
  • Bad check – your bank doesn’t honor your check or other form of payment.
Interest

The IRS is required to charge interest on any unpaid balance owed until it is paid in full. Learn more on the IRS’s Interest page, or view the latest interest rates.

How can I dispute IRS penalties?

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5 Most Expensive States For Millionaire Taxpayers To Live

5 Most Expensive States For Millionaire Taxpayers To Live

According to an article in The Kiplinger Report, the five most expensive US States to live in are California, Hawaii, New York, New Jersey, and the District of Columbia.

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NY Gov. Kathy Hochul Wants To Spend $2.4B Taxpayer Money

NY Gov. Kathy Hochul Wants To Spend $2.4B Taxpayer Money

According to an article In Natural News, New York’s Governor Kathy Hochul wants to use more taxpayer money for illegal immigrants in the state, particularly in New York City (NYC). She recently proposed another $2.4 billion for illegal immigrants after spending $1.9 billion on “migrant care” last year.

Hochul and NYC Mayor Eric Adams had previously agreed to allocate $1.1 billion for illegals that have made their way to the city, but the costs have now doubled.

According to reports, the money is expected to go toward National Guard deployment, short-term shelter services and relief centers at state-funded housing sites that include Creedmoor Psychiatric Center, Randall’s Island and Floyd Bennett Field. (Related: SANCTUARY OVERLOAD: Texas sends more buses full of ILLEGAL IMMIGRANTS to Democrat-controlled sanctuary cities.)

The state will also continue to provide “humanitarian aid” for NYC, which has seen an influx of more than 160,000 migrants in recent years. The migrant spending plan came as part of a $233 billion budget proposal from the governor’s office that will kick off months of negotiations with legislative leaders.

Hochul did not tackle the issue in her State of the State address this year, and the word “migrant” wasn’t mentioned in her detailed 181-page policy plan book. Recently, she unveiled a plan to provide shelter services, legal assistance and more for asylum-seekers, and reiterated calls for the federal government to provide more assistance to the state.

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Foreign Information Penalties: Provide Taxpayers Their Rights Before Assessment

Foreign Information Penalties: Provide Taxpayers Their Rights Before Assessment

International information return penalties are often thought of as primarily affecting rich people or multinational corporations with significant overseas assets. This is not true. Taxpayers – many of whom are lower- and middle-income individuals, small and midsize business owners, and immigrants – face significant and potentially life-changing penalties, even when they voluntarily comply, for failing to meet obscure and complex foreign information reporting requirements.

As I have discussed in prior blogs and my Annual Report to Congress, these penalties overwhelmingly impact lower- and middle-income individuals and small and midsize businesses who voluntarily come forward. For example, the IRS assesses 71 percent of individual IRC § 6038 penalties against lower- and middle-income taxpayers (those reporting under $400,000 in income). Likewise, it assesses 83 percent of systemic business IRC §§ 6038 and 6038A penalties against small and midsize businesses. These penalties can be huge. For instance, in the foreign gift context, the average penalty for 2018-2021 was more than $235,000 for taxpayers who reported $400,000 or less in income. Many of these penalties bear no relation to any underlying taxable income or liability.

Courts continue to litigate whether IRC § 6038(b) gives the IRS the authority to assess foreign information penalties and whether it can take administrative collection actions against taxpayers. These issues will take time to resolve with finality. (See Farhy v. Commissioner (Tax Court opinion and D.C. Circuit Court of Appeals opinion) and Mukhi v. Commissioner).

The IRS and Congress can and should act now to fix the unfair, draconian penalty regime taxpayers experience with these international information returns. I continue to advocate for the IRS and Congress to apply these penalties in a fair manner by providing taxpayers their rights prior to assessment of the penalties.

What Is the Problem?

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Last In, First Out (LIFO) Inventory Method: Pros And Cons

Last In, First Out (LIFO) Inventory Method: Pros And Cons

Inventory valuation is an accounting process used by companies to assign value to their inventory. It determines the cost of unsold goods at the close of an accounting period and plays a critical role in calculating the cost of goods sold (COGS) and the gross profit for the period.

The main reason for this process is to assign a monetary value for a company’s inventory items at the close of a reporting period. There are several methods used for inventory valuation. Each method affects the financial statements differently, especially under varying market conditions.

Advantages of LIFO

The LIFO (Last-In, First-Out) accounting method assumes that the inventory items most recently purchased are the first ones sold or used, which means that the COGS is calculated using the most recent inventory costs, leaving older inventory costs in the ending inventory balance.

Tax Savings & Cash Flow Improvement
    • LIFO can lead to lower cost of goods sold (COGS) during inflation.
    • LIFO can result in lower taxable income in times of inflation because it matches higher current prices with current sales, thereby reducing reported profits and tax liabilities.
    • Cash flow can be improved by deferring taxes since LIFO reports lower profits in times of rising prices.
Disadvantages of LIFO

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Joint Committee On Taxation: Overview Of The Federal Tax System As In Effect For 2024

Joint Committee On Taxation: Overview Of The Federal Tax System As In Effect For 2024

INTRODUCTION
This document,1 prepared by the staff of the Joint Committee on Taxation (“Joint Committee staff”), provides a summary of the present-law Federal tax system as in effect for 2024. The current Federal tax system has four main elements: (1) an income tax on individuals, estates, trusts, and corporations (which consists of both a “regular” income tax and, in the case of individuals and certain large corporations, an alternative minimum tax);2 (2) payroll taxes on wages (and corresponding taxes on self-employment income) to finance certain social insurance programs; (3) estate, gift, and generation-skipping transfer taxes; and (4) excise taxes on selected goods and services. This document provides a broad overview of each of these elements.

Several aspects of the Internal Revenue Code of 1986 (the “Code”) are subject to change over time. For example, some dollar amounts and income thresholds are indexed for inflation, including the standard deduction, tax rate brackets, and the annual gift tax exclusion. In general, the Internal Revenue Service (“IRS”) adjusts these numbers annually and publishes the inflation adjusted amounts in effect for taxable years beginning in a calendar year before the beginning of such calendar year. Where applicable, this document generally includes dollar amounts in effect for 20243 and notes whether dollar amounts are indexed for inflation.4

In addition, many provisions in the Federal tax laws are temporary or have parameters that change over time according to the statute. For simplicity, this document describes the Federal tax laws in effect for 2024, as of the date of publication, and generally does not include references to provisions as they may be in effect for future years or to termination dates for expiring provisions.5

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Sales Tax Audits: What To Expect And How To Prepare

Sales Tax Audits: What To Expect And How To Prepare

Sales tax audits are standard for businesses and can be a source of stress and anxiety for many business owners. However, with proper knowledge and preparation, you can confidently navigate a sales tax audit.

What To Expect During a Sales Tax Audit

A sales tax audit examines a company’s financial records to ensure it has properly collected, reported, and remitted sales tax to the appropriate tax authorities. Auditors typically review sales records, purchase invoices, exemption certificates, and other financial documents to verify the accuracy of the business’s sales tax filings.

Auditors may also interview key personnel to better understand the company’s sales tax processes and procedures. Additionally, auditors may perform on-site inspections of the company’s facilities to verify the accuracy of the reported sales and ensure compliance with sales tax laws and regulations.

How to Prepare For A Sales Tax Audit

Preparation is vital when it comes to a sales tax audit. Here are some tips to help you prepare for an upcoming audit.

1. Maintain Accurate Records

Keep detailed records of all sales and purchases, including invoices, receipts, and exemption certificates. Having organized and accurate records will make the audit process much smoother.

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How Is Software As A Service(SaaS) Treated Under State Tax Law?

How Is Software As A Service(SaaS) Treated Under State Tax Law?

A very important and often misunderstood area in the sales tax arena is the taxability of cloud-computing, cloud-based services, etc., collectively often referred to as Software-as-a-Service (or SaaS). The moniker alone is enough to start the state tax conversation down an interesting path.

The Basics
When we work with clients to determine how something should be taxed, we start with a few basic questions and then work from there.

Has nexus has been created?
This includes looking at both the physical presence as well as an economic presence. Following the U.S. Supreme Court’s June 2018 ruling in South Dakota v. Wayfair, many states enacted economic nexus statutes which require sellers to collect and remit sales tax in those states based on sales or transactional thresholds. In this process we also look at when nexus was created based on physical presence or economic nexus.

Is the product taxable?
Once nexus is established, the sale of tangible personal property by a retailer to a customer in a given state is generally taxable. We start there, and then review the transaction to see if there are any exemptions that would cause the sale of the property to not be taxable.

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Using FEIE: Bona Fide Residence Test For U.S. Expats

Using FEIE: Bona Fide Residence Test For U.S. Expats

The Foreign Earned Income Exclusion (FEIE) is a significant tax benefit for U.S. expats, allowing them to exclude a portion of their foreign-earned income from U.S. taxation, which is a crucial aspect of expat taxes. To qualify, expats must pass either the Physical Presence Test or the Bona Fide Residence Test. This article focuses on the Bona Fide Residence Test, providing updated information for 2024 and detailing everything you need to know to claim it.

WHAT IS THE BONA FIDE RESIDENCE TEST?
The Bona Fide Residence Test is a of two methods for American expats to qualify for the FEIE. To qualify, expats must pass either the Physical Presence Test or the Bona Fide Residency Test, which focuses on economic and social ties to a foreign country, uninterrupted residency, and subjective qualifications. This test is more subjective and often harder to pass, as the IRS scrutinizes your intentions and ties to the foreign country.
HOW DO YOU QUALIFY FOR THE BONA FIDE RESIDENCE TEST?

To qualify for the Bona Fide Residence Test in 2024, you must meet several criteria:

  1. U.S. Citizen or Resident Alien: You must be a U.S. citizen or a resident alien.
  2. Uninterrupted Period: Establish residency in a foreign country for an uninterrupted period that includes an entire tax year. This means that you must live in the foreign country for a continuous period that covers the entire calendar year.
  3. No Intentions to Return: Demonstrate that you have no immediate plans to return to the U.S. and that you have strong ties to the foreign country.
  4. Strong Ties: Establish strong connections to your foreign residence, such as employment, property ownership, family presence, and social ties.

Meeting these criteria helps determine if you qualify as a bona fide resident abroad for IRS purposes.

WHAT ARE THE COMMON PITFALLS?

Here are some common pitfalls to avoid:

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The When And Why Of Cost Segregation Studies

The When and Why of Cost Segregation Studies
What are the Benefits of a Cost Segregation Study?
There are a number of benefits associated with a Cost Segregation study and its various applications. To the extent you have taxable income, a study will help mitigate some or all of the tax liability for the current and possibly future years. This is most often achieved through the acceleration of depreciation deductions and the resulting tax deferral. The study will identify assets that are eligible for Bonus Depreciation treatment.

When prepared correctly, these studies can also be an excellent reference tool to deploy the various strategies available to property owners as contained in the Tangible Property Regulations with respect to expensing of certain incoming improvements as well as taking advantage of the Partial Asset Disposition (PAD) deduction.

Also, in light of the Tangible Property Regulations, a comprehensive study such as, Fixed Asset Review, can also properly document all assets that might be subject to disposition in the future.”

To learn more about using cost segregation throughout the Life Cycle of Real Estate, and the additional benefits that may be available please visit our Life Cycle of Real Estate page.

When Should a Cost Segregation Study be Conducted?

The timing of a cost segregation study can have a significant impact on the potential benefits and tax savings. Here are some ideal scenarios when a study should be conducted:

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Multi-Million Dollar State Lotto Jackpot Winner Finds Tax Advisor On TaxConnections This Week

Multi-Million Dollar State Lotto Jackpot Winner Finds Tax Advisor On TaxConnections This Week

Yesterday, I had a wonderful experience to share with readers of TaxConnections Blogs. As I was sitting there at my desk a call comes in from a man who has just won tens of millions of dollars in a State Lottery jackpot. He was excited to the moon and back and wanted to find a tax advisor to counsel him how to handle all the wealth he was in the process of receiving from the State Lottery. For the record, he came to www.taxconnections to search for an Advisor as he had not made any determination yet on whether he would take the prize in one lump sum or payments over multiple years.

For obvious reasons, protecting his privacy is our number one consideration so I will obviously not release his name or state nor exact amount of prize. Since I have never won a lottery myself, I am curious how this all  works, and he may very well share his private experience with me so that I may share this with all of you. Perhaps, being in the backseat will bring you joy and hope of what wonderful things can happen for you. The reason I am even talking about this story is that it brings great personal joy to me knowing that a site we have worked so hard to build is making important life-changing connections for people.

Over the years, as we have spent millions of dollars and thousands of hours building this wonderful platform and connecting tax professionals and companies; connecting tax professionals and taxpayers; connecting taxpayers with tax advisors in tax accounting firms; and boutique tax law practices with taxpayers; and now we are helping small to medium size tax practices sell their practices to buyers (we are building a team of trusted and vetted Advisors on our M&A Transaction Advisory Services team). Contact me if interested to be an Advisor selected to our M&A Team to receive referrals. Every one of these encounters has to do with the connections we make for tax professionals and advisors and technology on transactions. TaxConnections is a proven Jackpot Winner connector platform.

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