Tuesday, December 11, 2007

AT&T division will pay millions to settle cellphone tax

AT&T Mobility, a unit of AT&T Inc., has agreed to pay as much as $76 million to settle a cellphone-tax lawsuit brought by Missouri municipalities against wireless carriers operating in the state, The Wall Street Journal reported.

The municipalities assert that they can levy on cellphone service a tax normally applied to utilities and traditional "landline" phone companies.

Verizon Wireless settled the lawsuit last September for $31.5 million. Both Verizon and AT&T agreed to start collecting the tax from their customers.

Monday, December 3, 2007

Security firm challenged on whether guards are contractors or employees for tax purposes

A congressional leader is looking into Blackwater Worldwide's practice of paying its guards as independent contractors and not withholding taxes, the Wall Street Journal reported today.

Rep. Henry Waxman (D-Calif.), chair of the House Oversight and Government Reform Committee, wrote in an Oct. 22 letter to Blackwater that he believes the company "may have avoided paying millions of dollars in Social Security, Medicare, unemployment, and related taxes for which it is legally responsible," according to the Journal.

Blackwater, which provides security for the U.S. government in Iraq and elsewhere, said its tax policy follows the law.

Monday, November 26, 2007

States and IRS join forces to crack down on employment-tax violations

The IRS recently signed information-sharing agreements with agencies in 29 states as part of an increased effort to uncover employment-tax violations.

One of the major issues is whether companies are correctly classifying independent contractors. Unlike for employees, companies don't withhold Social Security, payroll taxes or other taxes from independent contractors' pay.

The states that have signed the agreement so far are: Arizona, Arkansas, California, Colorado, Connecticut, Hawaii, Idaho, Kentucky, Louisiana, Maine, Massachusetts, Michigan, Minnesota, Nebraska, New Hampshire, New Jersey, New York, North Dakota, Ohio, Oklahoma, Rhode Island, South Carolina, South Dakota, Texas, Utah, Vermont, Virginia, Washington and Wisconsin.

Wednesday, November 21, 2007

Bush nominates new IRS chief

President Bush will nominate Douglas Shulman, vice chairman of the Financial Industry Regulatory Authority, to be commissioner of the Internal Revenue Service, the White House announced.

Previously, he was vice president of Darby Overseas Investments and chief of staff of the National Commission on Restructuring the Internal Revenue Service.

Linda Stiff has been acting commissioner since April when Commissioner Mark Everson resigned to become president and chief executive officer of the American Red Cross.

Monday, November 12, 2007

Nonprofits must meet new tax filing requirements

New rules require even the tiniest nonprofit to file disclosure statements online with the Internal Revenue Service by May 1, 2008 or face losing their tax-exemption.

The rules introduce a category of Form 990 filing called the 990-N, which applies to organizations with annual revenues from $1 to $25,000.

Bob Ottenhof, chief executive of GuideStar (guidestar.org), which posts reports on charity finances, told the New York Times that, "Most nonprofits are complying with the rules. The problem is with those whose primary goal is not providing charity, but using charities for personal gain or to avoid taxes improperly.”

Friday, October 12, 2007

Trial of former KPMG executives set to begin

The trial of three former KPMG executives and an attorney on tax fraud charges is scheduled to begin Oct. 23.

"A victory for the government could bolster its broad probe into abusive tax shelters," says The Wall Street Journal. "An acquittal may cause the government to re-think its strategy in future tax-shelter cases."

For background on the landmark case and a discussion of its impact, see the Journal.

Monday, October 1, 2007

Senate committee reviews derivatives and hedge funds

The U.S. Senate Finance Committee is examining offshore hedge funds' use of derivatives as a way to avoid withholding taxes on U.S. stock dividends, The Wall Street Journal reported today.

The U.S. Treasury loses more than $1 billion in potential tax revenue each year through this practice, the Journal said. The finance committee review is part of an overall examination of the taxation of hedge funds and is in the preliminary stages.

Monday, September 17, 2007

Legality of derivatives for tax avoidance questioned

The Wall Street Journal provides an inside look in today' s paper at the evolution of derivatives as a way for hedge funds with off-shore operations to cut taxes, using the work of Lehman Brothers Holdings as a case study.

"Internal Lehman emails reviewed by the Journal reveal bankers searching for the line between smart tax planning and improper tax avoidance. In the end, according to the emails and to people familiar with Lehman's business, the bankers and their lawyers concluded that it was a business worth pursuing," the Wall Street Journal says.

The Journal reported in July that the Internal Revenue Service is seeking information from Lehman and Citigroup Inc. about certain trades. Other firms expect to receive similar inquiries.

Tuesday, September 11, 2007

Senate investigators seek details on companies' tax-cutting transactions

The Senate's Permanent Committee on Investigations has sent letters to 30 companies seeking information on certain tax-cutting transactions and arrangements, The Wall Street Journal reported.

The investigation appears to have been sparked by disclosures required by a new accounting rule known as "FIN 28."

The Journal quoted one letter as requesting the companies to "describe any United States tax position or group of similar tax positions that represents 5 percent or more of your total [unrecognized tax benefit] for the period, including in the description of each whether the tax position involved foreign entities or jurisdictions."

Senate investigators also want to know what tax professionals and law firms were involved in tax-cutting transactions on which companies spent at least $1 million for legal fees or other costs.

Tuesday, September 4, 2007

Customers of tax evasion website get temporary reprieve

A federal appeals court judge temporarily blocked a court order that required the operator of a tax evasion website to provide the government the names and identifying details of people who had obtained information at the website on how to stop federal tax from being withheld from their paychecks, according to the New York Times.

Judge Peter W. Hall set Sept. 18 for oral arguments on the issue.

Saturday, September 1, 2007

IRS offers closing agreements in municipal bond arbitrage cases

The Internal Revenue Service has announced a new Voluntary Closing Agreement Program (VCAP) to address violations of federal tax law on arbitrage investment restrictions. The violations are related to non-fair market value purchases of forward-float investment agreements used in advance refundings of tax-exempt municipal bonds.

This program will be available to municipal bond issuers who wish to correct such violations. Resolution terms described in this program are only available until March 1, 2008. Failure to correct a violation could result in a related bond issue being deemed “arbitrage bonds,” which lose their tax-exempt status.

Thursday, August 30, 2007

Website shut down for selling instructions on how to stop paying taxes

A website that sells materials stating that individuals can legally stop paying taxes has been shut on the order of a federal judge.

“The First Amendment does not protect speech that incites imminent lawless action,” Judge Thomas J. McAvoy, a senior judge in the Northern District of New York, said in his Aug. 9 order.

The New York Times reported that McAvoy also ordered that the names, addresses, telephone numbers, e-mail addresses and Social Security numbers of every person who received materials on how to stop paying taxes be turned over to the government.

Judge denies IRS request for Textron work papers

A federal judge in Rhode Island ruled yesterday that the Internal Revenue Service didn't have a right to tax-accrual work papers belonging to aerospace and defense contractor Textron Inc., the Wall Street Journal reported.

The case involves a "sale in, lease out" (SILO) deal Textron made in 2001. In 2004, Congress outlawed future so-called SILOs. The following year, the IRS said it would begin presuming that past SILO transactions violated tax laws.

U.S. District Court Judge Ernest C. Torres wrote that the papers were protected by "work product" privilege, as "the work papers were prepared 'because of' anticipated litigation with the IRS."

Tuesday, August 28, 2007

Sole proprietors blamed for portion of U.S. tax gap

Nearly two-thirds of U.S. sole proprietors underreported their net business income for the 2001 tax year, according to a recently released report by the General Accounting Office.

The report, "Tax Gap: A Strategy for Reducing the Gap Should Include Options for Addressing Sole Proprietor Ownership," says IRS data also indicate that sole proprietors misreported around 57% of their business income for that year.

The IRS estimates that $68 billion of the $345 billion gross tax gap for 2001 was due to sole proprietors.

Saturday, August 11, 2007

Pope will condemn tax evasion, tax havens

Pope Benedict XVI is working on a doctrinal pronouncement that will condemn tax evasion as “socially unjust,” The Times of London reports, citing Vatican sources.

The Times says the pontiff, in his second encyclical, "will denounce the use of 'tax havens' and offshore bank accounts by wealthy individuals, since this reduces tax revenues for the benefit of society as a whole."

The encyclical - the most authoritative statement a pope can issue - will focus on humanity’s social and economic problems in an era of globalization.

Thursday, August 2, 2007

IRS releases report on steps to improve voluntary compliance with tax laws

The Internal Revenue Service today released a report that reviews the agency's strategy to improve voluntary compliance with tax laws and help close the "tax gap."

"Reducing the Federal Tax Gap: A Report on Improving Voluntary Compliance" recognizes the importance of having a multi-year research program that will assist in understanding both the scope of noncompliance and the reasons for it.

The gross tax gap was estimated to be $345 billion in 2001. After enforcement effects and late payments, the number was reduced to a net tax gap of approximately $290 billion, the IRS said.

IRS rules youth sports club must withhold taxes from coaches' pay

The Internal Revenue Service has reached an agreement with a Connecticut youth soccer association that requires the league to treat coaches it has hired as employees rather than independent contractors, according to the New York Times.

The Fairfield United Soccer Association pays $2,500 a year to several dozen coaches who have high-level soccer skills. The group now will have to withhold income taxes from those payments. The Fairfield association also agreed to pay $11,600 in back taxes.

The case is seen as having major implications across the country in youth sports where volunteer parent organizations hire skilled coaches for their elite teams.

"For 20 years, all of these coaches have been reported as 1099 employees for everybody," Jay Skelton, the Fairfield group's president, told the Times. "If you talk to 100 clubs, I guarantee almost every one, if not all, would declare these guys as independent contractors."

"Unfortunately, we became the test case," he said.

Tuesday, July 24, 2007

Big tax break for corporations failed to create promised jobs

President Bush and Congress gave companies a big tax break two years ago, allowing them to repatriate billions of dollars in foreign profits and pay only minimal taxes with the justification that companies then would create more jobs in the U.S.

But the companies didn't create many jobs, reports the New York Times in a front-page article July 24. Instead, drug companies, which were the biggest beneficiaries of the program, have laid off tens of thousands of workers. And they "are once again using complex strategies, many of them demonstrably legal, to shelter billions of dollars in profits in international tax havens, according to their financial statements and independent tax experts," says the Times.

"With a few narrow exceptions, the drug companies are supposed to be paying as much as 35 percent of their worldwide profits in United States federal taxes," says the Times. "In reality they pay much less."

Transfer pricing is one way they can lower their U.S. tax bill, and it is one of the biggest challenges for tax enforcement. "Outsiders have a difficult time determining if companies have properly assessed the value of patents, trademarks and other intangible properties" for transfer pricing, says the Times.

Thursday, July 19, 2007

IRS investigates derivatives to determine whether designed solely to avoid taxes

The Internal Revenue Service has requested data from Citigroup Inc. and Lehman Brothers Holdings Inc. to determine whether complex derivatives trades they put together for hedge-fund and other clients were set up primarily to avoid taxes, the Wall Street Journal reported today.

Citigroup and Lehman Brothers have received "information document requests" (IDRs) from the IRS relating to the use of derivatives to avoid withholding taxes on U.S. stock dividends, according to the Journal.

The story noted that the IRS inquiry comes as the agency conducts "a broader inquiry into a practice that is common among some securities firms, which for years have pitched clients on these transactions using names such as 'yield enhancement,' 'dividend arbitrage' and 'tax efficiency' trades."

Congress also is looking at tax advantages taken by wealthy entities, such as private-equity firms -- and the individuals who profit from them to determine whether changes in tax laws are needed to close loopholes that allow them to pay less taxes than they should.

National Taxpayer Advocate makes recommendations to Congress

Congress should require the IRS to adopt a long-term research strategy to figure out how taxpayers can be convinced to comply voluntarily with tax regulations as part of its efforts to close the "tax gap," the National Taxpayer Advocate's office recommended in a report delivered to Congress today.

"Even as Congress directs the IRS to address specific areas of noncompliance, Congress should require the IRS to adopt a long-term research strategy that focuses not only on 'closing the tax gap' but also on understanding what it takes to encourage taxpayers to be voluntarily compliant and how to change taxpayer behavior," wrote Taxpayer Advocate Nina Olson in the report.

The report, which is required annually by law, sets out three main objectives for the advocate's office: improve taxpayer services; ensure taxpayers' rights are protected in the IRS's debt collection initiative; and make the IRS's "offer in compromise" program accessible for taxpayers unable to pay their full tax bill. Many taxpayers have been unable to use the program because they are unable to make the required 20 percent down payment, according to the advocate's report.

The National Taxpayer Advocate's Report to Congress - Fiscal Year 2008 Objectives also provides statistical information and analysis of taxpayer issues.

Monday, July 16, 2007

Judge drops charges against 13 in KPMG tax-shelter case

A federal district court judge today dropped all charges against 13 former KPMG executives in the largest criminal tax-shelter fraud case ever.

Judge Lewis A. Kaplan wrote that he had to dismiss the charges because prosecutors had violated the defendants' constitutional rights when they pressured the accounting firm KPMG to quit paying their legal fees.

He said the charges against three other KPMG defendants would stand because they hadn't shown that KPMG would have paid their defense costs if the government hadn't interfered in the matter.

In 2005, the government accused 17 former KPMG executives and two others of selling illegal tax shelters, depriving the U.S. Treasury of at least $2 billion in revenue. One executive pleaded guilty and is cooperating with the government.

Charges against KPMG were dismissed in January after it paid a $456 million fine.

For more information, see the New York Times story.

Thursday, May 24, 2007

Japan joins other countries to track tax avoidance and abusive tax transactions

Japan has accepted an invitation to join the Joint International Tax Shelter Information Centre (JITSIC), where members exchange information to track tax avoidance and abusive cross-border transactions.

In addition JITSIC has decided to open a second office in London in fall 2007.

JITSIC, formed in 2004 by Australia, Canada, the United Kingdom and the United States, plans to broaden its focus. A press release issued by the IRS said that the group will share "best practices on risk assessment and other key areas of interest," and increase the "transparency of cross-border transactions in order to create a level playing field for taxpayers who are voluntarily compliant."

Friday, May 4, 2007

Countries need to exchange information to thwart tax evasion, Senate committee told

To fight offshore tax evasion, the U.S. needs to improve the exchange of information with other countries, several witnesses told the Senate Finance Committee at a hearing on May 3.

Senator Max Baucus (D-MT), the committee chairman, said the US can't track where taxes are being evaded because the government can't keep up with the speed of international trade, the International Tax Review reported.

"The heart of the problem is that the Treasury, the IRS, and American institutions know far less than they should," he said.

To read the statements of Baucus and Sen. Charles Grassley (R-IA) and the witnesses at the hearing, see the finance committee website.

Thursday, May 3, 2007

IRS curtails audits of tax-haven users

Congressional investigators have found that the three-year limitation on conducting a tax audit is causing the IRS to curtail prematurely audits of people who use tax havens, reports the New York Times (a story carried by the International Herald Tribune on May 3). In some cases, the time limit dissuades agents from even opening an audit because it can't be finished on time.

In a report released May 3, the Government Accountability Office found that I.R.S. agents are so hobbled by “dilatory tactics” by offshore taxpayers and other problems that it takes almost two and a half years to complete a typical audit.

The IRS reporter that almost $300 billion in investment and business income was moved out of the U.S. in 2003. Analysts with the Joint Committee on Taxation have estimated that the annual outflow has shot to more than $400 billion since then.

Underreporting income also is a problem, costing the government about $300 billion a year. Democratic lawmakers say the government could be losing tens of billions of dollars a year from offshore tax evasion.

The GAO found that offshore audits routinely become bogged down by stalling tactics by taxpayers, difficulties in getting financial information from foreign institutions and the technical complexity of many offshore transactions.

Audits can be pursued for more than three years, but agents have to meet tough requirements to do so. The Times said that IRS agents' findings can be dismissed and the agents reprimanded if the unpaid taxes turn out to be smaller than expected.

Thursday, April 26, 2007

Congress, Bush call for crackdown on tax scofflaws

Congress is pressuring the Internal Revenue Service to do a better job of finding those who should be filing tax returns but haven't done so, while President Bush wants to impose stiffer penalties, says The Wall Street Journal (April 25, 2007. Subscription required.)

"Those who owe the IRS a tax return but fail to file are doing more than just breaking the law," said
Senate Finance Committee Chairman Max Baucus, a Montana Democrat. "They're draining our economy of vital resources that we need to pay for health care, education and even tax relief."

Under the president's plan proposed earlier this year, an individual who willfully fails to file tax returns in any three years within a five consecutive year period would be subject to a new criminal penalty if the total tax liability is at least $50,000. The president's proposal would classify such a failure as a felony. If convicted, an individual could face a fine of as much as $250,000, imprisonment for as much as five years -- or both.

If this proposal becomes law, "it will raise the stakes considerably for those charged with failure to file, particularly for professionals, such as lawyers and accountants, who have their licenses at stake," Mark Matthews, a former deputy IRS commissioner, told the Journal .

Thursday, April 19, 2007

Treasury Secretary says closing tax gap difficult

Treasury Secretary Henry Paulson said trying to close the "tax gap" -- the difference between taxes owed and taxes paid -- can't be done without "Draconian and painful requirements on all taxpayers." Paulson testified before the Senate Finance Committee on April 18, 2007. His dim view cannot have cheered lawmakers who want to collect these unpaid taxes (estimated by the IRS at $345 billion a year) as a way of finding additional revenue without raising taxes.

Assistant Secretary For Tax Policy Eric Solomon also testified before the Committee. He said that tax gap results from a variety of errors, including non-filing, underreporting of taxes, or underpayment of taxes. He estimated that over 80 percent of the gross tax gap is attributable to underreporting of tax (including underreported income or overstated deductions and credits). Over 40 percent of the gross tax gap is attributable to underreporting of net business income by individuals (affecting both individual income and self-employment taxes).

A Wall St. Journal (subscription required) article published on April 19, 2007 says that Finance Committee members expressed frustration with the Bush administration for failing to push aggressively for better tax compliance with federal tax laws.