Large Taxpayers still on IRS Radar Near-Term.

The Internal Revenue Service will continue to have a presence with the nation's largest taxpayers despite its plans for a gradual move away from a model where examination coverage is often determined by a taxpayer's size, IRS Large Business & International Commissioner Heather Maloy said April 18.

Her comments came while discussing the vision for a new audit process that eventually may shift some resources away from Coordinated Industry Case (CIC) taxpayers, first unveiled by IRS Deputy Commissioner for Service and Enforcement Steven Miller at the end of March.

“We will always have some type of presence among companies with the highest assets and the highest income. We are going to have to ensure the compliance of this population,” Maloy said on a webcast sponsored by PricewaterhouseCoopers LLP, Washington, D.C.

In response to questions from Kevin Brown, a principal in PwC's tax controversy and dispute resolution practice, she said, “I don't think CIC taxpayers should expect in the near term that there won't be any type of IRS presence.”

The Supreme Court Declined Review of Former Corporate Officer's Liability for Sec. 6672 Penalties - Excise Taxes.

The Supreme Court has declined to review a decision of the Fifth Circuit that the president/CEO of a defunct airline was a responsible person who willfully failed to remit excise taxes. The Fifth Circuit rejected the taxpayer's claims that he relied on counsel in paying other creditors before IRS and that a post-9/11 law extending the date of payment excused payment altogether.

Background. Under Code Sec. 6672(a), if an employer fails to properly pay over certain taxes, including transportation excise taxes, IRS can seek to collect a trust fund recovery penalty equal to 100% of the unpaid taxes from a "responsible person," i.e., a person who: (1) is responsible for collecting, accounting for, and paying over payroll taxes; and (2) willfully fails to perform this responsibility. In determining whether there is "willfulness" for purposes of Code Sec. 6672(a), the courts have focused on whether a taxpayer had knowledge about the non-payment of the payroll taxes, or showed reckless disregard with respect to whether the payments were being made.

Facts. Michael Conway founded and operated National Airlines, Inc. (National), and was National's chief executive officer (CEO), president, and chairman of its board of directors during the tax periods at issue (quarters ending Sept. 30, 2000; Sept. 30, 2001; and Dec. 31, 2001). National began flying passengers in '99, but was under bankruptcy protection by December of 2000 and ceased operations at the end of 2001. When National stopped doing business, it had reported but failed to pay transportation excise taxes for the tax periods at issue of $1,832,501.01, $3,497,448.32, and $4,803,626.85, respectively.

Evidence showed that Conway knew of the unpaid excise taxes for the third quarter of 2000, at the latest, when National declared bankruptcy. Further, he knew of the unpaid taxes from 2001, at the latest, on Sept. 22, 2001, when Congress passed the Air Transportation Safety and System Stabilization Act (the Act) giving airlines a deferral of time within which to pay their excise taxes.

Conway was an authorized check signer on each of National's checking accounts, ran National's day-to-day operations, continued to receive his salary (the highest in the company) after knowing of the unpaid taxes, and personally paid, authorized, or acquiesced in the payment of millions of dollars to non-IRS creditors. Evidence further showed that he had the authority to determine which bills were paid. Conway admitted that the excise taxes collected by National weren't segregated into separate bank accounts.

In National's bankruptcy, IRS filed an administrative claim for over $11 million, most of which reflected the unpaid excise taxes from 2001. National never objected to the claim. The Chapter 7 trustee allowed IRS's claim in its entirety.

On or around Mar. 14, 2003, IRS notified Conway of its intent to assess trust fund recovery penalties against him, which he timely appealed on May 9. IRS rejected his appeal and made its assessments against Conway under Code Sec. 6672 on Mar. 28, 2006.

Conway argued that the Act converted the unpaid excise taxes from trust funds to short-term loans, effectively making the government a partner with the airlines, and that he didn't pay the excise taxes based on counsel's advice. He also argued that he wasn't a responsible person, and that he didn't act willfully.

District Court sides with IRS. The district court found that the facts clearly showed that Conway was liable as a matter of law-he was the chief individual responsible for the overall business of National, he was its CEO and president, he was an authorized check signer, and he could hire and fire employees-and rejected his argument that he relied on counsel as "conclusory and disingenuous." It further found that he acted willfully, as shown by evidence that he authorized payments to creditors other than IRS after learning of the unpaid taxes, and rejected his argument that National's bankruptcy created an encumbrance on the available funds that prevented him from making payments to IRS.

The court also considered, and ultimately rejected, his argument that the Act excused payment of the excise taxes, finding that there was no indication that Congress intended to do anything more than defer their payment. The Act and accompanying IRS guidance unambiguously provided for an extension of time to pay, and not forgiveness of, the excise taxes.

Appellate Court decision. The Court of Appeals for the Fifth Circuit affirmed the district court's decision, agreeing that Conway was a responsible person (both before and during National's bankruptcy) who willfully failed to pay taxes.

Conway argued that he had reasonable cause for his failure to pay taxes, based on (i) reliance on the advice of counsel, (ii) the Act, (iii) the lack of unencumbered funds to pay the taxes, and (iv) his belief that National had fully paid the excise taxes. However, the Fifth Circuit easily rejected his arguments. The only advice of counsel in the record was the CFO's advice that National close its current bank accounts and open new ones as a debtor in possession, which fell far short of establishing reasonable cause. The Act didn't, as Conway argued, authorize National to use the withheld taxes as working capital. Further, he failed to show that the funds paid to non-IRS creditors had legal priority over the unpaid excise taxes, and any good faith belief by Conway that the taxes would be paid was insufficient to defeat willfulness.

No further review. On Apr. 16, 2012, the Supreme Court refused to review the decision of the Fifth Circuit in Conway.

FL TAX ALERT: USE TAX ON MANUFACTURERS / FABRICATORS INSTALLING TPP OUT OF STATE

MANUFACTURED / FABRICATED TANGIBLE PERSONAL PROPERTY INSTALLED INTO REAL PROPERTY IS SUBJECT TO FLORIDA USE TAX EVEN WHEN INSTALLED OUTSIDE FLORIDA.

Florida is not known for having many manufacturing or fabricating companies, but every single manufacturer / fabricator that we have is extremely valuable to the local and state economy, and particularly to our precarious job market. The state of Florida is regularly trying to attract more manufacturing companies by offering numerous tax incentives.

So it will likely surprise you that the Florida Department of Revenue has taken a very aggressive position that is likely to drive manufacturing and fabricating companies away from our great state (or possibly out of business all together).

Does your company (or your client's company) manufacture or fabricate tangible personal property which is then installed as real property improvements, such as cabinets, elevators, screened porches, fabricated steel, bleachers, custom stairs, solar panels, or other similar items?

Do some of these products get installed into realty outside the state of Florida?

If so, then you should prepare for a tax shock.

PostedBy James Sutton on Apr 19, 2012 5:54am PDT

Ex-BDO Seidman Partner Favato Gets 18 Months for Tax Crimes

Stephen A. Favato, a former partner at New York-based auditor BDO Seidman LLP, was sentenced to 18 months in prison for two tax crimes related to helping a client falsify his returns.
Favato was sentenced in federal court in Newark, New Jersey, where a jury convicted him in August 2010 of one count of obstructing the administration of Internal Revenue Service laws and one count of aiding the preparation of a false tax return. He faced as many as three years in prison on each count. He was acquitted on one count of tax evasion.

Prosecutors showed jurors that Favato, formerly a partner in BDO Seidman’s office in Woodbridge, New Jersey, advised client Daniel Funsch to include false items on joint tax returns in 2002, 2003 and 2004, according to a statement by the Justice Department and Internal Revenue Service. Favato gave advice that“enabled Funsch to fraudulently deduct his personal yacht expenses as business expenses,” according to the statement.

Funsch, chief executive officer of Intarome Fragrance & Flavor Corp. in Norwood, New Jersey, pleaded guilty in 2006 to conspiracy and tax evasion, court records show. Funsch testified as a prosecution witness against Favato.

Favato’s attorney, Alan Zegas, didn’t immediately return a call seeking comment.
After Favato’s indictment in April 2009, he was placed on a leave of absence, BDO Seidman spokesman Jerry Walsh said in an e-mailed statement at the time of his conviction. A month later, his partnership interest was terminated, Walsh said.

The case is U.S. v. Favato, 09-cr-237, U.S. District Court, District of New Jersey (Newark).

Bloomberg

IRS Issues Final Rules on Reporting Interest Paid to Nonresident Aliens

The Internal Revenue Service issued final rules April 17 on the reporting requirements for interest on deposits maintained at U.S. offices of certain financial institutions and paid to nonresident aliens.

The regulation (T.D. 9584) will affect commercial banks, savings institutions, credit unions, securities brokerages, and insurance companies that pay interest on deposits.

The regulation applies to payments of interest made on or after January 1, 2013. It becomes effective April 19, the date it is published in the Federal Register.

Software Has Enabled The Tax Code's Slide Into Madness

Ecerpts from Forbes

It occurs to me that our current insanely complex tax rules are made possible by technology. Yes, computer software makes filing easier (both for professionals and civilians). But that may be the problem.

The relative ease of filing, made possible by programs such as Intuit’s TurboTax, also makes it easier for Congress to write incomprehensible tax law.

Have you ever read, for example, Form 6251, the paperwork millions of middle-class households must complete just to figure out whether or not they owe the dreaded Alternative Minimum Tax? The IRS instructions for the form are 12 pages long.

In truth, if voters actually had to navigate this gibberish, we’d have a revolution that would make the tea party look like the League of Women Voters. But we don’t. In 2009, 92 percent of us got help, either from a third-party preparer or tax software, the IRS estimates.

In this way, technology both inoculates us from much of the complexity of tax filing and reduces compliance costs. But, more importantly, it immunizes the politicians from the consequences of their decisions that lead to this madness.

Tax complexity isn’t just about the number of forms and their incomprehensible instructions, no criticism intended towards the folks at the IRS who write them. They do the best they can, given the loony law Congress hands them.

The real price of complexity is the very opaqueness of the Tax Code itself. Because we don’t understand the law, we are convinced we are paying more than we owe and that everyone else is paying less.

Yet, tax software allows politicians to add ever more complexity, which we accept with little complaint. Think about the Buffett Rule endorsed by President Obama. The version debated in the Senate this week would create yet another minimum tax that would result in even more complex forms. But, of course, the households making $1 million or more who’d owe this tax would likely never see the forms. They’d just pay the accountant.

Happy tax day.

Best International Tax Structure for a U.S. Business

Most foreign countries require a local corporation to run a business.

But there is a problem. The IRS denies the foreign tax credit and a deduction of a business loss to the privately owned businesses. Without the foreign tax credit, you will pay tax twice on the same profit. First in the foreign country and again in the USA.

England, Scotland, most of Europe, China and Mexico are restrictive in letting a foreign business into their country. America is not this way because states’ rights. These countries require you to incorporate in their country.

Back in 1996, the IRS issued the “check the box’ regulations which allow some foreign entities to elect to be treated like a domestic LLC. If the election is made, then the entities are disregarded if there is only one owner. With more than one owner they are partnerships. If elected before business begins, this is a good tax structure, but not the best legal structure for asset protection (in the United States).

However, most foreign corporation used in Europe, Asia and Latin America are often not eligible of the check the box election. These are known as “Per Se” corporations. Here is the cause of the double taxation, loss of tax losses and loss of the foreign tax credit.

The American business must file the complex Form 5471 reporting the controlled foreign corporation subpart F income. Few CPA’s are experts in this field. So, you may need a consultant, like me. The solution is to find a method to allow the foreign corporation to elect Sub Chapter S and file a simple Form 1120S and not the Form 5471.

These foreign corporations cannot elect Sub Chapter S. Thus, the foreign tax credit is trapped inside the corporate shell.

The Department of the Treasury now allows a dual resident corporation. Your foreign corporation can also be a domestic sub chapter S corporation. The complex Form 5471 is replaced by the simplifier Form 1120-S (the return for a subchapter S corporation).