Maryland Now The First To Tax Big Tech’s Ad Revenue

According to The New York Times, State politicians, struggling with yawning budget gaps from the pandemic, have made no secret about their interest in getting a bigger piece of the tech industry’s riches.

Now, Maryland’s lawmakers are taking a new slice, with the nation’s first tax on the revenue from digital advertisements sold by companies like Facebook, Google and Amazon.

The State Senate voted on February 12, 2021 to override the governor’s veto of the measure, following in the footsteps of the state’s House of Delegates, which gave its approval on Thursday. The tax will generate as much as an estimated $250 million in the first year after enactment, with the money going to schools.

The Approval Signals The Arrival In The United States Of a Policy Pioneered By European Countries, and It Is Likely To Set Off A Fierce Legal Fight Over How Far Communities Can Go To Tax The Tech Companies.

Other states are pursuing similar efforts. Lawmakers in Connecticut and Indiana, for example, have already introduced bills to tax the social media giants. Several other states, like West Virginia and New York, fell short of passing new taxes on the tech giants last year, but their proponents may renew their push after Maryland’s success.

The moves are part of an escalating debate about the economic power of the tech giants. In the United States, law enforcement agencies brought multiple antitrust cases against Google and Facebook last year. Members of Congress have proposed laws to check their market power, encourage them to moderate speech more carefully and protect their users’ privacy.

Maryland’s tax also reflects the collision of two economic trends during the pandemic: 

1. The largest tech companies have had milestone financial performances as social distancing moved work, play and commerce further online. 
2. But cities and states saw their tax revenues plummet as the need for their social services grew.

“They’re really getting squeezed,” said Ruth Mason, a professor at the University of Virginia’s law school. “And this is a huge way to target a tax to the winners of the pandemic.”

The Maryland Tax, Which Applies To Revenue From Digital Ads That Are Displayed Inside The State,
Is Based On The Ad Sales A Company Generates.

A company that makes at least $100 million a year in global revenue but no more than $1 billion a year will face a 2.5 percent tax on its ads. Companies that make more than $15 billion a year will pay a 10 percent tax. Facebook’s and Google’s global revenues far exceed $15 billion.

While some states apply a sales tax to some digital goods and services when they are bought by customers, the Maryland tax is the first to be applied solely to the revenue a company got from digital advertising in the United States, experts said. The state’s lawmakers are expected to approve a second bill in the coming days making clear that the tax does not apply to media companies and that the cost cannot be directly passed along to businesses that buy ads, although critics say the tax will still lead to higher prices for ads.

European policymakers have turned to digital taxes in recent years as part of a larger regulatory push against the American tech giants. France has imposed a 3 percent tax on some digital revenue. Austria taxes income from digital advertising at 5 percent. The European efforts were condemned by the Trump administration, which threatened to impose tariffs on French goods over the issue.

Opponents may argue that because the largest tech companies are not based in Maryland, the law will tax activity that originated outside the state, violating the Constitution. They may also argue that the law runs afoul of a federal law that says taxes on digital goods or services must also apply to equivalent physical products.

But the law’s backers said they believed they were on solid ground to start taxing the giants.

Have an IRS or State Tax Problem?

 Contact the Tax Lawyers at

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or Toll Free at 888 8TAXAID (888-882-9243) 

 

LB&I Adds 2 & Removes 4 Compliance Campaigns Resulting in 58 Active Tax Audit Campaigns

On September 25, 2020, we posted LB&I Adds Four Compliance Campaigns To 57 Active Campaign List, where we discussed that the IRS Large Business and International (LB&I) division has added four new compliance campaigns to its active campaigns list of 57 campaigns in total.

Now on its Active Campaigns website, the IRS Large Business and International Division (LB&I) has added two new compliance campaigns to its list of active campaigns and has removed four from that list, bring its list to 58 campaigns.

In January 2017, the IRS announced a new audit strategy for its Large Business and International Division (LB&I) known as " compliance campaigns." With the compliance campaigns, LB&I essentially shifted to examinations based on compliance issues that LB&I determined presented greater levels of compliance risk, thereby improving return selection. 

The LB&I, on its Active Campaigns website, has added the following two new campaigns to its active campaigns list:

1. Puerto Rico Act 22, Individual Investors Act. This campaign addresses taxpayers who have claimed benefits through Puerto Rico Act 22, “Act to Promote the Relocation of Individual Investors to Puerto Rico,” without meeting the requirements of Code Sec. 937 (i.e., without being bona fide residents of Puerto Rico). As a result, these individuals may be excluding income subject to U.S. tax on a filed U.S. income tax return or failing to file and report income subject to U.S. tax.

        This campaign will also address those individuals who have met the requirements of Code Sec.                 937 but who may be erroneously reporting U.S. source income as Puerto Rico source income to             avoid U.S. tax. This campaign will address noncompliance in this area through examinations,                 outreach, and "soft letters." 

     2. Taxable asset transactions - matching buyers and sellers. Parties that participate in certain                     taxable asset transactions must report those transactions on either Form 8594 or Form 8883,                     which must be attached to their tax return. This campaign addresses business entities under the                 jurisdiction of LB&I that either (1) did not report a transaction on Form 8594 or Form 8883, or                 (2) reported the transaction in a manner inconsistent with the other party’s reporting of the                     transaction.

The Active Campaigns website doesn't say how LB&I will address noncompliance in this area. 

LB&I has removed the following campaigns from its “Active Campaigns” website:

1. Basket transactions. This campaign addressed structured financial transactions where the taxpayer treats an option or other derivative as open until a barrier event occurs and, therefore, does not recognize or report current period gains. The gains are deferred until the contract terminates; at which time the overall net gain is reported as a long-term capital gain. LB&I used issue-based examinations, "soft letters" to material advisors, and practitioner outreach to address noncompliance during this campaign.
2. Interest capitalization for self-constructed assets. When a taxpayer engages in certain production activities, they are required to capitalize interest expense under Code Sec. 263A. Interest capitalization applies to interest a taxpayer pays or incurs during the production period when producing property that meets the definition of designated property. The goal of this campaign was to ensure taxpayer compliance by verifying that interest is properly capitalized for designated property and the computation to capitalize that interest was accurate. LB&I used issue-based examinations, education soft letters, and educating taxpayers and practitioners to encourage voluntary compliance during this campaign.
3. Partnership stop filer.  Partners report income, losses, and other items passed through from their partnership. Some partnerships stop filing tax returns for various reasons yet still have economic transactions that are not being reported to their partners. That activity is likely not being reported by the partners. LB&I used issue-based examinations, soft letters encouraging voluntary self-correction, and stakeholder outreach to address noncompliance during this campaign.
4. Related-party transaction campaign. This campaign focused on transactions between commonly controlled entities that provide taxpayers a means to transfer funds from the corporation to related passthrough entities or shareholders. LB&I used issue-based examinations to address noncompliance during this campaign.

As an IRS Tax Defense Law Firm, outside of:

1. Form3520/3520-A Compliance and Penalties,
2. Micro-Captive Insurance Campaign,
3. Post OVDP Compliance
4. Swiss Bank Program Campaign and
   
5. Syndicated Conservation Easement Transactions
   

we have not seen nor heard of any action in the remaining 53 listed campaign areas?

Have an IRS Tax Problem?

 Contact the Tax Lawyers at
Marini & Associates, P.A. 

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com
or Toll Free at 888 8TAXAID (888-882-9243) 

IRS Revises Virtual Currency Transaction List in Final 1040 Instructions.

The final version of the instructions to Forms 1040 and 1040-SR has revised the non-exhaustive list of transactions involving virtual currency by removing the purchase of virtual currency and the acquisition of a financial interest in virtual currency from the list. The list is used by taxpayers to determine how they answer the question on Form 1040 and 1040-SR on whether they have received, sold, sent, exchanged, or otherwise acquired any financial interest in virtual currency during the year.

For the 2020 tax year, a taxpayer will need to answer the question on page 1 of Form 1040, U.S. Individual Income Tax Return, or 1040-SR, U.S. Tax Return for Seniors, which asks, "At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?" 

A draft version of the 1040 instructions released in December 2020 included a list of transactions involving virtual currency. The draft 1040 instructions read:

"A transaction involving virtual currency includes, but is not limited to:

• The receipt or transfer of virtual currency for free (without providing any consideration), including from an airdrop or following a hard fork;

• An exchange of virtual currency for goods or services;

• A purchase or sale of virtual currency;

• An exchange of virtual currency for other property, including for another virtual currency; and

• An acquisition or disposition of a financial interest in virtual currency."

The final version of the 1040 instructions has revised the list of virtual currency transactions. The final 1040 instructions read:

"A transaction involving virtual currency includes, but is not limited to:

• The receipt or transfer of virtual currency for free (without providing any consideration), including from an airdrop or hard fork;

• An exchange of virtual currency for goods or services;

• A sale of virtual currency;

• An exchange of virtual currency for other property, including for another virtual currency; and

• A disposition of a financial interest in virtual currency."

Thus, "a purchase of virtual currency" and "an acquisition of a financial interest in virtual currency" have been removed from the list.

The fact that these two things were removed from the list does not necessarily mean that they are therefore not virtual currency transactions. First, the list is not exhaustive since it "includes, but is not limited to" what is listed. Second, the question on the Form 1040 asks explicitly whether a taxpayer has received or acquired a financial interest in virtual currency. 

It would seem that, regardless of what is on the list in the instructions, if a taxpayer purchased virtual currency, or acquired a financial interest in virtual currency, then the taxpayer would be required to answer yes to the virtual currency question on the Forms.

Have as IRS Tax Problem?

 Contact the Tax Lawyers at

Marini & Associates, P.A. 

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com
or Toll Free at 888 8TAXAID (888-882-9243) 

IRS Issues Urgent EFIN Scam Alert to Tax Professionals

The Internal Revenue Service, state tax agencies and tax industry today warned tax professionals of a new scam email that impersonates the IRS and attempts to steal Electronic Filing Identification Numbers (EFINs).

The latest scam email says it is from “IRS Tax E-Filing” and carries the subject line “Verifying your EFIN before e-filing.”

The IRS warns tax pros not to take any of the steps outlined in the email, especially responding to the email. The body of the bogus email states:

    In order to help protect both you and your clients from unauthorized/fraudulent activities, the IRS     requires that you verify all authorized e-file originators prior to transmitting returns through our        system. That means we need your EFIN (e-file identification number) verification and Driver's            license before you e-file.

    Please have a current PDF copy or image of your EFIN acceptance letter (5880C Letter dated            within the last 12 months) or a copy of your IRS EFIN Application Summary, found at your e-           Services account at IRS.gov, and Front and Back of Driver's License emailed in order to complete     the verification process. Email: (fake email address)

    If your EFIN is not verified by our system, your ability to e-file will be disabled until you provide        documentation showing your credentials are in good standing to e-file with the IRS.
 
    © 2021 EFILE. All rights reserved. Trademarks
    2800 E. Commerce Center Place, Tucson, AZ 85706

Tax professionals who received the scam should save the email as a file and then send it as an attachment to phishing@irs.gov. They also should notify the Treasury Inspector General for Tax Administration at www.TIGTA.gov to report the IRS impersonation scam. Both TIGTA and the IRS Criminal Investigation division are aware of the scam.

Like all phishing email scams, it attempts to bait the receiver to take action (opening a link or attachment) with a consequence for failing to do so (disabling the account). The links or attachment may be set up to steal information or to download malware onto the tax professional’s computer.

In this case, the tax preparers are being asked to email documents that would disclose their identities and EFINs to the thieves. The thieves can use this information to file fraudulent returns by impersonating the tax professional.

The attachment may contain malware that allows the thief to track keystrokes and eventually steal all passwords or take over control of the computer systems.
  
For additional information and help, tax professionals should review Publication 4557, Safeguarding Taxpayer Data, and Identity Theft Information for Tax Professionals. 

Have as IRS Tax Problem?

 Contact the Tax Lawyers at

Marini & Associates, P.A. 

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com
or Toll Free at 888 8TAXAID (888-882-9243) 

IRS Can Request US Taxpayer's Foreign Account Info Without a Tax Treaty or Other Exchange of Tax Information Agreement

In a Program Manager Technical Advice (PMTA) 2021-1, the IRS said that it may request information regarding foreign accounts held by US citizens and residents from a participating foreign financial institution (PFFI) in accordance with FATCA even if the US does not have a tax treaty or other agreement to exchange tax information with the jurisdiction of the PFFI's residence or any jurisdiction in which the PFFI operates.

Chapter 4 of the Code, i.e., Code Sec. 1471 through Code Sec. 1474, also known as the Foreign Account Tax Compliance Act or FATCA, generally requires withholding agents to withhold tax on certain payments to a foreign financial institution (FFI) unless the FFI has entered into an FFI agreement with the U.S. to, among other things, report certain information with respect to U.S. accounts.

Under Code Sec. 1471(a), an FFI that does not meet the requirements of Code Sec. 1471(b) is subject to withholding. The requirements of Code Sec. 1471(b) are met with respect to any FFI that has an agreement in effect between such institution and the IRS under which such institution agrees to (among other things) obtain such information regarding each account holder of each account maintained by such institution as is necessary to determine which (if any) of such accounts are U.S. accounts. (Code Sec. 1471(b)(1)(A))

Under Code Sec. 1471(B)(1)(E), The FFI Must Also Agree To Comply With Requests By The IRS For Additional Information With Respect To Any United States Account
Maintained By Such Institution.

An FFI may comply with Code Sec. 1471(b) by registering with the IRS to enter into an FFI Agreement to become a participating FFI (PFFI). (Reg. §1.1471-4(a)) The FFI Agreement language can be found at Rev Proc 2017-16, 2017-3 IRB.

A PFFI includes both an FFI in a jurisdiction with a Model 2 intergovernmental agreement (IGA) in effect (a reporting Model 2 FFI) and an FFI in a jurisdiction with no IGA in effect. (Reg. §1.1471-1(b)(91))

The FFI Agreement requires a PFFI to report certain information for each calendar year to the IRS on Form 8966, FATCA Report, with respect to its U.S. accounts, which includes accounts held by individuals who are U.S. citizens or residents.

The FFI Agreement also provides that the IRS may request from the PFFI any additional information to determine a PFFI's compliance with its FFI Agreement and to assist the IRS with its review of account holder compliance with tax reporting requirements.

The U.S. has entered into income tax treaties with other countries. The treaties often have an article addressing information exchanges.

The issue addressed in this PMTA 2021-1 is whether the IRS, consistent with the terms of the FFI Agreement, request from PFFIs information about certain U.S. citizens or residents, even if the U.S. does't have a tax treaty or other agreement to exchange tax information with the jurisdiction of the PFFI's residence or any jurisdiction in which the PFFI operates?

This PMTA 2021-1 concluded that yes, the IRS may. None of the provisions in the FFI Agreement relating to an IRS request for information from a PFFI is dependent on the U.S. having any treaty or other agreement to exchange tax information with the jurisdiction of the PFFI's residence or any jurisdiction in which the PFFI operates.

Do You Have Undeclared Offshore Income?

Is Your Name Being Handed Over to the IRS?

  

Want to Know if the OVDP Program is Right for You? 

Contact the Tax Lawyers at 

Marini & Associates, P.A.   

for a FREE Tax Consultation contact us at:

www.TaxAid.com or www.OVDPLaw.com 
or Toll Free at 888-8TaxAid (888) 882-9243

152 Offshore Banks & Now Financial Advisors Are Turning Over Your Names To The IRS - What Are You Waiting For?

On January 15, 2020 we posted 151 Offshore Banks & Now Financial Advisors Are Turning Over Your Names To The IRS - What Are You Waiting For? and since then the Government has add Strachans (effective 10/6/2020) to this list bringing the number to 152 Offshore Banks and Foreign Financial Advisors.

The IRS keeps updating its list of foreign banks which are turning over the names of their US Account Holders.  Under the terms of their agreement with the IRS & Treasury, banks are required to:

• Make a complete disclosure of their cross-border activities;
• Provide detailed information on an account-by-account basis for accounts in which U.S. taxpayers have a direct or indirect interest;
• Cooperate in treaty requests for account information;
• Provide detailed information as to other banks that transferred funds into secret accounts or that accepted funds when secret accounts were closed;
• Agree to close accounts of account holders who fail to come into compliance with U.S. reporting obligations; and
• Pay appropriate penalties.

These Banks, Financial Instructions and Foreign Financial Advisors  have made substantial efforts to cooperate with the IRS investigation, including by: 

1. facilitating interviews that their Office with employees, including top level executives;
2. voluntarily producing documents in response to the Office’s requests;
3. providing, in response to a treaty request, unredacted client files for the U.S. taxpayer-clients who maintained accounts at their Banks or Financial Instruction; and
4. committing to assist in responding to a treaty request that is expected to result in the production of un-redacted client files for U.S. taxpayer-clients who maintained accounts at these Banks and Financial Instructions and with these Foreign Financial Advisors. 

This list does not impact the Streamlined programs because you must be non-willful to qualify. All of this is part of the June 2014 improvements to the OVDP, which sparked new interest in cleaning up offshore accounts.

 

1. With roughly 151 Foreign Banks and Financial Advisors cooperating with the DOJ & IRS and 
2. FATCA requiring the entire world to report to the IRS

it is INEVITABLE that this increased disclosure, will result in EVERY AMERICAN eventually being discovered. Banks worldwide want to know if there US clients are compliant with the IRS. 

As additional banks are added to the list, American taxpayers will continue to be subject to the 50% intentional failure to file penalty, which now applies to all taxpayers with foreign accounts who  make a voluntary disclosure after September 28 2018.

Although the 50% penalty is high, willful civil violations can result in tax, penalties and interest totaling 325% of the highest balance in the account for the  most recent six years period. Recent guidance suggests that the IRS could be more lenient in the future, but the IRS’s definition of leniency can still make the OVDP a very good deal that provides certainty.   

Do You Have Undeclared Income from one of 

these Offshore Banks or 

Financial Advisors?

Is Your Name Being Handed Over to the IRS?

  

Want to Know if the OVDP Program is Right for You? 

Contact the Tax Lawyers at 

Marini & Associates, P.A.   

for a FREE Tax Consultation contact us at:

www.TaxAid.com or www.OVDPLaw.com or

Toll Free at 888-8TaxAid (888) 882-9243

Reclassifying Wages as Dividends by IRS Upheld by Tax Court

The Tax Court has held in Aspro, Inc., TC Memo 2021-8 that payments made to a corporate taxpayer's three shareholders were dividends, not compensation for personal services rendered to the taxpayer, because the taxpayer had never previously paid dividends to the shareholders; the payments were roughly made in proportion to each shareholder's ownership; payments were made to two shareholders that were corporations, but the ostensible personal services were performed by individuals who owned those corporations; and the payments were made annually, but the personal services were performed throughout the year.

A corporation may deduct all the ordinary and necessary expenses paid or incurred during the tax year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered. (Code Sec. 162(a)(1); Reg §1.162-7(a))

But the test of deductibility in the case of compensation payments is whether they are in fact payments purely for services. (Reg §1.162-7(a))

Aspro, Inc, the taxpayer, operated an asphalt paving business. Most of the taxpayer's revenue came from contracts with government entities. These public projects are awarded to the low bidder.

The taxpayer had three shareholders. Shareholder A, an individual, owned 20% of taxpayer. Shareholders B and C, both corporations, owned 40% each.

Shareholder A also was taxpayer's president and was responsible for the company's day-to-day management. His responsibilities included bidding on projects.

A often spoke to the individuals who owned B and C to get their advice on bidding for projects.

In 2014, taxpayer paid management fees to A, B, and C for their services in advising taxpayer on how to bid for projects. Taxpayer deducted these management fees as personal services rendered to taxpayer.

Neither in 2014 nor in any prior year did the taxpayer pay dividends to its shareholders.

The IRS denied the deduction, claiming the fees were actually dividends.

The Tax Court Ruled That The Payments Were Dividends,
And Not Personal Service Management Fees.

While the Court did not dispute that potentially a portion of payments made to A might have been compensation for personal services, since the payments were not purely compensation (as discussed below) the payments were not deductible under Reg §1.162-7(a).

The Court looked at various facts that it said were indicia that the payments were dividends. For example:

·         The taxpayer never made any dividend distributions to its shareholders during its entire corporate history. The taxpayer merely paid management fees. This lack of dividend payments indicates that the management fee payments lacked a compensatory purpose, the Court said looking at Reg §1.162-7(b)(1) (the taxpayer being a corporation with few shareholders).

·         Although the management fees were not exactly pro rata among the three shareholders, the two large shareholders always got equal amounts, and the percentages of management fees all three shareholders received roughly corresponded to their respective ownership interests. This distribution supported an inference that taxpayer paid management fees to the shareholders as dividends.

·         The fact that taxpayer paid shareholders B and C, instead of the individuals actually performing services, indicated a lack of compensatory purpose.

·         Taxpayer paid management fees as lump sums at the end of the tax year, rather than throughout the year as the services were performed.

Have as IRS Tax Problem?

 Contact the Tax Lawyers at

Marini & Associates, P.A. 

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com
or Toll Free at 888 8TAXAID (888-882-9243)