IRS Offers Guidance On Electronic Signatures For Paper Filing

The Internal Revenue Service released guidance on September 1, 2021 that outlined forms on which it would accept electronic signatures, though the forms can be filed only on paper.

To help reduce burden for the tax community, the IRS allows taxpayers to use electronic or digital signatures on certain paper forms they cannot file electronically. The agency is balancing the e-signature option with critical security and protection needed against identity theft and fraud. Understanding the importance of electronic signatures to the tax community, the IRS offers an overview about using them on certain forms.

Types of acceptable electronic signatures

The IRS will accept a wide range of electronic signatures. An electronic signature is a way to get approval on electronic documents. It can be in many forms and created by many technologies. Acceptable electronic signature methods include:

1. A typed name typed on a signature block
2. A scanned or digitized image of a handwritten signature that's attached to an electronic record
3. A handwritten signature input onto an electronic signature pad
4. A handwritten signature, mark or command input on a display screen with a stylus device
5. A signature created by a third-party software

The IRS doesn't specify what technology a taxpayer must use to capture an electronic signature. The IRS will accept images of signatures (scanned or photographed) including common file types supported by Microsoft 365 such as tiff, jpg, jpeg, pdf, Microsoft Office suite or Zip.

E-signatures on certain paper-filed forms

The IRS allows taxpayers and representatives to use electronic or digital signatures on these paper forms, which they cannot file using IRS e-file:

• Form 11-C, Occupational Tax and Registration Return for Wagering;
• Form 637, Application for Registration (For Certain Excise Tax Activities);
• Form 706, U.S. Estate (and Generation-Skipping Transfer) Tax Return;
• Form 706-A, U.S. Additional Estate Tax Return;
• Form 706-GS(D), Generation-Skipping Transfer Tax Return for Distributions;
• Form 706-GS(D-1), Notification of Distribution from a Generation-Skipping Trust;
• Form 706-GS(T), Generation-Skipping Transfer Tax Return for Terminations;
• Form 706-QDT, U.S. Estate Tax Return for Qualified Domestic Trusts;
• Form 706 Schedule R-1, Generation Skipping Transfer Tax;
• Form 706-NA, U.S. Estate (and Generation-Skipping Transfer) Tax Return;
• Form 709, U.S. Gift (and Generation-Skipping Transfer) Tax Return;
• Form 730, Monthly Tax Return for Wagers;
• Form 1066, U.S. Income Tax Return for Real Estate Mortgage Investment Conduit;
• Form 1120-C, U.S. Income Tax Return for Cooperative Associations;
• Form 1120-FSC, U.S. Income Tax Return of a Foreign Sales Corporation;
• Form 1120-H, U.S. Income Tax Return for Homeowners Associations;
• Form 1120-IC DISC, Interest Charge Domestic International Sales – Corporation Return;
• Form 1120-L, U.S. Life Insurance Company Income Tax Return;
• Form 1120-ND, Return for Nuclear Decommissioning Funds and Certain Related Persons;
• Form 1120-PC, U.S. Property and Casualty Insurance Company Income Tax Return;
• Form 1120-REIT, U.S. Income Tax Return for Real Estate Investment Trusts;
• Form 1120-RIC, U.S. Income Tax Return for Regulated Investment Companies;
• Form 1120-SF, U.S. Income Tax Return for Settlement Funds (Under Section 468B);
• Form 1127, Application for Extension of Time for Payment of Tax Due to Undue Hardship;
• Form 1128, Application to Adopt, Change or Retain a Tax Year;
• Form 2678, Employer/Payer Appointment of Agent;
• Form 3115, Application for Change in Accounting Method;
• Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts;
• Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner;
• Form 4421, Declaration – Executor's Commissions and Attorney's Fees;
• Form 4768, Application for Extension of Time to File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes;
• Form 8038, Information Return for Tax-Exempt Private Activity Bond Issues;
• Form 8038-G, Information Return for Tax-Exempt Governmental Bonds;
• Form 8038-GC; Information Return for Small Tax-Exempt Governmental Bond Issues, Leases, and Installment Sales;
• Form 8283, Noncash Charitable Contributions;
• Form 8453 series, Form 8878 series, and Form 8879 series regarding IRS e-file Signature Authorization Forms;
• Form 8802, Application for U.S. Residency Certification;
• Form 8832, Entity Classification Election;
• Form 8971, Information Regarding Beneficiaries Acquiring Property from a Decedent;
• Form 8973, Certified Professional Employer Organization/Customer Reporting Agreement; and
• Elections made per Internal Revenue Code Section 83(b).

The forms are available at IRS.gov and through tax professional's software products.

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The U.S. Will Start to Automatically Receive CbC Reports From France & Germany

On August 25, 2021, the Competent Authorities of France and Germany agreed to automatically exchange country-by-country reports with the U.S.

According to the statements released by the Competent Authority of the U.S., French, German, and U.S. laws require multinational enterprise (MNE) groups to annually file a CbC report that conforms to the requirements of Action 13 of the Organization for Economic Cooperation and Development (OECD)/G20 Action Plan on Base Erosion and Profit Shifting (BEPS).

U.S. MNE groups must annually file Form 8975, Country-by-Country Report, with the income tax return of the ultimate parent entity to comply with this requirement. 

The Competent Authorities of The U.S. and France Are Negotiating Agreements To Allow For The Automatic Exchange of CbC Reports Between The U.S. And France and so are
The Competent Authorities of the U.S. and Germany.

Instead of waiting for these negotiations to conclude:

• The Competent Authorities of the U.S. and France have agreed to automatically exchange the CbC reports MNE groups file for fiscal years beginning in calendar 2021. The CbC reports will automatically be exchanged as soon possible after they are received and no later than 15 months after the last day of the fiscal year of the MNE group to which the report relates.

• The Competent Authorities of the U.S. and Germany have agreed to automatically exchange the CbC reports MNE groups file for fiscal years beginning in calendar 2020. The CbC reports will automatically be exchanged as soon possible after they are received and no later than 15 months after the last day of the fiscal year of the MNE group to which the report relates.

The Competent Authorities of France and Germany also intend to notify the U.S. when they perceive an error in a CbC report that may have led to incorrect or incomplete information reporting in the U.S. Similarly, the U.S. Competent Authority intends to notify its counterparts in Germany and France when it perceives an error in a CbC report that may have led to incorrect or incomplete information reporting in those countries. 

Have IRS Tax Problems?

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Accountant's Willful Blindness Was Not Sufficient to Sustain IRS Preparer Penalty

An accountant's willful ignorance of tax understatements on client returns isn't enough to hold him liable for certain penalties, the Ninth Circuit said, vacating for the second time a California federal court's decision affirming Internal Revenue Service penalties against him.

In John Q. Rodgers v. U.S., case number 20-55378, in the U.S. Court of Appeals for the Ninth Circuit, John Q. Rodgers' "willful blindness" to the tax understatements on returns he prepared for clients isn't enough to hold him liable for penalties under Internal Revenue Code Section 6694(b)(2)(A), the appeals court said Monday. It sent the case back to the California federal court to determine if Rodgers had the "specific intent to defraud the government" as required under relevant precedent, the Ninth Circuit said.

"The court must determine whether Rodgers acted with the specific intent to understate the reported tax liabilities," the opinion said. "And because the district court did not make that finding, we vacate the order and remand for further proceedings on whether the willfulness standard is satisfied."

The IRS issued penalties against Rodgers for issues with some of his clients' taxes, including overstated deductions for salaries and wages, incorrect deductions for country club dues and overstatements of costs-of-goods sold, according to court filings. Rodgers paid some of those penalties and then sued for a refund.

In the California federal court's first decision in 2017, it said Rodgers acted willfully under Section 6694(b)(2)(A) and found him liable for penalties. His "reckless disregard" was enough to find he willfully understated those taxes, the lower court ruled.

The Ninth Circuit partially vacated that ruling in June 2019, finding that Rodgers' recklessness in lowballing clients' tax liabilities didn't mean he acted willfully within the meaning of the statute, according to the opinion.

But on remand, the lower court found in 2020 that Rodgers knew there was a good chance there were understatements on his clients' returns and avoided learning of the understatements, according to filings. That "willful blindness" was enough to find that his understatements were intentional, warranting the penalties, according to the court. 

In its opinion August 30, 2021, the Ninth Circuit found that the lower court's application of the "willful blindness" doctrine wasn't enough to find that Rodgers acted willfully in his erroneous tax preparation services. In United States v. Salerno, the Ninth Circuit had found that finding a tax preparer willfully understated a client's taxes required addressing whether the preparer had the specific intent to do so, according to the opinion.

"It Is Settled Law That Willfulness 
Under Section 6694(B)(2)(A) Requires
Specific Intent To Understate Tax Liability
On Tax Returns or Claims," The Ninth Circuit Said.

Have IRS Tax Problems?

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New Streamlined Filing Compliance Procedures For Taxpayers Who Had A Transition Tax Liability

On its webpage, the IRS has provided instructions for taxpayers who wish to comply with IRS's Streamlined Filing Compliance Procedures and who had a liability for the IRC §965 transition tax.

The IRC §965 transition tax generally treats the accumulated post-1986 deferred foreign income (DFI) of a Specified Foreign Corporation (SFC) as Subpart F income. IRC §965 defines DFI as the greater of the DFI of such SFC determined as of November 2, 2017, or December 31, 2017. 

An election under IRC §965(h) allows a taxpayer to pay the IRC §965 net tax liability in installments over an eight-year period.

IRC §951(a)(1)(B) requires a U.S. shareholder of a CFC to include in gross income the amount determined under IRC §956 with respect to the CFC to the extent not excluded from gross income under IRC §959(a)(2). A U.S. shareholder's section 956 amount with respect to a CFC for a tax year is an amount based on the amounts of U.S. property held (directly or indirectly) by the CFC.

The streamlined filing compliance procedures (“streamlined procedures”) are available to taxpayers certifying that their failure to report foreign financial assets and pay all tax due in respect of those assets did not result from willful conduct on their part. The streamlined procedures are designed to provide to taxpayers in such situations with:

1. a streamlined procedure for filing amended or delinquent returns, and
2. terms for resolving their tax and penalty procedure for filing amended or delinquent returns.

A taxpayer who uses the streamlined procedures to come into compliance must remedy a specific number of tax years, generally the most recent three years for which the U.S. tax return due date (or properly-applied-for extended due date) has passed. 

Now Taxpayers That Own SFCs And Have An IRC §965(A) Amount, Who Wish To Use The Streamlined Procedures,
Must Come Into Compliance For The IRC §965 Transition Tax

 In Their Submission And Include The Tax Year In Which The Transition Tax Inclusion Might Occur (Generally 2017)
Even If That Tax Year Would Not Be Within The Standard Three-Year Lookback Period.

In other words, the lookback period for any submission to the Streamlined Filing Compliance Procedures involving SFCs with an IRC §965(a) inclusion in 2017 must include tax year 2017 and include all subsequent tax years.

And, The Election To Pay Net Tax Liability In Installments Under IRC §965(H)(1) Is Not Available For Taxpayers Submitting Delinquent Returns Under
The Streamlined Procedures.

Since the disclosure scope for a submission to the Streamlined Filing Compliance Procedures with a SFC will include tax years 2017 and/or 2018 and forward, noncompliant years prior to the submission scope may have previously untaxed Subpart F income or section 956 amounts. Absent the Subpart F income or section 956 amounts being reported by the taxpayer, making a submission to the streamlined procedures does not constructively provide the taxpayer with Previously Taxed Earnings & Profits (PTEP) for pre-disclosure years. 

In other words, a taxpayer using the streamlined procedures must strictly comply with the Code for purposes of IRC §965 and computing PTEP. Taxpayers must properly account for and report Subpart F income and section 956 amounts in their submission, and only amounts included in income by the taxpayer prior to the submission period and amounts included as part of the submission will constitute PTEP.

Taxpayers must include "Section 965" written in red at the top of the first page of each delinquent or amended tax return and at the top of each information return. The addition of "Section 965" should be after the annotation of "Streamlined Foreign Offshore" or "Streamlined Domestic Offshore" written in red.

The webpage provides the following hypothetical for a Streamlined Foreign Offshore submission illustrates this requirement::

• Taxpayer A is a U.S. citizen who has lived abroad for her entire adult life. On January 1, 2010, Taxpayer A formed a foreign entity classified as a corporation for U.S. income tax purposes, Foreign Co. B. Taxpayer A owns 51% of Foreign Co. B, which has a calendar year end.
• Taxpayer A has not filed U.S. individual income tax returns for the last ten years, and she has never filed an extension of time to file any of her income tax returns. Her failure to file income tax returns was non-willful.
• On August 1, 2021, Taxpayer makes a submission to the Streamlined Foreign Offshore Procedures (SFO). Taxpayer A's SFO submission includes a Form 14653 and delinquent income tax returns for tax years 2017, 2018, 2019, and 2020.
• Taxpayer A must file Forms 5471 (Information Return of U.S. Persons With Respect to Certain Foreign Corporations) reporting her ownership of Foreign Corp. B.
• Taxpayer A must also address the IRC §965 transition tax on her 2017 income tax return including completing a Form 965. Taxpayer A must write in red ink on the top of the first page of each of her delinquent income tax returns and at the top of each information return "Streamlined Foreign Offshore Section 965."

Do You Have Undeclared Offshore Income?

 

Want to Know Which
Voluntary Disclosure Program
is Right for You? 

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IRS CONTINUES to Criminally Prosecutes Employers For Failure To Pay Withheld Payroll Taxes - As Promised!

 On October 29, 2019 we ORIGINALLY posted The IRS is Now Criminally Prosecuting Employers For Failure To Pay Withheld Payroll Taxes! where we discussed that the IRS is stepping up criminally prosecuting business owners for failing to turn over withheld payroll taxes.

Since then:

• on October 12, 2020 we posted The IRS Criminally Prosecutes Yet Another Employer For Failure To Pay Withheld Payroll Taxes!, 
• on June 4, 2020  we posted Another Employer Gets Criminally Prosecuting For Failure To Pay Withheld Payroll Taxes!, 
• on June 29, 2020 we posted More Employers Gets Criminally Prosecuting For Failure To Pay Withheld Payroll Taxes!, 
• on October 28, 2020 we posted IRS CONTINUES to Criminally Prosecutes Employers For Failure To Pay Withheld Payroll Taxes - As Promised!, 
• on December 7, 2020 we posted Toms River NJ Law Partner Sentenced to 1 Year & 1 Day in Prison for Failing to Pay Over Payroll Taxes 
• on May 11, 2021 we posted GA Businessman Charged with Failure to Pay Employment Taxes and Attempt to Obstruct the IRS
• on June 7, 2021 we posted Montana Construction Company Owner & New York Plumbing Contractor Sentenced to15 Months & 20 Months in Prison for Employment Tax Fraud!
• on July 12, 2021 we posted Plumber Pleads Guilty to Leaking Funds From Employment Tax Withholdings

and now according to DoJ, a business owner in the construction industry was sentenced to one (1) year and one (1) day in prison on August 31, 2021 for employment tax fraud.

According to court documents and statements made in court, Edward Hansen owned and operated a steel erection businesses in Suffolk County. 

From 2008 to 2011, the IRS assessed more than $480,000 in penalties against Hansen for his failure to pay over employment taxes on behalf of several of these businesses. 

In the spring of 2011, after receiving another notification from IRS that he was liable for payroll taxes, Hansen closed County Steel Inc. and proceeded to operate the same steel erection business under the name BR-Teck. Hansen made another individual the nominal “President” of BR-Teck. Hansen, however, continued to operate the business and continued to not pay over employment taxes. 

From January 2012 through June 2017, Hansen did not pay the IRS more than $950,000 in payroll taxes withheld from the wages of BR-Teck’s employees. 

In addition to the  one (1) year and one (1) day in prison, U.S. District Judge Denis R. Hurley ordered Hansen to serve two years of supervised release and to pay a $5,000 fine. 

Thinking of Borrowing From Your Company's

Payroll Tax Withholdings?

You Better Thank Again, if You Like Your Freedom!

Have Payroll Tax Problems?

 

 

 Contact the Tax Lawyers at 

Marini & Associates, P.A.  

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New Form 5471, Sch Q - You Really Need to Understand This Extensive Expansion of Required Reporting for CFCs

Starting in tax year 2020, the new separate Schedule Q (Form 5471), CFC Income by CFC Income Groups, is used to report the CFC's income in each CFC income group to the U.S. shareholders of the CFC so that the U.S. shareholders can use it to properly complete Form 1118 (to compute the high-tax exception, high-tax kickout, and section 960 deemed paid taxes).

On its webpage, the IRS has clarified its instructions for 2020 Schedule Q (CFC Income by CFC Income Groups) of Form 5471 (Information Return of U.S. Persons With Respect to Certain Foreign Corporations). 

This update clarifies that:

• Separate Schedule(s) Q (Form 5471) are required to be filed only by Category 4, 5a, and 5b filers. It is not required to be filed by Category 1a or 1b filers. and
• On page 5 of the Instructions for Form 5471, footnote 1 in the table entitled "Filing Requirements for Categories of Filers" does not apply to category 5b filers who are required to complete separate Schedule(s) Q (Form 5471).

IRC Sec. 960(a) provides that, for purposes of computing the foreign tax credit, domestic corporations owning stock in controlled foreign corporations (CFCs) are deemed to have paid a portion of the foreign taxes paid by the CFC. 

Prop Reg § 1.960-1(c)(1) describes the computations involved in calculating foreign income taxes deemed paid by either a domestic corporation that is a U.S. shareholder of a CFC or by a CFC that is a shareholder of another CFC. A U.S. shareholder first applies grouping rules to assign the income of the CFC to separate categories of income described in Prop Reg § 1.904-5(a)(4)(v) (each a "section 904 category") and then to groups that correspond to certain types of income (each, an "income group") in a section 904 category. 

Under Reg § 1.954-1(d)(1), as part of the calculation of a CFC's subpart F income, there is an exclusion from foreign base company income for items that meet the "high-tax exception."

IRC §904(d)(2)(F)'s “high-tax kickout” rule, for purposes of the separate FTC limitation on passive income, certain high-taxed income that would otherwise be passive income will be treated as general category income.

IRC §6038(a)(1) requires U.S. persons to furnish information with respect to any foreign business entity that that person controls on Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations. Form 5471 lists several categories of persons who must file Form 5471. It also sets out different filing requirements for the different categories of persons.

1. Category 1 includes a U.S. shareholder of a foreign corporation that is a IRC §965 specified foreign corporation (SFC) at any time during any tax year of the foreign corporation, and who owned that stock on the last day in that year on which it was an SFC, taking into account the regs under IRC §965. Category 1 is comprised of Categories 1a, 1b and 1c.
2. Category 4 includes a U.S. person who had control of a foreign corporation during the annual accounting period of the foreign corporation.
3. Category 5 includes a U.S. shareholder who owns stock in a foreign corporation that is a CFC at any time during any tax year of the foreign corporation, and who owned that stock on the last day in that year on which it was a CFC. Category 5 is comprised of Categories 5a, 5b and 5c.

Schedule Q (Form 5471), CFC Income by CFC Income Groups, is used to report the CFC's income in each CFC income group to the U.S. shareholders of the CFC so that the U.S. shareholders can use it to properly complete Form 1118 (Foreign Tax Credit - Corporations) to compute the high-tax exception, high-tax kickout, and Code Sec. 960 deemed paid taxes. 

From my discussion with various colleagues, unfortunately tax software four 2020 does not currently provide for the required grouping of income and associated expenses and tax return preparers need to prepare their own spreadsheets to gather this information.

Need Help Filing Form 5471

 Contact the Tax Lawyers at

Marini & Associates, P.A. 

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