Asset Shifting To Low Tax Countries Could Result From The Reconciliation Bill According to Wharton Model

According to Law360, significant changes to international tax policy included in the $3.5 trillion budget reconciliation bill containing President Joe Biden's top legislative priorities could encourage multinational companies to shift intangible assets abroad, according to a Penn Wharton Budget Model report released October 1, 2021.

Proposed changes to the foreign-derived intangible income regimes and an increase in corporate taxes contained in the Build Back Better Act could make foreign countries more attractive to multinational firms and encourage the shifting of intangible assets to low-tax locales, the analysis said. The bill is making its way through the House of Representatives.

Specifically, reducing the FDII deduction to roughly 22% next year rather than 2026 and increasing the corporate tax rate from 21% to 26.5% would result in a nearly 21% tax rate for such income, according to the analysis. Countries with tax rates below that threshold could attract more multinationals and encourage profit or asset shifting, Penn Wharton said.

"Putting These Pieces Together, The U.S. Would Become An Even More Tax-Disadvantaged Location For A Multinational's Intangible Investment Compared To A Foreign Country With A Tax Rate Below 20.7 Percent Under The House Proposal,"
 The Report Said.

The analysis detailing the potential disadvantages of changing the international tax provisions under the 2017 Tax Cuts and Jobs Act comes as progressive and moderate Democrats squabble over the size of the reconciliation bill, which contains some of Biden's top priorities. Those priorities include enhanced child care and extensions of the supercharged child tax credit, which the Internal Revenue Service is currently issuing to some families on a monthly advance basis.

Under the TCJA, global intangible low-taxed income, or GILTI, is intended to behave like a global minimum tax for U.S. corporations by allowing companies to claim a 50% deduction for such income subject to a 21% rate. A 37.5% FDII deduction, meanwhile, effectively reduces the tax rate for multinational intangible income to 13.125%.

The reconciliation bill would change those regimes by lowering the FDII deduction to 21.875% in 2022 instead of 2026, when it was originally set to decrease, and by lowering the GILTI deduction to 37.5%. The Penn Wharton analysis found that the lowered FDII deduction, combined with increased corporate taxes, would effectively increase the FDII tax rate to 20.7%.

This increased rate would likely encourage multinational corporations with intangible assets to locate those assets elsewhere, the analysis said.

Representatives of the chairman of the House Ways and Means Committee, Rep. Richard Neal, D-Mass., and its ranking member, Rep. Kevin Brady, R-Texas, did not respond to requests for comment Friday. But one of the moderate Democrats withholding his support for the reconciliation bill, Sen. Joe Manchin, D-W. Va., criticized the changes to international tax included in the legislation in a statement Wednesday. 

"Our tax code should be reformed to fix the flaws of the 2017 tax bill and ensure everyone pays their fair share, but it should not weaken our global competitiveness or the ability of millions of small businesses to compete with the Amazons of the world," Manchin said in the statement.

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TIGTA Suggest Improvement to IRS Correspondence Examinations

TIGTA released its report on September 30, 2021, Suggest Improvement to IRS Correspondence Examinations.  

Correspondence examinations are generally narrower in focus than a traditional in-person audit of a taxpayer’s return and enable the IRS to reach more taxpayers at a lower cost.

The IRS relies heavily on correspondence examinations as a more economical means to address taxpayers with suspected underreporting of tax liabilities. 

From Fiscal Year2017 to Fiscal Year 2019, The IRS Conducted Almost 2 Million Correspondence Examinations And Recommended Approximately $12.2 Billion In Additional Taxes.

In Fiscal Years 2017 through 2019, correspondence examinations accounted for nearly 80% of all IRS examinations completed but accounted for less than one-half of the recommended additional  tax after examination. 

TIGTA’s review of the Small Business/Self-Employed Division’s correspondence examination case selection process found that the issues the IRS examined most frequently were not the most productive issues. This was due in part to the IRS not prioritizing the annual workplan based on prior year results.

In addition, TIGTA’s analysis of 743,648 examinations closed from Fiscal Year 2017 to Fiscal Year 2019 found that the IRS conducted 139,492 (19 percent) subsequent examinations identified by the subsequent return process, and 23,741 (17 percent) of these examinations were closed with the taxpayers agreeing to the additional tax assessed. 

However, the IRS did not open the correspondence examination on the subsequent year return until after it closed the examination on the current year. This increases the burden to the taxpayers, subjecting them to two separate correspondence examinations instead of one examination for multiple tax years.

According to the Internal Revenue Manual, IRS correspondence examiners are to consider subsequent year returns containing the same issues as in the year examined. However, TIGTA interviewed 15 tax examiners who stated that they are instructed only to review the specific issue and year that was selected for the examination and     not to expand their work into the following year. TIGTA identified 53,969 correspondence examinations, that had an issue on an individual tax form or the taxpayer was identified as a non-filer. Further review showed these examinations had a subsequent year tax return with the same potential issue that had not been examined and     met the IRS’s criteria for potential audit selection.

TIGTA recommended that the IRS: 

1) evaluate closed correspondence examination cases to identify the issues that result in the most significant noncompliance and develop a workplan to include most of these cases; 

2) change the subsequent return process to only address returns about which the taxpayer did not respond; and 

3) provide a reminder to ensure that employees are following processes for subsequent year returns during the correspondence examination process.

The IRS agreed with two of the three recommendations, including ensuring that tax examiners and managers are following processes for subsequent year returns during the correspondence examination process. 

However, the IRS disagreed with TIGTA’s recommendation to evaluate closed correspondence examination cases to identify the   issues that result in the most significant noncompliance, stating that historical business results are already utilized in the case selection process.

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FBAR Deadline Moved From Oct. 15 To Dec. 31 For Victims Of Natural Disasters

According to Law360, victims of recent natural disasters will have an extra 11 weeks to file Reports of Foreign Bank and Financial Accounts for the 2020 tax year, the U.S. Treasury Department's Financial Crimes Enforcement Network announced.

The FBAR Deadline Was Moved From Oct. 15 To Dec. 31,
According To A Notice Released On October 5, 2021.

The extension goes to taxpayers in areas designated by the Federal Emergency Management Agency as qualifying for individual assistance from Hurricane Ida, the California wildfires, severe storms and flooding in Michigan and Tennessee and Tropical Storm Fred.

The relief is part of the federal government's coordinated response to the natural disasters, according to FinCEN.

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SC Confirms That 2004 Law Increased $100,000 FBAR Limit By Not Hearing Challenge To FBAR Penalty Case

According to Law360, a New York woman's attempt to avoid a penalty of nearly $700,000 for failing to file foreign bank account reporting forms ended Monday after the U.S. Supreme Court declined to take up her case.

Alice Kimble had argued in Alice Kimble v. United States, case number 20-1697, in the U.S. Supreme Court that the Federal Circuit erred by upholding a ruling that she willfully failed to file the reports, known as FBARs, justifying a penalty that was excessive. Her penalty was calculated under Title 31, Section 5321 of the U.S. Code, which was amended in 2004 increasing penalties for willful violations of FBAR requirements to either $100,000 or 50% of the balance in the foreign account, whichever was higher.

Kimble claimed her failure to file a report wasn't willful because she did not know it was required. Even if it was willful, the penalty would still be limited to $100,000 because the IRS failed to draft regulations for the amended statute.

The dispute involved bank accounts with UBS in Switzerland and at HSBC in Paris. Kimble's father had opened the UBS account after surviving the Holocaust. Fearing a similar tragedy would happen in the U.S. motivated him to maintain the account for more than three decades in case the family needed to flee.

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Lack of Economic Hardship + Knowledge Leaves Another Innocent Spouse Case Being Denied

 

According to Procedurally Taxing, Goode v. Commissioner, T.C. Summ. Op. 2021-34 finds another spouse seeking relief from liability under IRC 6015 failing because of the knowledge element and the lack of economic hardship.  

In the recent post entitled “Is Economic Hardship the Antidote for Knowledge in an Innocent Spouse Case?” the Tax Court has created an unmistakable pattern of finding against spouses who have knowledge of the item giving rise to the liability and do not prove economic hardship.  

The Goode Case Is Another Case Where
The Petitioner Had Three Positive Factors And
Only One Negative Factor, Knowledge.

Despite the numerical advantage of the positive factors, the knowledge factor continues to enjoy the status of a super factor, unless the taxpayer seeking relief can successfully raise the antidote of economic hardship.

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October 15 Last Day to File 2020 Form 114 (FBAR)

The Internal Revenue Service reminds U.S. citizens, resident aliens and any domestic legal entity that the extension deadline to file their annual Report of Foreign Bank and Financial Accounts (FBAR) is Oct. 15, 2021.

Filers missing the April 15 annual due date earlier this year received an automatic extension until Oct. 15, 2021, to file the FBAR. They did not need to request the extension.

Filers affected by a natural disaster may have their FBAR due date further extended. It’s important filers review relevant FBAR Relief Notices for complete information.

Who needs to file?

The Bank Secrecy Act requires U.S. persons to file an FBAR if they have:

1. Financial interest in, signature authority or other authority over one or more accounts, such as a bank account, brokerage account, mutual fund or other financial account located outside the United States, and
2. The aggregate value of all foreign financial accounts exceeds $10,000 at any time during the calendar year.

Because of this threshold, the IRS encourages U.S. persons or entities with foreign accounts, even relatively small ones, to check if this filing requirement applies to them. A U.S. person is a citizen or resident of the United States or any domestic legal entity such as a partnership, corporation, limited liability company, estate or trust.

How to file

Filers do not file the FBAR with their federal income tax return. The 2020 FBAR must be filed electronically with the Financial Crimes Enforcement Network (FinCEN) and is only available through the BSA E-Filing System website. Those who are unable to e-file their FBAR must call FinCEN at 800-949-2732, or from outside the U.S. at 703-905-3975.

Avoid penalties

Those who don't file an FBAR when required may be subject to significant civil and criminal penalties that can result in a fine and/or prison.

The IRS will not penalize those who properly reported a foreign account on a late-filed FBAR if the IRS determines there was reasonable cause for late filing.

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Russian Banker Picks Wrong Way To Expatriate From the US Which Costs Him > $500 Million

According to the DoJ, the founder of a Russian bank pleaded guilty on October 1, 2021 to filing a materially false tax return.

“In 2013, when the value of Oleg Tinkov’s investment in his bank’s stock rose to over a billion dollars, Tinkov quickly renounced his U.S. citizenship and then lied to the IRS in a ploy to evade ‘exit taxes’ he knew were due,” said Acting Deputy Assistant Attorney General Stuart M. Goldberg of the Justice Department’s Tax Division. 

“Today, Tinkov Has Entered A Plea To A Felony And Agreed To Pay More Than $500 Million In Taxes, Interest And Penalties, More Than Double The Amount Of Money He Sought To Escape Paying To The U.S. Treasury Through His Fraudulent Scheme.”

“Oleg Tinkov brazenly violated United States tax law,” said Acting U.S. Attorney Stephanie M. Hinds for the Northern District of California. “No one who enjoys the immense benefits of United States citizenship, as Tinkov did, may avoid the corresponding obligation to support the country he chose. Tax evaders should take notice of the long reach of U.S. law enforcement.”

“Tinkov renounced his U.S. Citizenship shortly after receiving millions of dollars,” said Acting Special Agent in Charge Darrell J. Waldon of the IRS-CI Washington D.C. Field Office. “Despite his knowledge of U.S. tax reporting requirements, he substantially understated his wealth on filings with the IRS. 

International Tax Cheats Remain A Priority For My Office And Our Agency; And As Such, The International Tax And Financial Crimes D.C.-Based Group Will Continue To Aggressively Pursue Those Committing International Tax Crimes.”

According to the plea agreement, Oleg Tinkov, also known as Oleg Tinkoff, was born in Russia and became a naturalized United States citizen in 1996. From that time through 2013, he filed U.S. tax returns. In late 2005 or 2006, Tinkov founded Tinkoff Credit Services (TCS), a Russia-based branchless bank that provides its customers with online financial and banking services. Through a foreign entity, Tinkov indirectly held the majority of TCS shares. 

In October 2013, TCS held an initial public offering (IPO) on the London Stock Exchange and became a multi-billion dollar, publicly traded company. As part of going public, Tinkov sold a small portion of his majority shareholder stake for more than $192 million, and his assets following the IPO had a fair market value of more than $1.1 billion. Three days after the successful IPO, Tinkov went to the U.S. Embassy in Moscow, Russia, to relinquish his U.S. citizenship.

As part of his expatriation, Tinkov was required to file a U.S. Initial and Annual Expatriation Statement. This form requires expatriates with a net worth of $2 million or more to report the constructive sale of their assets worldwide to the IRS as if those assets were sold on the day before expatriation. The taxpayer is then required to report and pay tax on the gain from any such constructive sale.

Tinkov was told of his filing and tax obligations by both the U.S. Embassy in Moscow and his U.S.-based accountant. When asked by his accountant if his net worth was more than $2 million for purposes of filling out the expatriation form, Tinkov lied and told him he did not have assets above $2 million. When his accountant later inquired whether his net worth was under $2 million, rather than answer the question, Tinkov filled out the expatriation form himself falsely, reporting that his net worth was only $300,000. On Feb. 26, 2014, Tinkov filed a false 2013 individual tax return that falsely reported his income as only $205,317. In addition, Tinkov did not report any of the gain from the constructive sale of his property worth more than $1.1 billion, nor did he pay the applicable taxes as required by law. In total, Tinkov caused a tax loss of $248,525,339.

Tinkov was arrested on Feb. 26, 2020, in London, United Kingdom (UK), on these charge. Since that time, he has been contesting extradition on medical grounds. Tinkov has provided to the government and a court in the UK expert medical reports supporting his claim that he is undergoing a UK-based intensive treatment plan for acute myeloid leukemia and graft versus host disease, which has rendered him immunocompromised and unable to safely travel. As part of the plea, Tinkov has agreed to make the expert reports available to the court.

Tinkov’s sentencing hearing is scheduled for Oct. 29 before U.S. District Judge Jon S. Tigar. Under the terms of the plea agreement, Tinkov agrees to pay no less than $506,828,377, which includes the 2013 taxes, the civil fraud penalty, and statutory interest on that tax, totaling $448,957,108 as well as tax liabilities for other years that Tinkov acknowledged he owes. 

Per the terms of the plea agreement, the parties have agreed to recommend a custodial sentence of time served, followed by one year of supervised release, and an additional fine of $250,000. This recommendation binds the court once it accepts the plea agreement.

Should I Stay or Should I Go?

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