Tax Blog/Blawg

This is a two-part article intended to cover the challenges facing a taxpayer whose return is audited, producing a tax deficiency, on top of which the I.R.S. asserts a penalty.

First, a little bit of history.  Until 1982, outside of situations where the I.R.S. could prove an affirmative attempt to evade tax, the only sanction for errors on returns was the negligence penalty of I.R.C. § 6653(a).  That penalty was imposed at the rate of five percent and did not bear any interest, so that in the view of many it was an encouragement for people to play the "audit lottery," since owing the tax, that ...

In Tuesday’s confirmation hearings for Supreme Court nominee Elena Kagan, one topic on which there appeared to be agreement between the nominee and the panel was concern about the dwindling number of cases heard by the High Court. In response to questioning from Senator Arlen Specter, Kagan had no explanation for the precipitous decline in the Court’s docket over the last 20 years, but agreed that it has led to an increase in unresolved conflicts among the circuit courts on “vital national issues.”

Quite naturally, those of us in the tax field like to think of our livelihoods as ...

Just when the Department of Justice must have thought that it could do no wrong in pursuing the workpapers of taxpayers and their auditors, it ran smack into the formidable blockade that is the Court of Appeals for the District of Columbia Circuit.  In United States v. Deloitte LLP et al., No. 09-5171 (D.C. Cir. Jun. 29, 2010), the D.C. Circuit seems to have fired a shot across the bow of both the Department of Justice and the IRS’s brand-new Schedule UTP.  

Now that the tax extenders legislation has died, what’s next?  At least some of the provisions (e.g., the new tax regime for “carried interests”) are likely to find their way into future legislation.  But what about the tax extenders themselves, such as the look-through rule of section 954(c)(6) and the section 41 research credit?  Although many of the extensions involve tax expenditures (i.e., provisions that cost the Treasury money), they would almost certainly be offset by the bill’s revenue raisers, which were themselves styled as anti-abuse and loophole-closing provisions.  As a result, we probably have not seen the last of these measures.

As a follow up to my colleague George Connelly's earlier post concerning the IRS's recently announced "Global High Wealth" Industry Group, I offer some further thoughts on what the IRS is attempting to do with this new group focusing on wealthy individuals.  The IRS recently announced that the group has issued its first batch of audit letters and the audits of wealthy individuals will soon commence.

The IRS has created the group in the LMSB division, which generally handles audits of the largest corporations under a "team" audit concept.  A team audit means that the IRS assigns several agents to the case, including, where appropriate, specialists in areas like international taxes, financial products, and employment taxes, as well as engineers and economists.

The IRS is concerned with very wealthy individuals who own multiple entities using complicated structures to avoid U.S. federal income taxes.  The individuals may be operating foreign businesses or may have foreign investments through foreign trusts, partnerships, or corporations.

We note with great sadness the death of Marty Ginsburg yesterday at his home in Washington, DC.  Professor Ginsburg's contributions to our profession - as a teacher and author, as an attorney, and as a person - will be remembered fondly.

(Via TaxProfBlog)

As my readers know, I focus my practice on representing people who have “misunderstandings” with the Internal Revenue Service.  I can’t count the number of clients who have made a comment along the lines of “get me Geithner’s deal” since it came to light that he had some significant and frankly embarrassing tax problems while working for the International Monetary Fund.  In point of fact, making a statement like that to an IRS employee is probably one of the worst things a taxpayer could say, because the rank and file IRS employees realize that if they did what Mr. Geithner did, they would be fired on the spot.

Times are tough, and many troubled companies are facing the need to modify debts that were issued when times were better (and the companies were financially much stronger).  For companies that wish to modify their debts, and for investors that hold those debts, federal tax law imposes an unfortunate limitation.  An outstanding debt that undergoes a “significant modification” is treated as having been exchanged for a new instrument with the modified terms.  See Treas. Reg. § 1.1001-3.  As a result, holders of the debt will generally be required to recognize gain or loss on the deemed exchange of the debt and, in some instances, the issuer may be forced to recognize income as well.  Thus, the question of whether a modification will result in a deemed exchange of the debt for federal income tax purposes has the potential to complicate, or even derail, potentially beneficial debt modifications.

TaxBlawg’s Guest Commentator, David L. Bernard, is the recently retired Vice President of Taxes for Kimberly-Clark Corporation, a past president of the Tax Executives Institute, and a periodic contributor to TaxBlawg.

As the IRS sifts through dozens of comment letters on the proposed disclosure of uncertain tax positions, in-house tax officers have to wonder what's next. Over the last decade, CTO's have been hit with a barrage of new demands and worries. We have seen the rise of FIN 48 (now ASC 740-10), Sarbanes-Oxley and the resulting increased focus on controls, increasingly burdensome quarterly and annual attest firm reviews, listed transactions disclosures, the electronic filing mandate (Everson's legacy), Schedule M-3, and now the still proposed UTP disclosure.

Notwithstanding the new challenges, the number one performance metric used to judge a tax department's performance is still the effective tax rate ("ETR"). CTO's and their staffs continue to be measured by their delivery on the ETR at a time when most at the IRS seem to believe that all tax planning is bad, outside counsel is becoming more cautious, attest firms are insisting to review opinions (thus jeopardizing privilege), budgets and head count have been cut and, oh by the way, "cash is king".