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IRS Increases Interest Rates for the Second Quarter of 2018

On March 7, 2018, the Internal Revenue Service announced that the IRS underpayment and overpayment interest rates have increased for the second quarter of 2018. The second quarter of 2018 begins on April 1, 2018 and ends on June 30, 2018.

The second quarter of 2018 IRS interest rates will increase by one percent and will be as follows:
five percent for overpayments (four percent in the case of a corporation);
two and one-half percent for the portion of a corporate overpayment exceeding $10,000;
five percent percent for underpayments; and
seven percent for large corporate underpayments.

The IRS increased its underpayment and overpayment interest rates for the last time in the second quarter of 2016.

Under the Internal Revenue Code, the rate of interest for the second quarter of 2018 is determined on a quarterly basis. The second quarter of 2018 overpayment and underpayment interest rates are computed based on the federal short-term rate determined during January 2018 to take effect February 1, 2018, including daily compounding.

Generally, in the case of a corporation, the underpayment rate is the federal short-term rate plus 3 percentage points and the overpayment rate is the federal short-term rate plus 2 percentage points. The rate for large corporate underpayments is the federal short-term rate plus 5 percentage points. The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point.

This increase in the IRS underpayment and overpayment interest rates for the second quarter of 2018 is highly important and will have an impact on many US taxpayers. In particular, I would like to point out two principal areas impacted by this increase in the second quarter of 2018 IRS interest rates.

First, this increase means that the taxpayers will have to pay a higher interest on any underpayment of tax as calculated on the amended tax returns. This includes the payments that US taxpayers must make pursuant to the IRS Offshore Voluntary Disclosure Program and the Streamlined Domestic Offshore Procedures.

Second, the increase in the interest rates for the second quarter of 2018 directly affects the calculation of PFIC interest due on any “excess distributions”. It is important to remember that PFIC interest cannot be offset by foreign tax credit.

IRS Fails to Recover a Large Erroneous Refund | Litigation Tax Attorney

In a recent case, the IRS failed to recover a large erroneous refund of $21 million that it gave to a company called Starr International Co. Inc. (“Starr”). The opinion was released on January 31, 2018 by the District Judge Christopher R. Cooper (U.S. District Court for the District of Columbia) who granted Starr’s summary judgment motion. Let’s delve deeper into why the IRS was not able to recover this erroneous refund.

The Starr Case: Initial 2007 Request for Erroneous Refund

The story that led to a such a large erroneous refund is very interesting and related to the US-Swiss tax treaty. In 2007, as a shareholder of AIG stocks, Starr received dividends from AIG. In December of 2007, Starr filed a request with the US Competent Authority (“CA”) to claim a reduced withholding tax rate on the AIG dividends.

Then, without waiting for the CA response, Starr filed a refund claim with the IRS for the tax year 2007, seeking a refund in the amount it would have been entitled to had the CA granted the request for treaty benefits. It should be pointed out that Starr indicated on its Form 1120-F that this was a protective refund claim (to avoid the later Statute of Limitations problems) and informed the CA of the claim.

Once it was informed about the Starr’s protective refund claim, the CA instructed the Ogden Service Center not to issue a refund for 2007. Moreover, in October of 2010, the CA denied Starr’s request for treaty benefits for 2007.

The Starr Case: Request for 2008 Large Erroneous Refund Granted

This denial did not have the intended effect. On the contrary, Starr filed another refund request with the IRS for $21 million for 2008 and amended its refund claim for 2007. Starr also did it in a very clean and honest manner – on its 2008 Form 1120-F (next to the line indicating the refund amount), Starr wrote “see statement 1”. Statement 1 disclosed that CA did not grant treaty benefits to Starr and presented its counter-arguments arguing that CA’s decision was erroneous.

In 2011 the IRS erroneously granted Starr’s refund request for 2008 and issued a refund for $21,151,745.75. At the same time, the IRS did not issue any refund for the amended 2007 claim.

The Starr Case: Erroneous Refund for 2008 Leads to Lawsuit to Recovery Refund for 2007 and IRS Lawsuit to recover the 2008 Erroneous Refund

Emboldened by its 2008 erroneous refund, Starr decided to file a lawsuit in the D.C. District court to claim a refund for 2007. The lawsuit was filed in 2014 after Starr must have believed that the Statute of Limitations for the IRS to recover the 2008 erroneous refund had expired. It appears that this part of the case still continues as Starr has appealed the recent ruling in the government’s favor.

In the meantime, in response to Starr’s ever expanding appetite for refunds, the IRS decided to attempt to curb the Starr’s ambitions by recovering the 2008 erroneous refund. In 2015, the government amended its answer to Starr’s 2014 lawsuit and added a counterclaim seeking to recover the 2008 refund. Here, the most interesting part of the case begins.

The Starr Case: the IRS Arguments for the IRS Statute of Limitations to Recover 2008 Erroneous Refund

Generally, the IRS has only two years to initiate a lawsuit to recover a refund. There is, however, an exception. If a taxpayer obtains any part of the refund through fraud or misrepresentation, the Statute of Limitations may be extended to five years. The government bears the burden of proof to show that an extension of the statute of limitations is justified.

The IRS based its claim for the extension of the Statute of Limitations on three different arguments. First, the IRS stated that Starr made a misrepresentation when it indicated on line 9 of Form 1120-F that Starr was entitled to a $21 million refund; the IRS argued that it should have put “0″ on it.

Additionally, the IRS also made a second variation on the same argument, relying on Rev. Proc. 2006-54, which sets forth the procedures for requesting treaty benefits from the CA. Section 12.04 expressly states that denials of requests for discretionary treaty benefits are final and not subject to administrative review. Based on this section, the government asserted that Starr, in contradiction to the established procedure, sought an administrative review of the CA’s denial of its refund claim by not making it clear that it was not entitled to a refund claim.

Second, the IRS argued that the Starr’s failure to inform the CA about it 2008 refund claim was another misrepresentation. Here, the IRS again relied on Rev.Proc. 2006-54, which states that a taxpayer must update the CA on all material changes regarding issues under consideration.

Finally, the government argued that Starr made the third misrepresentation when it failed to notify the Ogden Service Center (where the Starr’s claim for 2008 erroneous refund was filed), that it lacked the jurisdiction to issue the 2008 refund.

The Starr Case: the Court Refuted All IRS Arguments and Denied the IRS Request to Recover 2008 Erroneous Refund

The district court judge disagreed with all of the three IRS arguments. With respect to the first argument, the court disagreed with the government’s position, because had Starr requested $0 on its refund claim and then litigated the merits of the claim in court, it would have been entitled only to $0 even if it won. The court noted that this has been the government’s position in the past. Moreover, Treas. Reg. §301.6402-3(a)(5) requires that refund claims contain a statement of the amount overpaid.

In this context, the court addressed the government’s argument that, by filing a refund claim, Starr was looking for a back-door administrative review of the CA’s denial of its claim. The court noted that a refund claim is not a request for administrative review, but a normal way for a taxpayer to obtain a refund that the IRS already withheld.

Moreover, the refund claim was an absolute jurisdictional requirement for seeking a judicial review of CA’s denial of Starr’s claim for refund. Had Starr failed to file a refund claim before going to court, the court would have lacked the subject matter jurisdiction to hear the case.

With respect to the government’s second argument, the court stated that it is irrelevant because Starr filed its 2008 refund claim when CA already made the final decision to deny the refund claim. In other words, there were no issues under CA’s consideration at the time when Starr filed its refund claim.

Finally, the court completely disagreed with the government’s argument that Starr should have informed the Ogden Service Center that it lacked jurisdiction to issue the refund. The court stated that there is simply no regulation, statute or an IRS instruction that would require the taxpayers to inform the IRS of what falls and what does not fall within its jurisdiction.

Since the government failed its burden of proof that Starr obtained its refund through misrepresentations, the court granted Starr’s motion for summary judgment and found that the IRS was not entitled to extend the Statute of Limitations to five years.

Contact Sherayzen Law Office for Help With Tax Litigation

If you or your business are being sued by the IRS, contact Sherayzen Law Office for professional help with tax litigation.

Shakira Tax Evasion is Reportedly Investigated by Spain | Tax Law News

On January 23, 2018, the Spanish Newspaper based in Madrid “El País” broke the news that the Colombian Singer Shakira (full name Shakira Isabel Mebarak) is being reportedly investigated by the Spanish tax authorities for tax evasion. Let’s explore the alleged Shakira tax evasion investigation in more detail.

Alleged Shakira Tax Evasion Investigation is Centered Around Spanish Tax Residency

At the core of the alleged investigation of potential Shakira tax evasion lies the concept of tax residency. Under the tax laws of Spain, a person who resides in Spain for at least 183 days during a calendar tax year may generally be considered a Spanish tax resident. As such, he would be required to disclose his worldwide income on a Spanish tax return.

It should be noted (as Sherayzen Law Office has pointed out in the past) that Spain is a very strict tax jurisdiction in many aspects, especially when it comes to tax evasion. In fact, it is the only country in the European Union which has a form similar to the IRS Form 8938 – Spanish Modelo 720.

Alleged Shakira Tax Evasion Investigation: 2011-2014 Tax Residency of Shakira in Question

El País reported that the Spanish tax authorities focused their investigation of Shakira on tax years 2011 through 2014. The singer has claimed that she was resident of the Bahamas at that time. Shakira’s lawyer stated that Shakira lived in several places over the years due to her lifestyle as an international singer and has been in full compliance with tax laws of all relevant jurisdictions.

The tax authorities reportedly reached a different conclusion – that Shakira was a Spanish tax resident during the years 2011, 2012, 2013 and 2014. It is not clear whether the alleged conclusion was arrived at using direct evidence or indirect evidence. El País, for example, stated that the Spanish Tax Agency investigators went to her hairdresser in Spain to establish that Shakira lived in Spain.

It should be pointed out that Shakira officially declared herself as a Spanish tax resident in 2015 due to her marriage with the Spanish soccer player Gerard Pique.

Paradise Papers Could Have Prompted the Investigation of Potential Shakira Tax Evasion

The alleged Shakira Tax Evasion investigation also has an interesting twist. It appears that it could have been prompted by the famous Paradise Papers in November of 2017.

The Paradise Papers is a collection of 13.4 million of files that were stolen from the client files of Appleby Law Firm, a Singapore-based trust company, as well as company registries of nineteen different jurisdictions.

According to the Paradise Papers, Shakira transferred some or all of her intellectual property and trademarks to Tournesol, Ltd., (“Tournesol”) a company registered in Malta in 2009. Shakira is the sole shareholder of this company. Tournesol increased its capital by 31 million euros through an interest-free loan agreement with ACER Entertainment, a related company owned by Shakira and registered in Luxembourg.

Alleged Shakira Tax Evasion Investigation: Potential Penalties

Shakira’s estimated net worth is $200 million. This means that her tax fraud case will involve large numbers, possibly in the millions of dollars.

It appears that if Shakira is found guilty of tax fraud that is in excess of 600,000 euros, she could be facing from two to six years in prison for each count of tax fraud. Moreover, she could be facing a fine of six times the amount of underpaid tax. It should be pointed out that the charges will most likely focus on the years 2012-2014, because 2011 appears to be barred by the Spanish statute of limitations.

Shakira’s celebrity status will not have any impact on the Spanish tax authorities. In fact, she now joined a list of many celebrities who have been investigated by the Spanish Tax Agency, including Lionel Messi and Cristiano Ronaldo.