IRS Tax Gaps Estimates Show Taxpayers owe $385 Billion in 2006 Taxes

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The Internal Revenue Service recently released new “tax gap” estimates for tax year 2006, showing that taxpayers owe $385 Billion (an increase of about 1/3 over the tax gap from tax year 2001).  The tax gap is defined as the amount of tax liability owed by taxpayers that is not timely paid.

The tax gap is divided into three components: non-filing, underreporting and underpayment.  Most of the increase in the tax gap from tax years 2001-2006 occurred in underreporting and underpayment; in the non-filing segment, the numbers were largely unchanged.

Underreporting in 2006, as in 2001, was the largest contributing factor to the tax gap, increasing to $376 billion (and $67 billion on corporate income taxes) from $285 billion five years earlier.  Underpayment of tax in 2006 increased to $46 billion, up from $33 billion in 2001.  Non-filing accounted for $28 billion in 2006, up a billion from five years before.

Despite the increase in the tax gap over the five years, the voluntary compliance rate (the percentage of total tax revenues paid on a timely basis) stayed almost statistically unchanged, at around 83%.

The 2006 gross tax gap (the amount that was not timely paid), was estimated at $450 billion, an increase from $345 billion in 2001.  The 2006 net tax gap, (the amount of tax that was never paid), was $385 billion, up from $290 billion from five years earlier.

IRS Form 1120 Schedule UTP Filing Requirements

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The IRS recently announced that Schedule UTP must be filed with Forms 1120, 1120-F, 1120-L or 1120-PC, if an entity meets certain requirements. UTP stands for “Uncertain Tax Positions”, and the purpose of the schedule is for corporate taxpayers to provide concise disclosure of uncertain tax issues relating to the reporting of reserves in their audited financial statements.

Filing Requirements

Schedule UTP will affect more and more corporate taxpayers through a gradual phase-in period. For tax years 2010-2011, corporations that file Forms 1120, 1120-F (foreign companies), 1120-L (life insurance companies) or 1120-PC (property and casualty insurance companies), have uncertain tax positions and possess total assets exceeding $100 million, must file Schedule UTP. For Form 1120-F filers, worldwide assets are used to determine whether a corporation must also file Schedule UTP.

Beginning with the tax year 2012, the total asset threshold will be reduced to $50 million. Starting in tax year 2014, the threshold will be further reduced to $10 million. Currently, tax positions taken before 2010 need not be reported on Schedule UTP.

The IRS has stated that these requirements may also be extended to additional entities, such as tax-exempt organizations, real estate investment trusts, regulated investment companies, and pass-through entities (S corporations, partnerships, and limited liability companies).

While Schedule UTP requires the reporting of U.S. Federal income tax positions, reporting of uncertain foreign or state tax positions is not required.

Reporting of a tax position is required on Schedule once a reserve for a tax position has been recorded on the financial statements, and a position is taken on the Federal tax returns.

Reporting Reserves

Schedule UTP requires reporting of uncertain Federal income tax positions for which a corporation or related party has recorded a reserve in its audited financial statements under applicable financial accounting standards (corporations, however, only report their own tax positions on the schedule, and not the tax positions of a related party). Reserves may include, for example, reported contingent legal liabilities, reductions of an Income Tax Refund Receivable, or increases in a liability for Income Taxes Payable.

Additionally, a corporation must report tax positions taken for which no reserve was established because of an expectation of litigation. If no reserve was established for income tax, Schedule UTP will also be required if a corporation or related party determines that there is less than a 50% chance that the IRS will settle, and it is “more likely than not” that the corporation will prevail in litigation.

However, corporations are not required to report in instances where no reserve was created because the tax position was sufficiently certain, or where applicable financial accounting standards determined that the item was immaterial.

Major Tax Positions

Corporations filing Schedule UTP must also identify “major tax positions” (MTP’s). MTP’s, including transfer pricing positions, which exceed greater than or equal to 10% of the overall tax liability (calculated by dividing the amount of the MTP by the sum of all tax positions, excluding positions expected to be litigated) must be reported.

Purpose of Schedule UTP

Schedule UTP is intended to provide the IRS with a concise disclosure of the uncertain tax issues taken by a corporate taxpayer. The description should be limited to no more than a few sentences and should state the relevant facts involved. Further, Schedule UTP instructions specify that the brief description should not include legal analysis of the tax position taken.

The IRS will treat an entity as having filed Form 8275 (Disclosure Statement) or Form 8275-R by filing a complete and accurately disclosed tax position on Schedule UTP; additionally the Internal Revenue Code (IRC) section 6662(i) disclosure requirements will be satisfied with proper disclosure on the schedule.

Penalties

Schedule UTP instructions currently do not specify a penalty structure. However, the IRS has noted that in instances where it appears that corporations are non-compliant with Schedule UTP requirements, it will bring an appropriate enforcement action.

In the upcoming years, it is clear that Schedule UTP will need to be filed by an increasing number of corporations, raising compliance costs and the complexity of tax planning and preparation. Corporations that have, or expect to have total assets of $10 Million or more (and possibly tax-exempt organizations, depending upon future IRS interpretations), should prepare in advance for complying with this new form. Sherayzen Law Office can help you plan for this eventuality.

Contact Sherayzen Law Office NOW To Prepare For New Schedule UTP Requirements

This article is intended to give a brief summary of these issues, and should not be construed as legal or tax advice. Corporate compliance and tax planning necessitates an experienced understanding of complex regulations, IRC statutes, and case law, and IRS penalties for failure to comply can be substantial. If you have further questions regarding your own tax circumstances, Sherayzen Law Office offers professional advice for all of your corporate, cross-border, international, and other tax needs. Call or email for a consultation today.

IRS Increases Deductions and Exclusions for the Tax Year 2012

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The Internal Revenue Service recently announced that for tax year 2012, personal exemptions and standard deductions will increase, and tax bracket thresholds will rise because of inflationary effects. This article will explain some of these changes.

Personal Exemptions, Standard Deductions and Tax Bracket Changes

The increased amount of each personal and dependent exemption will be $3,800 (up $100 from 2011). The updated standard deduction will be $11,900 for married couples filing joint returns (up $300), $5,950 for single individuals and married individuals filing separately (up $150), and $8,700 for heads of household (up $200).

Tax-bracket thresholds will also increase for each filing status. For married couples filing a joint return, the 25% taxable income threshold will begin at $70,700, up from $69,000 for tax year 2011.

401(k) Contribution Changes

The IRS also announced that the maximum 401(k) contribution amount will increase by $500 to $17,000.

Foreign Earned Income Deduction

The IRS stated that the maximum foreign earned income deduction will increase by $2,200 to $95,100 for tax year 2012.

Estate and Gift Tax Exclusions

The basic estate tax exclusion will increase to $5,120,000 (up from $5,000,000 for calendar year 2011) for the estate of any decedent dying during calendar year 2012. Further, the aggregate decrease in value of an estate’s property cannot exceed $1,040,000 (an increase of $1,020,000 for 2011) for executors electing the special use valuation method for qualified real property.

The annual gift exclusion will stay at $13,000.

Conclusion

This article is intended to give a brief summary of these issues, and should not be construed as legal or tax advice. Please consult IRS materials independently for further verification. If you have further questions regarding your own tax circumstances, Sherayzen Law Office offers professional advice for all of your US and international, and estate planning tax needs. Call our office (952) 500-8159 or email [email protected] for a consultation today.

Eligibility for Voluntary Classification Settlement Program

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As discussed in an earlier article, I already explained the essence of a new Voluntary Classification Settlement Program (“VCSP”) announced by the IRS earlier this week. I then explored the application process. In this essay, I would like to explore the general eligibility requirements for the VCSP.

Generally, the VCSP is available for to many businesses, tax-exempt organizations and government entities that currently erroneously treat their workers or a class or group of workers as nonemployees or independent contractors, and now want to correctly treat these workers as employees.

In order to be eligible for the VCSP, a taxpayer must meet three requirements.

First, the applicant must have consistently treated its workers in the past as nonemployees.

Second, the applicant must have filed all required Forms 1099 for the workers for the previous three years.

Finally, the third requirement is that the applicant cannot currently be under audit by the IRS, the Department of Labor, or any other state agency concerning the classification of these workers. Note that a taxpayer who was previously audited by the IRS or the Department of Labor concerning the classification of the workers will only be eligible if the taxpayer has complied with the results of that audit.

Contact Sherayzen Law Office NOW to Obtain VCSP Representation

If you wish to participate in the VCSP, you should contact Sherayzen Law Office immediately. Our experienced tax firm will rigorously represent your interests during the entire process of the Voluntary Classification Settlement Program and strive to achieve the most satisfactory and efficient resolution of your case.

Estimated Tax Payments are due on June 15, 2011

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Estimated tax payments for the second quarter (April 1 –  May 31) of 2011 are due on June 15, 2011. The estimated tax payments should be made using Form 1040-ES. Note, if the due date for an estimated tax payment falls on a Saturday, Sunday, or legal holiday, the payment will be considered on time if it is made on the next business day.