taxation law services

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 Declares New 2012 Offshore Voluntary Disclosure Program

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On January 9, 2012, the Internal Revenue Service announced that it opens another offshore voluntary disclosure program – 2012 Offshore Voluntary Disclosure Program or 2012 OVDP – to help people hiding offshore accounts get current with their taxes and announced the collection of more than $4.4 billion so far from the two previous international programs.

The IRS opened the 2012 OVDP following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. The third offshore program comes as the IRS continues working on a wide range of international tax issues and follows ongoing efforts with the Justice Department to pursue criminal prosecution of international tax evasion. This program will be open for an indefinite period until otherwise announced. Program was closed in 2018.

“Our focus on offshore tax evasion continues to produce strong, substantial results for the nation’s taxpayers,” said IRS Commissioner Doug Shulman. “We have billions of dollars in hand from our previous efforts, and we have more people wanting to come in and get right with the government. This new program makes good sense for taxpayers still hiding assets overseas and for the nation’s tax system.”

The 2012 OVDP is similar to the 2011 OVDI program in many ways, but with a few key differences. First, unlike the last year, there is no set deadline for people to apply. Second, while the 2012 OVDP penalty structure is mostly similar to the OVDI program, the taxpayers in the highest penalty category will suffer from a hike in the penalty rate – the new penalty framework requires individuals to pay a penalty of 27.5 percent of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the eight full tax years prior to the disclosure. That is up from 25 percent in the 2011 program. Some taxpayers will be eligible for 5 or 12.5 percent penalties; these remain the same in the new program as in 2011. Third, participants must file all original and amended tax returns and include payment for back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties. Fourth, as under the prior programs, taxpayers who feel that the penalty is disproportionate may opt instead to be examined.

The important details of the 2012 OVDP are still going to be announced by the IRS later.  It is important to emphasize, however, that the terms of the 2012 OVDP could change at any time going forward. For example, the IRS may increase penalties in the 2012 OVDP for all or some taxpayers or defined classes of taxpayers – or decide to end the program entirely at any point.

The IRS also stated that it is currently developing procedures by which dual citizen taxpayers, who may be delinquent in filing but owe no U.S. tax, may come into compliance with U.S. tax law.

“As we’ve said all along, people need to come in and get right with us before we find you,” Shulman said. “We are following more leads and the risk for people who do not come in continues to increase.”

This offshore effort comes as Shulman also announced today the IRS has collected $3.4 billion so far from people who participated in the 2009 offshore program, reflecting closures of about 95 percent of the cases from the 2009 program. On top of that, the IRS has collected an additional $1 billion from up front payments required under the 2011 program. That number will grow as the IRS processes the 2011 cases.

In all, the IRS has seen 33,000 voluntary disclosures from the 2009 and 2011 offshore initiatives. Since the 2011 program closed last September, hundreds of taxpayers have come forward to make voluntary disclosures. Those who have come in since the 2011 program closed last year will be able to be treated under the provisions of the new 2012 OVDP program.

Contact Sherayzen Law Office for Legal Help With Your Voluntary Disclosure

If you are currently not in compliance with U.S. tax laws, contact Sherayzen Law Office for legal help. Our experienced international tax firm will explore all of the available options, advise you on the best course of action, draft all of the required documentation, provide IRS representation, and conduct the necessary disclosure to bring your affairs tax affairs into full compliance with U.S. tax system.

Social Security Wage Base Increase in Tax Year 2012

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In November of 2011, the Social Security Administration announced that the wage base (also known as “contribution and benefit base”) used for computing the social security tax is increased to $110,100 in the tax year 2012.  The wage base is used to compute the maximum amount of income subject to the Social Security taxes.

This is the first increase since 2009.  From 2009 through 2011, the wage base was $106,800.

Similarly, the earnings needed to earn one Social Security credit also slightly increased to $1,130 in 2012 (in 2011, it was $1,120).

Limitations to the Non-Recognition Rules for Asset Transfers to Foreign Corporations

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Are you thinking of transferring appreciated property to a foreign corporation in order to utilize the corporate “non-recognition” rules, and to possibly avoid further US taxes? You should be aware that while in certain circumstances it is feasible to transfer such property in order to properly run a business, there are many limitations placed upon the ability of US persons to do so when transfers to foreign corporations are involved. This article will briefly explain these limitations under section 367, and its subsections.

The Corporate Non-Recognition Rules

Under the IRS non-recognition rules, C corporations can generally avoid taxation on certain transfers of appreciated property when a corporation is formed (IRC section 351), reorganized (IRC sections 354, 355, or IRC 361), or liquidated (IRC section 332). These rules thus constitute an exception to the general corporate tax rule that sales or exchanges of property by taxpayers is a taxable event.

However, the corporate non-recognition rules are limited under IRC Section 367 when property is transferred by or to foreign corporations.

IRC Section 367

IRC Section 367 was enacted in order to prevent US taxpayers from avoiding US taxes by transferring assets to controlled foreign corporations when such an entity is formed, reorganized, or liquidated under the corporate non-recognition provisions. The section specifies that a foreign entity will not be considered to be a “corporation” for the purposes of IRC Sections 332, 351, 354, 356, and 361.

The following paragraphs will briefly describe some of the subsections of section 367.

IRC Section 367(a)

Section 367(a) limits the ability of US persons to transfer appreciated property (such as stock, assets, or certain other property) to foreign corporations in a corporate reorganization to avoid US taxes, and then sell the appreciated property outside of the U.S. tax jurisdiction. Unless a transferor qualifies for an exception, section 367(a) generally treats an exchange of certain property (under sections 351, 354, 356 or 361) by a U.S. person to a foreign corporation as a taxable exchange. These exchanges are commonly termed as “outbound transfers”.

The IRC generally grants an exception to outbound transfers of assets (other than stock) if the assets are to be used in the active conduct of a trade or business outside the United States.

IRC Section 367(b)

IRC section 367(b) is primarily intended to monitor the earnings and profits of a controlled foreign corporation. The subsection IRC provides that, “[I]n the case of any exchange described in IRC sections 332, 351, 354, 355, 356 or 361 in connection with which there is no transfer of property described in IRC section 367(a)(1), a foreign corporation shall be considered to be a corporation except to the extent provided in regulations prescribed by the Secretary which are necessary or appropriate to prevent the avoidance of Federal income taxes”. Additionally, there are proposed regulations under this section addressing the carryover of earnings and profits and taxes.

IRC Section 367(d)

Outbound transfers of intangible assets are covered under subsection 367(d), and not the more general subsection 367(a). Under this subsection, if a U.S. person transfers an intangible asset to a foreign corporation (in an exchange described in IRC section 351 or 361), the tax effect is to treat the intangible asset as having been exchanged for contingent (royalty) payments. The contingent payments (for a period of no more than 20 years) must be commensurate with the income attributable to the intangible transferred.

US persons subject to this subsection must report the exchange in accordance with IRC section 6038B, or be subject to penalties, as well as an extended statute of limitations under IRC section 6501(c)(8).

IRC Section 367(e)

Under Section 367(e), if a US corporation distributes the stock of a foreign corporation to a foreign person in a distribution described in IRC section 355 (“Distribution of stock and securities of a controlled corporation”), gain on the distribution will be taxable to the distributing corporation under IRC section 367(e)(1); however, the distribution of the stock of a domestic corporation by a US corporation to a foreign person under section 355 would not generally be taxable under IRC Section 367(e). The tax liability of the foreign person is unaffected by this section.

Furthermore, under IRC section 367(e)(2), if a U.S. corporation is liquidated into a foreign parent corporation under IRC section 332, the U.S. corporation will be treated as if it sold its assets in a taxable transaction (i.e. IRC section 337(a) and (b)(1) will not be applicable), except as provided by regulations.

Additional Related Reporting Requirements

It is important to remember that IRC Section 367 requires various IRS reporting requirements, collectively known as “367 Notices”. Moreover, certain outbound transfers by U.S. persons may require the filing of Form 926. Other IRS reporting requirements may apply depending on your particular fact pattern.

Contact Sherayzen Law Office for Legal Help With Transferring of Appreciated Property to Foreign Corporations

This article provides only a very general overview of the IRC Section 367; however, the subject matter is much more complex and depends on constantly changing IRS regulations. Therefore, this article does not offer legal advice and should NOT be relied upon in determining your particular tax situation.

If you (or the entities that you control or partially-own) are planning on transferring tangible and intangible property to a foreign entity, contact Sherayzen Law Office for professional legal assistance in this obscure and highly complicated international tax matter. Our experienced international tax firm will guide you through the complex web of international tax rules in order to best structure your international business and tax transactions as well as help you comply with the numerous relevant IRS reporting requirements.

Last Estimated Tax Payments for the Tax Year 2011 are Due on January 17, 2012

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Estimated tax payments for the fourth-quarter of 2011 are due on January 17, 2012. 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.

This is the last chance to make the payment of estimated taxes for the tax year 2011.