taxation law services

Filing Deadline Extended to March 30, 2012, for Some Tax-Exempt Organizations

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On December 16, 2011, the IRS announced that certain tax-exempt organizations with January and February filing due dates will have until March 30, 2012, to file their annual returns.

The IRS is granting this extension of time to file because the part of the e-file system that processes electronically filed returns of tax-exempt organizations will be off-line during January and February. The agency stressed that the rest of the e-file system will continue to operate normally and urged all individuals and businesses to choose the accuracy, speed and convenience of electronic filing.

In general, the extension applies to tax-exempt organizations whose normal filing deadline is either January 17 or February 15, 2012. Ordinarily, these deadlines would apply to organizations with a fiscal year that ended on August 31 or September 30, 2011, respectively. The extension also applies to organizations that already obtained an initial three-month filing extension and now have an extended filing deadline that falls on January 17 or February 15, 2012. The majority of tax-exempt organizations will be unaffected by this extension because they operate on a calendar-year basis and have a May 15 filing deadline.

The extension applies to affected organizations filing Forms 990, 990-EZ, 990-PF, or 1120-POL. Form 990-N filers will not be affected. No form needs to be filed to get the March 30 extension.

In order to avoid receiving a late filing penalty notice, a reasonable cause statement should be attached to the tax return. If organizations receive late-filing penalty notices, they should contact the IRS so that these penalties can be abated. The IRS encouraged these organizations to consider either e-filing early — before the end of December — or waiting until March to file electronically.

Making the Section 338(g) Election when Purchasing a Target Corporation’s Stock

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This article will explain Internal Revenue Code Section 338(g), which allows corporations, that buy a certain percentage of a target corporation’s stock and meet certain requirements, to make an election to treat the acquisition as an asset purchase instead of a stock purchase. In the right circumstances, a Section 338(g) election can be a very useful tool for tax purposes; however there are certain drawbacks, so you should consult an experienced tax attorney to determine whether the election would be a sound decision for your corporation.

Requirements for Section 338(g) Election

In general, in order to make an Section 338(g) election, the purchasing corporation must acquire through a “qualified stock purchase” 80% or more of the total voting power and 80% or more of the total value of the stock of the target corporation within a 12-month period. Preferred stocks are not counted for either purpose.

The election may only be made in taxable stock sales, and the purchaser must be a C corporation. Thus, individuals, partnerships and similar entities are not eligible to make the election. A corporation may purchase a foreign corporation and make the election; however, there are many complex international tax issues that may arise (such as the Subpart F rules).

Once the election is made, the target corporation is deemed as having sold all of its assets in a single transaction; it will be treated as a new corporation which purchased all of the assets of and is unrelated (for most purposes) to the old target corporation. The new (target) corporation also assumes any liabilities of the old target corporation.

Treatment of Basis of Stock & Assets

Normally, when a corporation purchases the net assets of a target company in a taxable stock sale, the purchaser will take a carryover basis in the acquired assets. However, by electing Section 338(g), purchasers will be allowed to take a stepped-up basis at the fair market value purchase price (as well as taking the stock at the FMV price), and the transaction will be deemed for the purposes of the section, as an asset sale. The election is made unilaterally by the purchasing corporation.

Main Advantages and Disadvantages of the Election

The primary advantage of a Section 338(g) election is that by treating the purchase as an asset sale, the purchaser is likely to be able to deduct depreciation and amortization expenses associated with the assets and intangibles; other tax credits may also apply.

The primary disadvantage, however, is that the deemed asset sale may trigger a taxable gain for the acquiring corporation. Conversely, the target corporation’s shareholders will be treated as having sold their shares, and thus will have a taxable gain or loss on the sale of their stock.

Thus, an acquiring corporation must consider whether making the election is worthwhile from a tax perspective. Generally, usable tax credits or Net Operating Losses of the target corporation will be necessary in order to consider making the election.

Contact Sherayzen Law Office for Tax Planning Help With Business Acquisitions

If you are planning to acquire another business and would like to explore the tax consequences of such purchase (or explore alternative structuring of such purchase), contact Sherayzen Law Office. Our tax firm has extensive knowledge of corporate tax law and we will use our reliable experience to help you achieve your acquisition goals in a tax-sensitive way.

IRS Releases Guidance on Foreign Financial Asset Reporting (Form 8938)

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On December 15, 2011, the Internal Revenue Service stated that it will soon release the final version of a new information reporting form that taxpayers will use starting this coming tax filing season to report specified foreign financial assets for tax year 2011.  Form 8938 (Statement of Specified Foreign Financial Assets) will be filed by taxpayers with specific types and amounts of foreign financial assets or foreign accounts. It is important for taxpayers to determine whether they are subject to this new requirement because the IRS imposes significant penalties for failing to comply.

The Form 8938 filing requirement was enacted in 2010 as part of FATCA to improve tax compliance by U.S. taxpayers with offshore financial accounts.  The scope and the depth of the Form is even more profound that the FBARs.

Individuals who may have to file Form 8938 are U.S. citizens and residents, nonresidents who elect to file a joint income tax return and certain nonresidents who live in a U.S. territory. Form 8938 is required when the total value of specified foreign assets exceeds certain thresholds.

Form 8938 is not required of individuals who do not have an income tax return filing requirement.

The new Form 8938 filing requirement does not replace or otherwise affect a taxpayer’s obligation to file an FBAR (Report of Foreign Bank and Financial Accounts).

Failure to file Form 8938 when required may result in severe penalties – $10,000 with an additional penalty up to $50,000 for continued failure to file after IRS notification.  Moreover, a 40 percent penalty on any understatement of tax attributable to non-disclosed assets can also be imposed.  Other penalties may apply.

Finally, a special statute of limitation rules apply to Form 8938.

Contact Sherayzen Law Office For Tax Help with the IRS Form 8938

If you need any help with respect to understanding Form 8938 or to see whether you need to file this Form, contact Sherayzen Law Office Ltd.  Our experienced international tax firm will explain to you the requirements of Form 8938 and help you comply with its requirements.

Form 1065 Penalties

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IRS Form 1065 (U.S. Return of Partnership Income) is an information return used to report the income, gains, losses, deductions, credits, and related items from the operation of partnerships.

Partnerships generally do not pay taxes because they are pass-through entities. Instead, profits or losses, and related items, are reported by partners (typically based upon their partnership interests) on their individual tax returns. Despite the fact that income taxes are not owed by partnerships, the form must still be filed for those required to do so, and there are various penalties that may be imposed, for various reasons, by the IRS.

This article covers the penalties that may apply for failures to comply with Form 1065 requirements. The penalties may be steep in certain circumstances, so taxpayers subject to filing Form 1065 should be aware of them.

Failure to File Penalty

A penalty will be assessed against a partnership that is required to file a partnership return if it either fails to file the return by the due date (including extensions) or if it files a return that does not report all required information, unless such failure is due to reasonable cause. If a partnership plans to demonstrate reasonable cause, it must attach an explanation to the partnership return.

The late filing penalty is $195 for each month (or part of a month) for a maximum of 12 months that the failure continues multiplied by the total number of individuals who were partners during any part of the partnership’s tax year for which the return is due.

Failure To Timely Furnish Information

A $100 penalty (for each Schedule K-1 form for which a failure occurs) may be imposed for failure to furnish a Schedule K-1 to a partner when due and for each failure to include all required information (or the inclusion of incorrect information) on a Schedule K-1. A maximum penalty of $1.5 million for all such failures during a calendar year, may be imposed.

If the requirement to report accurate information is intentionally disregarded, the penalty for each failure is increased to the greater of $250 or 10% of the aggregate amount of items required to be reported. In such cases, the $1.5 million maximum penalty does not apply.

Trust Fund Recovery Penalty

A trust fund recovery penalty for Form 1065 may be imposed on all persons who are responsible for collecting, accounting for, and paying over various trust fund taxes (including certain excise, income, social security, and Medicare taxes), and who acted willfully in failing to collect, withhold, and/or pay such taxes (the IRS may determine who is responsible for such requirements). Such taxes are typically reported on various forms, including Form 720 (Quarterly Federal Excise Tax Return), Form 941 (Employer’s Quarterly Federal Tax Return), Form 944 (Employer’s Annual Federal Tax Return), and Form 945 (Annual Return of Withheld Federal Income Tax), among others.

The trust fund recovery penalty for Form 1065 is equal to the unpaid trust fund tax.

Contact Sherayzen Law Office For Legal Help in Dealing with Form 1065 Penalties

If you are facing Form 1065 penalties or wish to find out how to properly comply with the IRS requirements to avoid such penalties, contact Sherayzen Law Office for legal help with Form 1065. Our experienced partnership tax firm will guide you through the complex web of partnership tax requirements as well as provide vigorous ethical IRS representation if necessary.

Form 1120S Penalties and Interest

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Form 1120S (US Income Tax Return for an S Corporation) is used to report the income, gains, losses, deductions, credits, and related items, for any tax year covered, of a domestic corporation or other entity that elects to be treated as an S corporation by filing Form 2553. If the IRS accepts the election, Form 1120S must be filed as long as the election remains in effect.

This article will examine the penalties and interest that may be applied for failure to comply with the rules and regulations concerning the filing of Form 1120S when required. The penalties can be severe in some instances, so taxpayers subject to the requirements of the form should take notice of them.

There are numerous penalty and interest provisions that apply to the requirements of Form 1120S.

Late Filing of a Return

A penalty may be imposed if a return is filed after the applicable due date (including extensions), or if the return does not report all of the required information required, unless the failure to comply is due to reasonable cause.

For returns on which no tax liability is owed, the late filing penalty as of the time of this writing is $195 for each month (or part of a month), up to 12 months that the return is late or does not include the necessary information, multiplied by the total number of persons who were shareholders in the corporation for the tax year (during any part of the corporation’s tax year) in which the return is due. If a tax is due, this same penalty mechanism will be applied, plus a 5% penalty on the unpaid tax for each month (or part of a month) that the return is late. The maximum penalty will be capped at 25% of the unpaid tax. The minimum penalty for a return that is due, and more than 60 days late, is the lesser of the tax owed or $135.

Taxpayers who claim that the failure to timely file was due to reasonable cause must include an attached explanation with the return.

Late Payment of Tax

In general, a corporation that has a tax liability, but does not pay the tax when due, may be penalized ½ of 1% of the unpaid tax for each month (or part of a month) that the tax is unpaid. The late payment penalty is capped at a maximum of 25% of the unpaid tax. As with the failure to file penalty, taxpayers may be able to prevent or limit the imposition of the late payment penalty, provided that reasonable cause can be demonstrated.

Failure to Timely Furnish Information

A $100 penalty may be imposed for each failure to furnish a Schedule K-1 to a shareholder when due and/or for each failure to include on Schedule K-1 all required and accurate information. The penalty is applied to each Schedule K-1 for which a failure occurs. If a taxpayer intentionally disregards the requirement to report correct information, the penalty for each failure is increased to the greater of $250 or 10% of the aggregate amount of items required to be reported.

A reasonable cause exception is also available for this penalty.

Trust Fund Recovery Penalty

A trust fund recovery penalty may be imposed on all persons, including S-corporations, who are responsible for collecting, accounting for, and paying over various trust fund taxes (including certain excise, income, social security, and Medicare taxes) and who acted willfully in failing to collect, withhold, and/or pay such taxes (the IRS may determine who is responsible for such requirements). Such taxes are typically reported on various forms, including Form 720 (Quarterly Federal Excise Tax Return), Form 941 (Employer’s Quarterly Federal Tax Return), Form 944 (Employer’s Annual Federal Tax Return), and Form 945 (Annual Return of Withheld Federal Income Tax), among others.

The trust fund recovery penalty imposed is equal to the full amount of the unpaid trust fund tax.

Other Potential Penalties

Penalties can also be imposed for Form 1120S purposes under IRC sections 6662 (Imposition of accuracy-related penalty on underpayments), 6662A (Imposition of accuracy-related penalty on understatements with respect to reportable transactions), and 6663 (Imposition of fraud penalty).

Interest

In addition to the penalties described above, interest can be charged for failure to comply with various Form 1120S requirements.

Interest will be charged on taxes that are paid late even if a taxpayer is granted an extension of time to file. Interest can also charged on penalties imposed as a result of failure to file, fraud, negligence, substantial valuation misstatements, substantial tax understatements, and reportable transaction understatements from the due date (including extensions) to the date of actual payment. See IRC section 6621 and regulations for the applicable interest rates charged relating to such penalties.

Contact Sherayzen Law Office For Legal Help With 1120S Penalties

Whether you are facing substantial 1120S penalties, looking for proper tax planning to avoid such penalties, or just need assistance to comply with 1120S tax requirements, please contact Sherayzen Law Office.  Our experienced tax firm will guide you through the complex maze of the corporate tax law, provide rigorous IRS representation in disputing the penalties, and help you create and implement a creative ethical tax plan.