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IRS Appeals Video Conference | IRS Tax Lawyer & Attorney

In May of 2019, Mr. Andrew Keyso, a deputy chief of the IRS Office of Appeals, stated that the Appeals Office is in the early stages of rolling out the technology to conduct video conferences as an option for Appeals conferences. This is great news for tax practitioners – an IRS Appeals video conference is a very convenient option for doing business with the IRS.

IRS Appeals Video Conference: WebEx Platform and Early Testing

The IRS Appeals video conference option will be based on WebEx video conferencing software developed by Cisco. It is secure and convenient, but some training is necessary to use it efficiently.

The IRS has already successfully tested WebEx software for appeals video conferences in early 2018. In October of 2018, IRS made the software more broadly available to its employees so that they can offer video conferences.

IRS Appeals Video Conference: IRS Wants Employees to Use It More

Unfortunately, not all IRS employees at the Appeals Office offer video conferences. Neither do many taxpayers seek them (undoubtedly due to lack of knowledge about them). Those who do so, however, find this option very attractive.

The IRS definitely wants its employees to use the IRS Appeals video conference option more. Speaking at the American Bar Association Section of Taxation conference in May of 2019, Diane Ogawa, an IRS appeals officer in Honolulu, stated: “We are trying to get more appeals officers training and on board with WebEx”. Sherayzen Law Office believes that, as more Appeals employees, taxpayers and tax practitioners become familiar with WebEx, the usage of the IRS Appeals video conference option should greatly increase.

IRS Appeals Video Conference: Positive Reaction from Tax Lawyers

The tax lawyers are generally in favor of using the IRS Appeals video conference option. They find it a convenient and effective way to conduct a hearing conference. There is also an additional benefit of reduced costs: there is no need to waste time and money on traveling to the IRS office.

IRS Appeals Video Conference: Potential Problems

This option, however, is not without potential problems. Besides the potential technical issues, the biggest problem is privacy. An unrepresented taxpayer may try to hold a video conference in a public place (like Starbucks) and the IRS will simply not agree to it. A represented taxpayer will not likely run into this problem, because his representative should know about these privacy issues.

The bigger privacy concern, though, comes from tax lawyers. They need to make sure that the prying eye of WebEx technology does not catch the other clients’ files, names and so on in the background of the WebEx video. Lawyers should strive to protect the attorney-client privileged information to the maximum extent possible.

Sherayzen Law Office Supports the IRS Video Conference Option and Hopes the IRS Expands It to Audit Interviews

As an international tax law firm, Sherayzen Law Office has clients throughout the United States and, indeed, the world. Flying to a meeting with an IRS agent is sometimes inconvenient for both, the taxpayer and the attorney; it is also expensive. Video conferencing is a perfect solution to this issue, and Sherayzen Law Office fully supports the current IRS video conferencing efforts.

Moreover, we encourage the IRS to apply video conferencing to other areas, such as IRS audit meetings.

Minneapolis MN International Tax Lawyer & Attorney | PLR 201922010

On May 31, 2019, the IRS released a Private Letter Ruling (“PLR”) on the extension of time to make an election to be treated as a disregarded entity for US tax purposes under Treas. Reg. Section 301.7701 (26 CFR 301.7701-3). Let’s explore this PLR 201922010 in more detail.

PLR 201922010: Fact Pattern

PLR 201922010 deals with a typical fact pattern for someone who is doing business overseas. A US citizen wholly owns a foreign corporation which wholly owns a foreign subsidiary. The foreign subsidiary wants to make an election to be classified as a disregarded entity for US tax purposes, but misses the deadline to do so timely. Hence, it files a request for the IRS to grant a discretionary extension of time to file Form 8832 pursuant to Treas. Reg. Sections 301.9100-1 and 301.9100-3.

PLR 201922010: Legal Analysis

The IRS began its legal analysis of the request by noting that, under Treas. Reg. Section 301.7701-3(a), a business entity that is not classified as a corporation under Treas. Reg. Section 301.7701-2(b)(1), (3), (4), (5), (6), (7) or (8) (hereinafter, an “eligible entity”) can elect its classification for federal tax purposes as provided in Treas. Reg. Section 301.7701-3. An eligible entity with at least two members can elect to be classified as either an association (and thus a corporation under the Treas. Reg. Section 301.7701-2(b)(2)) or a partnership. An eligible entity with a single owner, however, can elect to be classified as an association (i.e. a corporation) or to be disregarded as an entity separate from its owner.

The IRS then focused specifically on the classification of foreign entities relying on Treas. Reg. Section 301.7701-3(b)(2)(I). This provision states that, unless it elects otherwise, a foreign eligible entity is (A) a partnership if it has two or more members and at least one member does not have limited liability; (B) an association if all members have limited liability; or © disregarded as an entity separate from its owner if it has a single owner that does not have limited liability.

What does “limited liability” mean in this context? Treas. Reg. Section 301.7701-3(b)(2)(ii) answers this question by stating that a member of a foreign eligible entity has limited liability if the member has no personal liability for the debts of or claims against the entity by reason of being a member.

How does one make this classification election? Treas. Reg. Section 301.7701-3(c)(1)(I) provides, in part, that an eligible entity may elect to be classified other than as provided under Treas. Reg. Section 301.7701-3(b), or to change its classification, by filing Form 8832 with the service center designated on Form 8832.

Then, the IRS addressed the key issue for this PLR – when this classification election can be made. Treas. Reg. Section 301.7701-3(c)(1)(iii) provides that the election will be effective on the date specified by the entity on Form 8832 or on the date filed if no such date is specified on the election form. The effective date specified on Form 8832 can not be more than 75 days prior to the date on which the election is filed and can not be more than 12 months after the date on which the election is filed.

Is it possible to make a late election? The IRS answered this question by referring to Treas. Reg. Section 301.9100-1(c), which provides that the Commissioner may grant a reasonable extension of time to make a regulatory election, or a statutory election (but no more than six months except in the case of a taxpayer who is abroad), under all subtitles of the Internal Revenue Code (Code), except subtitles E, G, H, and I. Treas. Reg. Section 301.9100-1(b) defines “regulatory election” as an election whose due date is prescribed by a regulation published in the Federal Register, or a revenue ruling, revenue procedure, notice or announcement published in the Internal Revenue Bulletin.

Treas. Reg. Section 301.9100-3 addresses extensions of time for making late regulatory elections. Treas. Reg. Section 301.9100-3(a) states that such requests for relief will be granted when the taxpayer provides the evidence (including affidavits described in Treas. Reg. Section 301.9100-3(e)) to establish to the satisfaction of the Commissioner that the taxpayer acted reasonably and in good faith, and the grant of relief will not prejudice the interests of the Government.

PLR 201922010: IRS Granted Request for Extension to Time to Make the Election

Based on the information submitted and the representations made, the IRS concluded that the foreign entity satisfied the requirements of Treas. Reg. Sections 301.9100-1 and 301.9100-3. As a result, the IRS granted to the foreign entity an extension of time of 120 days from the date of PLR 201922010 to file a properly executed Form 8832 with the appropriate service center electing to be treated as a disregarded entity.

PLR 201922010: The Electing Foreign Entity Must Submit Form 8858 and All Other Returns

The IRS emphasized that its ruling was contingent on the electing foreign entity and its owner filing within 120 days from the date of the PLR all of the required federal income tax and information returns for all relevant years. The IRS specifically mentioned Form 8858 (Return of U.S. Persons With Respect to Foreign Disregarded Entities).

Contact Sherayzen Law Office if You Need to File a PLR Request for Late Entity Classification Election Similar to PLR 201922010

If you need to ask the IRS to grant a late entity classification request, you can contact Sherayzen Law Office for professional help with drafting and submitting your request for a Private Letter Ruling.

October 2018 IRS Compliance Campaigns | International Tax Lawyer & Attorney News

On October 30, 2018, the IRS Large Business and International division (LB&I) has announced five additional compliance campaigns. Let’s discuss in more detail these October 2018 IRS compliance campaigns.

October 2018 IRS Compliance Campaigns: Background Information

By the middle of the 2010s, the IRS realized that the then-existing structure of the LB&I was not the best format to address modern noncompliance issues; it could not even accurately identify potential noncompliant taxpayers. Also, the IRS believed that LB&I was not applying the IRS funds in an efficient manner.

Hence, after extensive planning, the IRS decided to move LB&I toward issue-based examinations and a compliance campaign process. Under the new format, LB&I itself decided which compliance issues presented the most risk and required a response in the form of one or multiple treatment streams to achieve compliance objectives. The IRS came to the conclusion that this approach made the best use of IRS knowledge and appropriately deployed the right resources to address specific noncompliance issues.

Each campaign was preceded by strategic planning, re-deployment of resources, creation of new training and tools as well as careful taxpayer population selection through metrics and feedback. The IRS has also built a supporting infrastructure inside LB&I for each specific campaign.

The first thirteen campaigns were announced by LB&I on January 13, 2017. Then, the IRS added eleven campaigns on November 3, 2017, five campaigns on March 13, 2018, six campaigns on May 21, 2018, five campaigns on July 2, 2018 and five campaigns on September 10, 2018. In other words, as of September 11, 2018, there were a total of forty-five campaigns. The additional five October 2018 IRS compliance campaigns bring the total number of campaigns to fifty.

Five New October 2018 IRS Compliance Campaigns

Here are the new October 2018 IRS Compliance campaigns that should be added to the already-existing forty-five campaigns: Individual Foreign Tax Credit Phase II, Offshore Service Providers, FATCA Filing Accuracy, 1120-F Delinquent Returns and Work Opportunity Tax Credit. Each of these five campaigns was identified through LB&I data analysis and suggestions from IRS employees.

October 2018 IRS Compliance Campaigns: Individual Foreign Tax Credit Phase II

IRC Section 901 alleviates double-taxation through foreign tax credit for income taxes paid by US taxpayers on their foreign-source income. In order to claim the credit, one must meet certain eligibility requirements. This campaign addresses taxpayers who have claimed the credit, but did not meet the requirements. The IRS will address noncompliance through a variety of treatment streams, including examination.

October 2018 IRS Compliance Campaigns: Offshore Service Providers

The goal of this campaign is purely punitive – to target US taxpayers who engaged Offshore Service Providers that facilitated the creation of foreign entities and tiered structures to conceal the beneficial ownership of foreign financial accounts and assets for the purpose of tax avoidance or evasion. The treatment stream for this campaign will be issue-based examinations.

October 2018 IRS Compliance Campaigns: FATCA Filing Accuracy

The Foreign Account Tax Compliance Act (FATCA) was enacted in 2010 as part of the HIRE Act. The overall purpose is to detect, deter and discourage offshore tax abuses through increased transparency, enhanced reporting and strong sanctions. Under FATCA, Foreign Financial Institutions and certain Non-Financial Foreign Entities are generally required to report the foreign assets held by US account holders; the same applies to substantial (beneficial) US owners of these assets. This campaign addresses those entities that have FATCA reporting obligations but do not meet all their compliance responsibilities. The Service will address noncompliance through a variety of treatment streams, including termination of the FATCA status.

October 2018 IRS Compliance Campaigns: 1120-F Delinquent Returns

The campaign addresses delinquent (i.e. filed late) Forms 1120-F. Form 1120-F is a US income tax return of a foreign corporation. It must be accurate, true and filed timely in order for a foreign corporation to claim deductions and credits against effectively connected income. For these purposes, Form 1120-F is generally considered to be timely filed if it is filed no later than eighteen months after the due date of the current year’s return.

The IRS may waive the filing deadline where, based on its facts and circumstances, the
foreign corporation establishes to the satisfaction of the IRS that the foreign corporation acted reasonably and in good faith in failing to file Form 1120-F. The reasonable cause standard is described in Treas. Reg. Section 1.882-4(a)(3)(ii). LB&I Industry Guidance 04-0118-007 (dated February 1, 2018) established procedures to ensure waiver requests are applied in a fair, consistent and timely manner under the regulations.

The objective of the 1120-F Delinquent Returns campaign is to encourage foreign entities to timely file Form 1120-F returns and address the compliance risks for delinquent 1120-F returns. The IRS hopes to accomplish it by field examinations of compliance-risk delinquent returns and external education outreach programs.

October 2018 IRS Compliance Campaigns: Work Opportunity Tax Credit

This campaign addresses the consequences of the Work Opportunity Tax Credit (WOTC) certification delays and the burden of amended return filings. Due to delays associated with the WOTC certification process, taxpayers are often faced with the burdensome requirement of amending multiple years of federal and state returns to claim the WOTC in the year qualified WOTC wages were paid. This requirement, coupled with any resulting examinations of this issue, is an inefficient use of both taxpayer and IRS resources.

Pursuant to Rev. Proc. 2016-19, the IRS has agreed to accept the “WOTC year of credit eligibility” issue into the Industry Issue Resolution (IIR) program. The IIR is intended to provide remedies to reduce taxpayer burden, promote consistency, and decrease examination time to most effectively use IRS resources. The campaign’s objective is to collaborate with industry stakeholders, Chief Counsel, and Treasury to develop an LB&I directive for taxpayers experiencing late certifications and to promote consistency in the examinations of WOTC claims.

Contact Sherayzen Law Office for Professional Tax Help

If you have been contacted by the IRS as part of any of its campaigns, you should contact Sherayzen Law Office for professional help. We have helped hundreds of US taxpayers around the world with their US tax compliance issues, and we can help you!

Contact Us Today to Schedule Your Confidential Consultation!

July 2018 IRS Compliance Campaigns | International Tax Lawyer & Attorney

On July 2, 2018, the IRS announced the creation of another five compliance campaigns. Let’s discuss these July 2018 IRS Compliance Campaigns in more detail.

July 2018 IRS Compliance Campaigns: Background Information

The IRS compliance campaigns is the end result of a long period of planning by the IRS Large Business and International division (“LB&I”). The idea behind the IRS compliance campaigns is to concentrate the LB&I resources in a way that deals with the potential noncompliance area in the most efficient way. The first campaigns were announced by the IRS on January 31, 2017. Then, the IRS rapidly added new campaigns in November of 2017, March of 2018 and May of 2018. As of July 1, 2018, there were 35 campaigns outstanding.

Five New July 2018 IRS Compliance Campaigns

Here are the new July 2018 IRS Compliance campaigns that should be added to the already existing thirty-five campaigns: Restoration of Sequestered AMT Credit Carryforward, S Corporation Distributions, Virtual Currency, Repatriation via Foreign Triangular Reorganizations and Section 965 Transition Tax.

Each of these campaigns was identified by the IRS through LB&I data analysis and suggestions from IRS employees.

July 2018 IRS Compliance Campaigns: Restoration of Sequestered AMT Credit Carryforward

This campaign deals with the complex issues concerning sequestered Alternative Minimum Tax (“AMT”) credit. Refunds issued or applied to a subsequent year’s tax, pursuant to IRC Section 168(k)(4), are subject to sequestration and are a permanent loss of refundable credits. Taxpayers may not restore the sequestered amounts to their AMT credit carryforward, but some are doing so in any case.

Given the complexity of the issues involved, the IRS decided to make soft letters as the primary treatment stream for this campaign. Soft letters will be mailed to taxpayers who are identified as making improper restorations of sequestered amounts. The IRS will then monitor these taxpayers to make sure that they correct the problem and stay in compliance. The idea is to educate taxpayers on the proper treatment of sequestered AMT credits so that they self-correct all problems.

July 2018 IRS Compliance Campaigns: S Corporation Distributions

This is a very important campaign that will affect a very large number of small business owners. It will focus on three major problem areas. The first issue is failure to report gain upon the distribution of appreciated property to a shareholder. The second issue is the proper classification of a corporate distribution (of cash and property) as a taxable dividend. Finally, the third issue concerns non-dividend distributions to shareholders in excess of their stock basis; such distributions are taxable. The IRS adopted a more severe approach to this campaign. The treatment streams for this campaign include issue-based examinations, tax form change suggestions and stakeholder outreach.

July 2018 IRS Compliance Campaigns: Virtual Currency

This campaign is the IRS attempt to catch up with modern technology and properly tax transactions that involve virtual currencies. IRS Notice 2014-21 classifies virtual currency as “property” for federal tax purposes. Hence, any sales or exchanges that involve virtual currencies will be taxable in the United States.

The fact that these transactions take place outside of the United States would not affect the taxability of foreign currencies as long as a US tax resident is involved in these transactions. As Sherayzen Law Office has pointed out numerous times in the past, US tax residents are subject to taxation on their worldwide income. This rule includes virtual currencies.

This campaign involves highly complex issues and requires flexible approach to compliance enforcement. This is why the IRS will address noncompliance related to the use of virtual currency through multiple treatment streams including outreach and examinations.

The IRS has expressly stated that its compliance enforcement activities will follow the general tax principles applicable to all transactions in property as outlined in Notice 2014-21. The IRS will also continue to consider and solicit taxpayer and practitioner feedback in education efforts, future guidance and development of Practice Units.

Interestingly enough, the IRS stated that it will not create a voluntary disclosure program specifically to address tax non-compliance involving virtual currency. Instead, the IRS urges taxpayers with unreported virtual currency transactions to self-correct their returns as soon as practical.

July 2018 IRS Compliance Campaigns: Repatriation via Foreign Triangular Reorganizations

This campaign focuses on enforcement of Notice 2016-73 (“the Notice”) which the IRS issued in December of 2016. The Notice curtails the claimed “tax-free” repatriation of basis and untaxed CFC earnings following the use of certain foreign triangular reorganization transactions. The goal of the campaign is to identify and challenge these transactions by educating and assisting examination teams in audits of these repatriations.

July 2018 IRS Compliance Campaigns: Section 965 Transition Tax

This is a highly important campaign that focuses on the issue that will continue to plague US taxpayers for a long time – 965 transition tax. IRC Section 965 requires US shareholders (a term of art) to pay a transition tax on the untaxed foreign earnings of certain specified foreign corporations as if those earnings had been repatriated to the United States. Taxpayers may elect to pay the transition tax as a lump-sum payment or in installments over an eight-year period. This means that some (and probably most) of these US shareholders should have paid some or all of the tax on their 2017 income tax return.

The LB&I already engaged in an outreach campaign in 2018 to reach trade groups, advisors and other outside stakeholders to raise awareness of filing and payment obligations concerning the 965 transition tax. The IRS even circulated an external communication on this subject through stakeholder channels in April of 2018.

Contact Sherayzen Law Office for Professional Tax Help

If you have been contacted by the IRS as part of any of its campaigns, you should contact Sherayzen Law Office for professional help. We have helped hundreds of US taxpayers around the world with their US tax compliance issues, and we can help you!

Contact Us Today to Schedule Your Confidential Consultation!

FDII Export Incentive | Foreign Business Income Tax Lawyer & Attorney

The 2017 Tax Cuts and Jobs Act (the “2017 tax reform” or “TCJA”) enacted a highly-lucrative incentive for US corporations to export directly from the United States – the Foreign-Derived Intangible Income (“FDII”) regime. In this article, I would like to introduce the readers in a general manner to the FDII export incentive contained in the TCJA.

FDII Export Incentive: TCJA

The creation of the participation exemption system posed a problem for the drafters of the TCJA – how does one stop US corporations from running all of their foreign business through a foreign corporation since foreign corporate profits may actually be transferred to the United States tax-free? Among other provisions of this complex law, the drafters utilized two powerful incentives for US corporations to export directly overseas.

The first one was a “stick” – the Global Intangible Low-Taxed Income or GILTI. The GILTI regime established what can be best described as a global minimum tax on the earnings of foreign subsidiaries of a US business entity.

The second approach was a “carrot” – the FDII export incentive. The FDII regime creates a powerful incentive for US corporations to export goods and services from the United States by creating a deemed deduction of a large percentage of corporate export income. In other words, the effective corporate tax rate is reduced through the FDII regime because a portion of a corporation’s export income is being deducted and never subject to US taxation.

FDII Export Incentive: General Description of the Deemed Deduction

The deemed deduction applies only to a US corporation’s FDII. FDII is basically a certain portion of corporate income from foreign sources determined by a formula established by Congress.

The formula requires a multi-step process. The first steps involve the determination of the Deduction-Eligible Income (DEI), Qualified Business Asset Investment (“QBAI”), Foreign-Derived Deduction-Eligible Income (“FDDEI”). Once all of these items are calculated, then the Deemed Intangible Income (“DII”) is figured out.

FDII is calculated last. The basic formula for FDII is: DII times the ratio of FDDEI over DEI.

The last step is to calculate the tax liability which involves the reduction of FDII by 37.5%. Thus, the effective tax rate for a corporate taxpayer (assuming the current 21% corporate tax rate stays the same) with respect to its FDII is only 13.125%.

It should be mentioned that the current deemed deduction will stay at 37.5% only through December 31, 2025. For the years after December 31, 2025, the deemed deduction will go down to 21.875%. This means that the effective tax rate on FDII will be 16.406%. Unless the law changes (which is possible), non-FDII corporate income will continue to be taxed at 21%.

FDII Export Incentive: Net Impact of the Deemed Deduction

Based on even just this general analysis of FDII, we can understand why the FDII export incentive is such an important part of the US corporate tax law. First, in most cases, the FDII deduction is a disincentive to shift foreign-source income from a US corporation to a controlled foreign corporation (“CFC”). A CFC may be subject to taxation under two different anti-deferral regimes, Subpart F or GILTI tax. Subpart F income will just force the recognition of foreign income by the CFC right away without any deemed deduction (i.e. this would be the worst-case scenario).

If the Subpart F rules do not apply, then the corporation may be subject to the GILTI tax. It is true that the effective corporate tax rate for GILTI, after its current 50% deemed reduction is only 10.5%. Nevertheless, FDII”s effective tax rate of 13.125% significantly reduces the difference from that what it would have been otherwise (i.e. between 10.5% and 21%). Moreover, when one factors in the additional administrative, US tax compliance and local tax compliance expenses, this difference may become nonexistent.

Second, the FDII deemed deduction makes US corporations more competitive worldwide, because they may now realize a higher profit margin even if they lower the prices for their products and services sold overseas.

Contact Sherayzen Law Office for Professional Help With FDII Calculations and International Business Tax Planning

If your business engages in selling products or services overseas, there are opportunities for international business tax planning from US perspective. Contact Sherayzen Law Office to take advantage of these opportunities through professional, creative and ethical tax help.

Contact Us today to Schedule Your Confidential Consultation!