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Audit Reconsideration | International Tax Lawyers Minnesota

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Audit Reconsideration is a very important IRS procedure that may provide a taxpayer with a “second chance” to challenge the results of an established IRS determination without going through the expensive process of tax litigation (assuming it is still available as an option). In this article, I will introduce and explore the concept of audit reconsideration for educational purposes.

Audit Reconsideration: General Purposes

Audit Reconsideration is procedure that allows a taxpayer to contest the results of a prior audit where additional tax was assessed and remains unpaid (or where a tax credit was reversed). This procedure is also utilized to challenge a Substitute for Return (SFR) determination.

When Can a Taxpayer Request Audit Reconsideration?

One of the most important reasons why audit reconsideration is considered to be such an important procedural tool is that it can be requested by a taxpayer at any time after an examination assessment is made (as long as the tax remains unpaid). In other words, Audit Reconsideration provides a taxpayer with the flexibility that is unmatched by any other appeal mechanism.

Reasons for Requesting Audit Reconsideration

Audit Reconsideration can be requested for any of the following five reasons:

1. Taxpayer failed to appear for the IRS audit;

2. Taxpayer moved and never received correspondence from the IRS (often, in a situation involving correspondence audits);

3. Taxpayer has additional information that was not presented during the audit;

4. Taxpayer simply disagrees with the final audit assessment (perhaps, because the IRS committed a computational or processing error in assessing the tax);

5. Taxpayer files an original delinquent return after an assessment was made due to a substitute return executed by the IRS.

Procedural Prerequisites for Requesting Audit Reconsideration

There are two important procedural prerequisites for making the request for audit reconsideration: (i) the taxpayer must have filed a tax return; and (ii) the assessment must remain unpaid or the Service must have reversed tax credits that the taxpayer disputes.

Circumstances When the IRS Will Not Consider a Request for Audit Reconsideration

There are certain circumstances when the IRS will not even consider a request for Audit Reconsideration:

(1) The taxpayer has already been granted an audit reconsideration request and did not provide any additional information with the current request that would change the audit results;

(2) The assessment was made as a result of a closing agreement under Code Section 7121 on IRS Form 906 (signed by a taxpayer pursuant to assessment within the IRS Offshore Voluntary Disclosure Program) or Form 866; same applies to assessments made under Form 870-AD;

(3) The assessment was made as a result of a compromise under Code Section 7122 – such agreements are almost always final and conclusive;

(4) The assessment was made as the result of final TEFRA administrative proceedings;

(5) A final decision with respect to the tax liability was made by the US Tax Court, US District Court or the US Court of Federal Claims.

How to Request Audit Reconsideration

There is not any special form that the IRS requires in order to request an audit reconsideration. Instead, any letter composed by the taxpayer or his representative will be deemed sufficient as long as the prerequisites listed above are satisfied and the request includes the following information:

(1) the request must identify which adjustments the taxpayer is disputing – the proposed changes must be made clear to the IRS;

(2) the request must provide additional information that was not considered during the original examination (only copies of the documents should be mailed to the IRS because originals will not be returned);

(3) a copy of the original Form 4549 should be included with the letter; and

(4) a daytime and evening telephone number and the best time for the IRS to reach the taxpayer.

The request letter with supporting documentation should be mailed to the correct address listed in the IRS Publication 3598 or the office that last corresponded with the taxpayer.

Contact Sherayzen Law Office for Professional Help With Your Request for Audit Reconsideration

If you disagree with the results of your personal or business income tax and/or FBAR audit, contact Sherayzen Law Office to explore your appeal options. Preserving and properly using your administrative IRS appeal options is extremely important given the expense involved in a tax court litigation. At Sherayzen Law Office, we have helped numerous clients with their IRS Appeals and Audit Reconsideration Requests and we can help you!

Contact Us Today to Schedule Your Confidential Consultation!

Tax Definition of the United States | US Tax Lawyers

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The tax definition of the United States is highly important for US tax purposes; in fact, it plays a key role in identifying many aspects of US-source income, US tax residency, foreign assets, foreign income, application of certain provisions of tax treaties, et cetera. While it is usually not difficult to figure out whether a person is operating in the United States, there are some complications associated with the tax definition of the United States that I wish to discuss in this article.

Tax Definition of the United States is Not Uniform Throughout the Internal Revenue Code; Three-Step Analysis is Necessary

From the outset, it is important to understand that the tax definition of the United States is not uniform. Different sections of the Internal Revenue Code (“IRC”) may have different definitions of what “United States” means.

Therefore, one needs to engage in a three-step process to make sure that the right definition of the United States is used. First, the geographical location of the taxpayer must be identified. Second, one needs to determine the activity in which the taxpayer is engaged. Finally, it is necessary to find the right IRC provision governing the taxation of that taxpayer engaged in the identified specific activity in that specific location; then, look up the tax definition of the United States with respect to this specific IRC provision.

General Tax Definition of the United States

Generally, for tax purposes, the United States is comprised of the 50 states and the District of Columbia plus the territorial waters (along the US coastline). See IRC § 7701(a)(9). The territorial waters up to 12 nautical miles from the US shoreline are also included in the term United States.

General Tax Definition of the United States Can Be Replaced by Alternative Definitions

As it was pointed out above, this general definition is often modified by the specific IRC provisions. The statutory reason why this is the case is the opening clause of IRC § 7701(a) which specifically allows for the general definition to be replaced by alternative definitions of the United States: “when used in this title, where not otherwise distinctly expressed or manifestly incompatible with the intent thereof … .”

Hence, instead of relying on the general tax definition of the United States in IRC § 7701(a), one needs to look for alternative definitions specific to the IRC provision that is being analyzed. Moreover, the fact that there is no express alternative definition is not always sufficient, because one may have to determine the intent (most likely from the legislative history of an IRS provision) behind the analyzed IRC provision to see if an alternative tax definition of the United States should be used.

General Tax Definition and Possessions of the United States

While the object of this small article does not include a detailed discussion of the alternative tax definitions of the United States, it is important to note that the Possessions of the United States (“Possessions”) are not included within the general tax definition of the United States. They are not mentioned in IRC § 7701(a)(9); IRC 1441(e) even states that any noncitizen resident of Puerto Rico is a nonresident alien for tax withholding purposes. Similarly, IRC § 865(i)(3) defines Possessions as foreign countries for the purposes of sourcing income from sale of personal property.

On the other hand, Possessions may be included within some of the alternative tax definitions of the United States. For example, for the purposes of the Foreign Earned Income Exclusion, Possessions are treated as part of the United States.

Thus, it is very important for tax practitioners and their clients who reside in Possessions to look at the specific IRS provisions and determine whether an alternative definition applies to Possessions in their specific situations.

Contact Sherayzen Law Office for Professional Tax Help

If you need professional tax help, contact the international tax law firm of Sherayzen Law Office Ltd. Our legal team is highly experienced in US domestic and international tax law. We have helped hundreds of US taxpayers to resolve their tax issues and We can help You!

Contact Sherayzen Law Office Today to Schedule Your Confidential Consultation!

Russian Taxation of Gifts to Nonresidents: Recent Changes

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The Russian Ministry of Finance (“MOF”) recently issued Guidance Letter 03-04-06/64102 (dated October 31) regarding the taxation of gifts from Russian legal entities to nonresidents (i.e. the Russian taxation of gifts to nonresidents). This Letter will have a direct impact on the tax planning for Russians who are tax residents of the United States.

Russian Taxation of Gifts to Nonresidents: Russian-Source Gifts are Taxable

In the letter, the MOF stated that, under the Russian Tax Code Article 209, Section 2, the Russian-source income of individuals who are not tax residents of the Russian Federation is subject to the Russian income tax (the Russian tax residents are taxed on their worldwide income – i.e Russian-source and foreign-source income).

Furthermore, the MOF determined that gifts received by nonresidents from a Russian legal entity are considered to be Russian-source income. This means that these gifts are taxable beyond the exemption amount. According to Tax Code Article 217, section 28, the exemption amount is 4,000 Russian roubles per tax year. Hence, a gift from a Russian legal entity to a non-resident of Russia will be subject to the Russian individual income tax if it exceeds 4,000 rubles.

Russian Taxation of Gifts to Nonresidents: the Place of Gift Does Not Matter

It is important to emphasize that, in this situation, the sourcing of the gift is determined by the giftor – i.e. if the giftor is a Russian legal entity, the gift is considered as Russian-source income irrespective of the actual location of the place where the gift took place. For example, if a Russian legal entity gifts 10,000 rubles in Switzerland, the gift is still considered to be Russian-source income.

Russian Taxation of Gifts to Nonresidents: Tax Withholding Rules

The general rule is that the Russian legal entity who makes the gift to a nonresident is considered to be the withholding agent who is required to withhold from the gift and remit to the MOF the individual income tax due. However, the MOF specified that, if a gift is a non-monetary one or of such a nature that a tax cannot be withheld, then the entity must notify the Russian Federal Tax Service that it could not and did not withhold the tax (with the amount of the tax due). The nonresident would be responsible for the payment of the tax due in this case.

Impact of the Changes in the Russian Taxable of Gifts to Nonresidents on US Tax Residents

The Guidance Letter 03-04-06/64102 will have an important impact on the Russian tax and estate planning strategies with respect to US tax residents. One of the most common strategies for business succession and estate planning in Russia has been gifting of assets to children who were non-residents of Russia and US tax residents. The guidance letter directly impacts this strategy forcing the re-evaluation of the desirability of this entire course of action.

Hapoalim Prepares for Settlement with DOJ | FATCA Tax Attorney

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On October 6, 2016, Israeli bank Hapoalim Ltd. announced that, in order to cover the costs of a future settlement with the US Department of Justice (DOJ), it will add a $70 million charge to an existing $50 million provision in its third-quarter results. The expected settlement will cover Hapoalim’s role in helping US tax residents to evade their US tax obligations.

In its news release, Hapoalim stated that its representatives held an initial discussion with the DOJ on September 30, 2016, to discuss the future settlement. The bank did not indicate whether $120 million in charges that it booked to date is the actual amount that Hapoalim will pay under its settlement with the DOJ. Rather, the news release emphasizes the uncertainty that still exists with respect to the actual amount.

The issue of the DOJ investigation dates back to the year 2011. In its recent (June 30, 2016) financial statements Hapoalim confirmed that its Swiss subsidiary Bank Hapoalim (Switzerland) Ltd. had been notified by Swiss authorities in 2011 that it was being investigated by the US government as a result of the DOJ’s suspicions that the bank had assisted US clients in evading federal taxes. The Swiss subsidiary could not resolve this issue in 2013 in the DOJ’s Swiss Bank Program due to the fact that it could not be classified as a Category 2 bank.

It is important to remember that the DOJ is not the only institution that is going after Hapoalim. The State of New York is conducting its own review. In its news release, Hapoalim indicated that the $120 million charge is not related to the New York investigation.

While all of this legal uncertainty makes it difficult for Hapoalim to assess its future liability under any deferred prosecution agreement, one can compare its situation with Bank Leumi. In 2014, Bank Leumi Group entered into a Deferred Prosecution Agreement with the DOJ under which it paid $270 million ($157 million of this penalty was allocated to Bank Leumi’s Swiss accounts held by US taxpayers).

If we rely on this precedent, it appears that Hapoalim is greatly underestimating its penalty, because Bank Leumi and Hapoalim are fairly similar in size as well as their actions in soliciting US clients. One also must not forget about the possible future indictments of Hapoalim’s employees (at least in the United States) by the DOJ.

France Asks Switzerland for Names of UBS Accountholders

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This is an international tax lawyer news update: on September 26, 2016, Swiss tax officials confirmed that France asked Switzerland to provide the names of the holders of more than 45,000 UBS bank accounts. The request covers years 2006-2008.

Le Parisien newspaper, which first published extracts from the French request that the combined balance in the affected accounts exceeded CHF 11 billion (around $ 11.4 billion.). Le Parisien, which did not disclose how it gained access to the letter, also said the French authorities were able to identify the holders of 4,782 accounts.

The French request came to light after, on September 12th 2016, the Swiss Supreme Court over-ruled the lower court’s rejection of a similar request from the Netherlands for financial details of Dutch residents with accounts at UBS. Despite the Netherlands’ success, doubts still remain about the viability of the French request due to the fact that article 28 of the France-Switzerland tax treaty of 1967, as modified in 2010, provides that accounts that were closed before 2010 are not covered by the agreement and, therefore, should not be subject to information exchange.