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2018 Individual Tax Rates | International Tax Lawyer & Attorney

The Tax Cuts and Jobs Act of 2017 modified the tax brackets that existed in tax year 2017. In this short essay, I will discuss the new 2018 individual tax rates.

2018 Individual Tax Rates: Historical Background

Tax rates seem to change every time there is a new President. For example, when President Bush got elected in 2000, the Congress passed the Economic Growth and Tax Relief Reconciliation Act of 2001 creating a new tax bracket and bringing the rest of the tax rates down; the top rate was gradually reduced to 35% from 39.6%.

Then, under the new administration of President Obama, the American Taxpayer Relief Act of 2012 increased the tax rates again with the top rate going back up to 39.6%.

2018 Individual Tax Rates: 2017 Tax Reform

Under President Trump, the Congress passed a major reform of the US tax system through the Tax Cuts and Jobs Act of 2017. The tax rates were among the most important changes with respect to domestic US tax law.

While the tax reform preserves the same seven tax brackets for individual tax payers, it introduces new 2018 individual tax rates for almost each of them. Under the previous law, the tax brackets were 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. Now, the new rates starting tax year 2018 are much lower: 10%, 12%, 22%, 24%, 32%, 35%, and 37%.

It is important to emphasize that these are not permanent changes. The new tax brackets will operate only through tax year 2025; starting January 1, 2026, the tax rates will return to those that existed in 2017.

2018 Individual Tax Rates: Income Thresholds for Tax Brackets Increase

In addition to lower tax rates, the 2017 tax reform also restructured the income thresholds that apply to most tax brackets. Generally, the income thresholds went up.

For example, in order to be subject to 39.6% tax in 2017, taxpayers filing a joint tax return must have had income in excess of $470,700. In 2018, in order to be subject to the top bracket’s tax rate of 37%, the same couple will have to have income in excess $600,000. The income of $470,700 would only trigger the 35% tax rate in 2018.

Sherayzen Law Office has long held the view that the increase in the income thresholds for tax brackets is especially important (perhaps, more so than the decrease in tax rates) to alleviate the tax burden of the middle class. However, we do note with alarm that the benefits might have been spread too widely to include the top 1% of the earners while the 10% bracket was kept essentially the same. We believe that this was one of the reasons why the Congress made the increase in income thresholds for tax brackets a temporary one despite the anticipated inflation pressures in the future.

First Quarter 2018 IRS Underpayment Interest Rates | Tax Lawyer MN

On December 5, 2017, the IRS announced that the First Quarter 2018 IRS underpayment interest rates and overpayment interest rates will remain the same as they were in the last quarter of 2017. This means that, the First Quarter 2018 IRS underpayment interest rates and overpayment interest rates will be as follows: On December 5, 2017, the IRS announced that the First Quarter 2018 IRS underpayment interest rates and overpayment interest rates will remain the same as they were in the last quarter of 2017. This means that, the First Quarter 2018 IRS underpayment interest rates and overpayment interest rates will be as follows:

four (4) percent for overpayments (three (3) percent in the case of a corporation);
four (4) percent for overpayments (three (3) percent in the case of a corporation);
four (4) percent for underpayments; six (6) percent for large corporate underpayments; and one and one-half (1.5) percent for the portion of a corporate overpayment exceeding $10,000.

The Internal Revenue Code requires that the rate of interest be determined on a quarterly basis. For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points. Generally, in the case of a corporation, the underpayment rate is the federal short-term rate plus 3 percentage points and the overpayment rate is the federal short-term rate plus 2 percentage points. The rate for large corporate underpayments is the federal short-term rate plus 5 percentage points. The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point.

The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point.

The First Quarter 2018 IRS underpayment interest rates and overpayment interest rates were computed based on the federal short-term rate determined during October of 2017 to take effect on November 1, 2017, based on daily compounding.

There are two principal applications for the First Quarter 2018 IRS underpayment interest rates in the context of US international tax law. First, the First Quarter 2018 IRS underpayment interest rates are used to calculate interest on the additional tax liability that has arisen as a result of filing amended federal tax returns.  This is also true with respect to tax returns that are amended as part of the OVDP or the Streamlined Domestic Offshore Procedures voluntary disclosure package.

Second, the First Quarter 2018 IRS underpayment interest rates are relevant to calculation of a PFIC (Passive Foreign Investment Company) interest on PFIC tax imposed on “excess distribution” under the default IRC Section 1291 PFIC calculation method.

Ordinary Business Care and Prudence Standard | International Tax Lawyer

Ordinary Business Care and Prudence Standard is a requirement that is present, explicitly or implicitly, in all reasonable cause defenses. In this article, I would like to explain what Ordinary Business Care and Prudence Standard means and what are the main factors for analyzing whether a taxpayer met the burden of proof required under the Ordinary Business Care and Prudence Standard.

Ordinary Business Care and Prudence Standard: General Requirements

The ordinary business care and prudence standard is an objective standard. There is no precise definition of this standard, because its application is fact-dependent. Nevertheless, the standard is generally satisfied as long as the taxpayer acted prudently, reasonably and in good faith (taking that degree of care that a reasonably prudent person would exercise) and still could not comply with the relevant tax requirement. IRM 20.1.1.3.2.2 (02-22-2008) adds that “ordinary business care and prudence includes making provisions for business obligations to be met when reasonably foreseeable events occur”.

Ordinary Business Care and Prudence Standard: Common Factors

While the determination under the ordinary business care and prudence standard is highly fact-dependent, there are certain common factors that the IRS will take into account. IRM 20.1.1.3.2.2 (02-22-2008) specifically lists four factors that must be reviewed by the IRS, but states that all available information should be considered. Let’s explore these common factors:

1. Compliance History

The main issue here is to see if this is the first failure to comply with US tax laws by the taxpayer or whether he already violated in the past the tax law provision in question IRM 20.1.1.3.2.2 (02-22-2008) states that “the same penalty, previously assessed or abated, may indicate that the taxpayer is not exercising ordinary business care”. The IRM urges the IRS agents to check at least three preceding tax years for payment patterns and the taxpayer’s overall compliance history.

If the violation was the first time a taxpayer exhibited noncompliant behavior, this will be a positive factor that will be considered with other reasons the taxpayer provided for reasonable cause. While a first-time noncompliance does not by itself establish reasonable cause, taxpayers who violated the same provision more than once will find it more difficult to establish that their behavior satisfied the ordinary business care and prudence standard.

2. Length of Time

At issue here is the time between the event cited as the reason for the initial tax noncompliance and subsequent compliance actions. IRM 20.1.1.3.2.2 (02-22-2008) requires the IRS agents to consider: “(1) when the act was required by law, (2) the period of time during which the taxpayer was unable to comply with the law due to circumstances beyond the taxpayer’s control, and (3) when the taxpayer complied with the law.”

Obviously, if the taxpayer did not discover his noncompliance until one year later and immediately tried to remedy the situation, it will add significant force to his argument that his behavior satisfied the ordinary business care and prudence standard. On the other hand, an unexplained delay between the time the taxpayer discovered his noncompliance and the time he attempted to remedy it will have a negative impact on the overall taxpayer’s argument.

Another highly important factor that plays a crucial role in offshore voluntary disclosures is whether, after discovering his prior noncompliance, the taxpayer voluntarily complied prior to being contacted by the IRS. In a voluntary disclosure context, if the IRS initiates an examination and contacts the taxpayer first, his voluntary disclosure options may be entirely foreclosed. On the other hand, the fact that a taxpayer voluntarily contacted the IRS with his amended tax return that corrected his prior tax noncompliance may play a highly positive role in convincing the IRS that the taxpayer’s prior behavior was consistent with the ordinary business care and prudence standard.

Hence, it is highly important for the taxpayer to explain what happened during the time between his prior noncompliance and his current effort to remedy the situation.

3. Circumstances Beyond the Taxpayer’s Control

The crucial issue here is whether the taxpayer could have anticipated the event that caused the noncompliance. If he could have done it, then his case might be materially weakened. On the other hand, if the taxpayer could not have anticipated the event, then, it might play a very important role in convincing the IRS that his behavior satisfied the ordinary business care and prudence standard.

A lot of sub-factors play a very important role here: the taxpayer’s education, his tax advisors, whether he has been previously subjected to the tax at issue, whether he has filed the tax forms in question before, whether there were any changes to the tax forms or tax law (which the taxpayer could not reasonably be expected to know), and so on. The level of complexity of the issue in question is also an important additional sub-factor.

The “circumstances beyond control” factor is necessarily tied to the “length of time” factor described above, because a taxpayer’s obligation to meet the tax law requirements is ongoing. Ordinary business care and prudence standard generally requires that the taxpayer continue to meet the requirements, even if is he late.

4. Taxpayer’s Reason for Prior Noncompliance

The taxpayer must provide and the IRS agent must consider an actual reason for the prior tax noncompliance whatever it may be and this reason must address the specific penalty imposed. It is the combination of this taxpayer’s reason together with other factors, including the common factors described above, that will form the basis for the taxpayer’s argument that his behavior satisfied the ordinary business care and prudence standard.

Contact Sherayzen Law Office to Contest IRS Penalties based on Reasonable Cause and Ordinary Business Care and Prudence Standard

Since 2005, Sherayzen Law Office has saved its clients millions of dollars in potential IRS penalties. If you wish to challenge the imposition of IRS penalties on your prior US domestic and/or international tax noncompliance, contact Sherayzen Law Office for professional help. We will thoroughly review the facts of your case, determine the available defense strategies to reduce or eliminate IRS penalties (including the determination of whether your case satisfied the ordinary business care and prudence standard), implement these strategies and defend your case against the IRS.

Contact Us Today to Schedule Your Confidential Consultation!

First Quarter 2017 Underpayment and Overpayment Interest Rates

On December 5, 2016, the IRS announced that the First Quarter 2017 underpayment and overpayment interest rates will remain the same from the Fourth Quarter of 2016.

This means that, the First Quarter 2017 underpayment and overpayment interest rates will be as follows:

four (4) percent for overpayments (two (3) percent in the case of a corporation);
four (4) percent for underpayments;
six (6) percent for large corporate underpayments; and
one and one-half (1.5) percent for the portion of a corporate overpayment exceeding $10,000.

Under the Internal Revenue Code, the rate of interest is determined on a quarterly basis. For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points. Generally, in the case of a corporation, the underpayment rate is the federal short-term rate plus 3 percentage points and the overpayment rate is the federal short-term rate plus 2 percentage points. The rate for large corporate underpayments is the federal short-term rate plus 5 percentage points. The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point.

The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point.

The First Quarter 2017 underpayment rates are relevant not only for simple amended tax returns (with amounts due), but also for a number of other different reasons. Here, I would like to emphasize two particular reasons for the importance of the first quarter 2017 underpayment rates. First, it is used to calculate interest for the US taxpayers who participate in the OVDP or the Streamlined Domestic Offshore Procedures.

Second, the first quarter 2017 underpayment rates will be relevant to future PFIC interest calculation on any excess distributions (for default Section 1291 PFICs).

Third Quarter of 2016 IRS Interest Rates

The Internal Revenue Service recently announced that Third Quarter of 2016 IRS Interest Rates will remain the same for the. Third quarter begins on July 1, 2016 and ends on September 30, 2016) The Third Quarter of 2016 IRS Interest Rates:

four (4) percent for overpayments [three (3) percent in the case of a corporation];
four (4) percent for underpayments;
six (6) percent for large corporate underpayments; and
1 and one-half (1.5) percent for the portion of a corporate overpayment exceeding $10,000.

Under the Internal Revenue Code, the rate of interest is determined on a quarterly basis; therefore, US taxpayers and tax professionals should refer to IRS announcements of IRS interest rates on a quarterly basis. For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points.

Third Quarter of 2016 IRS Interest Rates are relevant for various reasons; among these reasons, three main uses stand out. First, these are the rates that will be used to charge an interest on any tax owed by a taxpayer. Second, these rates will be used to calculate the interest rate that the IRS owes with respect to tax refunds on the amended US tax returns.

Finally, Third Quarter of 2016 IRS Interest Rates are relevant to PFIC default 1291 calculations. The PFIC tax that is levied on “excess distribution” is subject to IRS interest rates. Hence, if a PFIC’s holding period includes the third quarter of 2016, the tax attorney who calculates PFIC interest on the PFIC tax will need to use Third Quarter of 2016 IRS Interest Rates.

The IRS interest rates were stagnant at 3% for a very long time (from 2010 through first quarter of 2016). However, in the second quarter of 2016, the IRS raised the interest rates from 3% to 4% following the increase of the federal short-term rate from 0% to 1%. Sherayzen Law Office will continue to closely monitor the moves of the Federal Reserve to increase its interest rates in the future.