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IRS Announces Procedures Adjusted for APA and Certain Competent Authority Requests

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The Internal Revenue Service, Deputy Commissioner (International), Large Business and International Division (“LB&I”), announced certain organizational and administrative changes and transitional procedures in connection with the creation of the Advance Pricing and Mutual Agreement (“APMA”) program.

Prior to February 26, 2012, the Advance Pricing Agreement (“APA”) program was part of the Office of the Associate Chief Counsel (International), and the functions of the U.S. Competent Authority were generally exercised by the office of the Director, Competent Authority & International Coordination within the LB&I Division of the IRS. Effective February 26, 2012, the APA program and those Competent Authority functions (including mutual agreement procedures) related to transfer pricing and other allocation issues, as well as determinations of permanent establishment status, are realigned and consolidated into APMA, a single program within LB&I.

The Director of APMA reports to the Director, Transfer Pricing Operations. Other Competent Authority functions are the responsibility of a new LB&I Treaty Assistance and Interpretation team in the office of the Assistant Deputy Commissioner (International), LB&I.

Pursuant to this realignment, the administration of requests for Competent Authority assistance is shared by two separate units within LB&I. Requests for APAs or regarding other transfer pricing, permanent establishment and allocation issues are addressed by APMA. Competent Authority requests regarding non-allocation issues are addressed by the LB&I Treaty Assistance and Interpretation team.

The IRS intends to revise the existing published guidance with respect to requests for APAs and Competent Authority assistance. Before issuing such updated guidance, the IRS will seek public comment.

Pending issuance of such guidance, taxpayers should continue to follow and rely on Rev. Proc. 2006-9, 2006-1 C.B. 278, as modified by Rev. Proc. 2008-31, 2008-1 C.B. 1133 with respect to requests for APAs and Rev. Proc. 2006-54, 2006-2 C.B. 1035 with respect to requests for Competent Authority assistance, except as follows:

1. References to the APA program should be understood to refer to APMA.

2. For determinations regarding limitation on benefits, the user fee under Rev. Proc. 2006-54, §14.02 is $27,500, effective for requests received after Feb. 4, 2012. See Rev. Proc. 2012-1 (Appendix A), 2012-1 I.R.B. 1.

3. Taxpayers should send APA requests and requests for Competent Authority assistance to the following address:

Deputy Commissioner (International)
Large Business and International Division
Internal Revenue Service
1111 Constitution Avenue, N.W.
Routing: MA2-209
Washington, D.C. 20224
Attention: Katina Cooper

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 Extends the 2011 Tax Return Filing Deadline to April 17, 2012

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On January 4, 2012, the Internal Revenue Service announced that the taxpayers will have until  April 17, 2012 (Tuesday) to file their 2011 tax returns and pay any tax due.  This is because April 15, 2012, falls on a Sunday, and Emancipation Day, a holiday observed in the District of Columbia, falls this year on Monday, April 16, 2012.  Since, according to federal law, District of Columbia holidays impact tax deadlines in the same way that federal holidays do, all taxpayers will have two extra days this year to file their 2011 tax returns.  Note, however, that taxpayers requesting an extension will have until October 15, 2012, to file their 2011 tax returns; there is no change in the filing date here.

The IRS will begin accepting e-file and Free File returns on January 17, 2012. Additional details about e-file and Free File will be announced later this month.

Expanded Tax Credit for Hiring Unemployed Veterans

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On November 21, 2011, the VOW to Hire Heroes Act of 2011 was signed into law.    The new law provides an expanded work opportunity tax credit to businesses that hire eligible unemployed veterans and for the first time also makes part of the credit available to tax-exempt organizations. Businesses can claim the credit as part of the general business credit and tax-exempt organizations can claim it against their payroll tax liability. The credit is available for eligible unemployed veterans who begin work on or after November 22, 2011, and before January 1, 2013.

Also included in this new law is the Veterans Retraining Assistance Program (VRAP) for unemployed Veterans. The Department of Veteran Affairs (VA) and the Department of Labor (DoL) are working together to roll out this new program on July 1, 2012.  Specific eligibility requirements apply.  Moreover, the program is only limited to 45,000 participants for the 2012 fiscal year (and to 54,000 participants between October 1, 2012 and March 31, 2014).

Underpayment and Overpayment Interest Rates for the First Quarter of 2012

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On November 29, 2011, the Internal Revenue Service announced that underpayment and overpayment interest rates will remain the same for the calendar quarter beginning January 1, 2012. The rates will be:

  • three (3) percent for overpayments (two (2) percent in the case of a corporation)
  • three (3) percent for underpayments
  • five (5) percent for large corporate underpayments
  • one-half (0.5) 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.

Notice 88-59, 1988-1 C.B. 546, announced that, in determining the quarterly interest rates to be used for overpayments and underpayments of tax under section 6621, the Internal Revenue Service will use the federal short-term rate based on daily compounding because that rate is most consistent with section 6621 which, pursuant to section 6622, is subject to daily compounding.

Interest factors for daily compound interest for annual rates of 0.5 percent are published in Appendix A of Revenue Ruling 2011-32. Interest factors for daily compound interest for annual rates of 2 percent, 3 percent and 5 percent are published in Tables 7, 9, 11, and 15 of Rev. Proc. 95-17, 1995-1 C.B. 561, 563, 565, and 569.