All posts by tax-law-news

Crackdown on Tax Treaty Abuses

Tax authorities throughout the world are cracking down on taxpayers – individuals and corporations – that utilize some aggressive tax planning strategies. While most of these schemes are perfectly legal and merely take advantage of loopholes in the international tax system, there is a growing concern that they not only threaten tax revenue for governments but also undermine local and regional business and economic development.

Aggressive tax planning strategies under fire

There are a number of tax avoidance methods used by multinational corporations that exploit international tax law “loopholes” and result in “double non-taxation”—loopholes that are slowly and steadily being closed. Among these strategies are the following:

  • Transfer Pricing Manipulation – This involves trade between related parties at prices meant to manipulate markets or to deceive tax authorities (e.g., Company A sells to subsidiary B in a tax haven at an artificially low price, so that A can report a low profit. Then subsidiary B sells to subsidiary C in another country at an inflated price, so that subsidiary C can report a low profit). These schemes are prevalent in Africa and the developing world. The EU has adopted a directive regarding country-by-country reporting to combat this practice.
  • Hybrid Loan Arrangements - The EU recently closed a loophole used by many multinational corporations, whereby financial instruments that are considered tax-deductible loans in some member states and tax-exempt equity in others have been exploited to avoid taxation on profits.
  • Base Erosion and Profit Shifting (BEPS) – The OECD has an  Action Plan that addresses tax planning strategies that allocate taxable profits to locations where no actual business is conducted, but where taxes are low, or that otherwise make profits disappear for tax purposes by exploiting gaps in tax laws.

While it is crucial for companies to keep their tax burdens low, it is equally important to make sure that the tax strategies utilized do not raise red flags, particularly in the international arena.

Avoiding Red Flags in Tax Avoidance

Businesses with operations abroad must not only keep abreast of local laws and regulatory issues, but must also maintain a tax strategy that is responsive to worldwide taxation developments in order to maximize opportunities and minimize risks. Moskowitz LLP has extensive experience in  international tax planning and representation, including cross-border transactions. Our lawyers are well-versed in successful strategies to legally eliminate or minimize U.S. and international tax obligations.  Contact our firm today for a consultation.

The Corporate Inversion: From Obscure Strategy to Hot Trend

Capitalist ideals of “free enterprise” and “competition” make great debate topics, but when compared to the business-friendly tax codes of other nations the United States Tax Code cannot compete. With the highest corporate income tax rate in the developed world, many businesses and longstanding American icons have made the move towards corporate inversion, a tax reduction method of re-incorporating a company in another country if a significant portion of the company’s income is derived from foreign sources.

How do corporate inversions work?

This once obscure corporate tax strategy has made recent headlines with a record number of major U.S. corporations currently seeking inversions. CNN Money reports that from 2004-2013, 47 U.S. companies relocated, compared to 29 from 1983-2003. What makes corporate inversion such an attractive proposition to so many U.S. companies?

Corporate inversions enable companies to reduce their U.S. tax burden by re-incorporating in a country that has lower tax rates.  When the company’s residency changes, the way the U.S. taxes that company changes. The company still pays U.S. tax on its U.S. profits at U.S. corporate tax rates (the combined U.S. federal-state corporate tax rate is currently 39.1 percent).  However, the company’s worldwide profits are no longer taxable in the U.S. since its status has changed from U.S. domiciled to non-U.S. domiciled.

In addition to benefitting from a lower tax rate, a number of companies that undertake corporate inversions also practice earnings stripping, with the company in the U.S. taking on debt in order to fund foreign operations, and paying excessive interest on that debt which can be deducted from U.S. taxes. The arrangement is structured so that the debt is owed to a related party (usually the U.S. company’s foreign parent) for whom the interest may be either partially or wholly tax exempt. 

Are There Any Conditions?

Since it is illegal for a company to claim residency in a locale where it conducts little or no business, inversions are generally preceded by mergers with foreign corporations —either the foreign corporation will take over the U.S. company or the two companies combining to create a new entity in another jurisdiction.

Under 26 U.S. Code § 7874, the foreign entity must own at least 20 percent of the new business.  In an effort to curb the practice, President Obama proposed raising this threshold to 50 percent. If this plan succeeds, U.S. companies would be required to surrender control to their foreign partners. An exception to this rule provides ownership may remain with the U.S. company if it has “substantial business activities” in the foreign country consisting of:

  • 25 percent of its business in the foreign country; and
  • 25 percent of its employees and employee compensation in the foreign country.

In the meantime, a number of major U.S. corporations have inversions currently pending, including:

  • Chiquita Brands International, Inc., which announced on March 10, 2014 that it will combine with the Dublin-based Fyffes. The merger, a billion dollar deal, will result in the creation of the largest banana producer on the planet.
  • Walgreens, the largest drugstore chain in the U.S. has exercised its option to buy controlling interest in Switzerland’s Alliance Boots.  Inversion was considered and revealed to  save Walgreens approximately $4 billion in taxes in the next five years alone.   However, on August 6, 2014, a statement was issued stating that Walgreens maintain its tax domicile in the United states because of the likelihood of IRS scrutiny and action.
  • Applied Materials recently announced a merger with Japan’s Tokyo Electron. The new combined company will be incorporated in the Netherlands, where it expects to pay an effective tax rate of approximately 17% by 2017.

Keep in mind that corporate inversion is not tax evasion. U.S. companies have a duty to their shareholders to preserve corporate assets, and use legal means to save taxes is perfectly legitimate. Protecting your potential to successfully use corporate inversion for your company requires thorough knowledge of the latest tax developments under the guidance of experienced corporate tax attorneys.  The San Francisco-based tax law firm of Moskowitz LLP offers its clients an innovative, cost-effective approach to meet all their international tax representation needs.

Also note that on August 26, 2014, Moskowitz LLP will be presenting a Webinar through West Legal, Tax Inversions: Tax Savings Strategies for Corporations and What Political Calls for Tax Reform Mean.   Please join us:  http://westlegaledcenter.com/program_guide/course_detail.jsf?videoCourseId=100029030&ADMIN_PREVIEW=true

Christopher Housh Appointed Chapter Director 2013 - 2015 GGSEA

Golden Gate Society of Enrolled Agents


Christopher Housh has been appointed Chapter Director by the GGSEA.

SAN FRANCISCO, CA - March. 5, 2013 - Moskowitz LLP, a San Francisco-based tax law firm, is proud to announce that Christopher Housh, E.A. will be serving as Chapter Director for the Golden Gate Society of Enrolled Agents (GGSEA) between June 2013 and May 2015.

The GGSEA is a professional organization of individuals who have been licensed to represent taxpayers in their dealings with the Internal Revenue Service.

Christopher Housh has worked at Moskowitz LLP for over 12 years, beginning as a legal document assistant before ascending to his position as an Enrolled Agent. He will continue to work for the firm full-time throughout his tenure as Chapter Director.

"I want to bring a closer sense of unity between tax professionals in the Bay Area, whether they be Enrolled Agents, CPAs, or Tax Attorneys," says Housh. "My experiences and successes working within a tax law firm that employs all three types of licensed tax professionals, has demonstrated that when utilized together, the value provided to the taxpayer client is truly greater than the sum of any one part."

Throughout his time with Moskowitz LLP, Chris has established a reputation among clients and tax agency representatives for his knowledge, dedication and warmth, and has facilitated agreeable settlements for countless Bay Area taxpayers facing audits, tax liabilities, and other challenges.

"I will be presenting the interests of the Enrolled Agents of San Francisco and the Peninsula to the Board of the Golden Gate Chapter," Chris says of his role within the GGSEA. "I also intend to be involved in tax advocacy, such as meeting with the state assembly and legislature members about pending tax legislation."

Steve Moskowitz, Esq., founding partner of Moskowitz LLP, made the following statement regarding the  appointment:
"This is part of our ever-striving effort to work with the community, tax professionals and the government to better achieve the end goals of our clients and to promote awareness of tax issues in California and  the Nation."

About Moskowitz LLP

Moskowitz LLP is San Francisco-based tax law firm that caters to clients on a local, national and global scale. The tax attorneys, CPA’s, and EA’s at Moskowitz LLP, some of whom have practiced in tax for over 30 years, have helped professionals, small businesses and private citizens with tax conflicts including, but not limited to, tax audits, liability disputes, and criminal defense against evasion and fraud charges - and also as it applies to international tax compliance.  We have an established reputation for producing results, even in cases deemed "unwinnable" by larger firms, and can also assist with effective tax planning and tax collection matters.

 

Contact:

Moskowitz LLP, A Tax Law Firm
Chris P. Housh, Enrolled Agent
Phone: (415) 394-7200
Address: 180 Montgomery Street, Ste. 1950, San Francisco, CA 94104
Website: www.moskowitzllp.com/Christopher-P-Housh-EA

How The IRS taxes your illegal income, Stephen M. Moskowitz interview

We are honored that CNN Money has interviewed Stephen M. Moskowitz of Moskowitz LLP, A Tax Law Firm.  The article can be found here.  In it, we discuss How The IRS taxes your illegal income.

This is a tricky area of law that is more common that many people may think.  For instance, in California there are discrepancies in certain areas of state and federal law, like, medical marijuana and dispensaries, and its related taxation.  It can mean a lot of money for the government, which makes it serious business for all taxpayers.  Criminal tax work is unique and demands a high level of competence and experience with the tax tax and criminal laws.  Our criminal tax practice group routinely advises individuals, businesses and tax professionals on how to prepare legal tax returns.  We have been in the trenches defending freedom, assets, and dignity for over 30 years.  We are available to give you all the representation that is so crucial at this point in time.

Feeling generous this year?

Donating to Charity may be a tax benefit but it also is a Red Flag for an IRS Audit

Giving to others is rewarding in and of itself, but it's always nice to see your generosity provide you with a tax benefit and result in a lower tax bill.  In our tax law practice we represent many individuals and one of the most often audited items on tax returns is the charitable deduction.    The Charitable Contributions Deduction allows taxpayers to deduct their contributions to qualifying charitable contributions of cash and property within certain limitations.


Does your donation qualify for a tax deduction?

Planning your charitable gifts and donations with a tax attorney can help you ensure that you receive full tax credit for your generosity.    On a more sophisticated level, your tax attorney can also help you through tax planning when to make the gift and what type of property to give thereby maximizing the benefits of your generosity, and legally minimize your tax bill. 

Having a tax attorney assist you is prudent because taking the charitable deduction may also raise your chances of an IRS audit. That is because one of the IRS audit indicators that IRS computers look for is the income level and the average charitable donation for similar income groups.  See our article, The Audit Lottery Myth.    Further, the IRS knows that compliance with documenting the deduction and/or taking the deduction correctly can be complicated.  As such, it is an easy “money maker” for the IRS to just flag it and put the burden on the taxpayer to prove their entitlement to the deduction.  

For instance, a client of ours manages his own charitable foundation.     The IRS audited the tax returns and questioned that tax deductions and asserted that our client did not meet the Tax Code’s requirements.   The Moskowitz Tax Attorneys defended our client’s right to tax status and won.   This saved our client over 1.5 million dollars in taxes and penalties and the charity continues to exist today.

Also in our tax law defense practice the Moskowitz Tax Law firm defends individuals who are audited by the IRS and it turns out that they had made up the tax deduction or the audit triggers a further federal investigation.   For instance, the following excerpt is from a press release issued by the US Attorney’s Office:  

The indictment alleges that from December 2011 through February 2012, (NAME Redacted by author) obstructed the Internal Revenue Service by obtaining false documents that he intended to present to the IRS in support of deductions he claimed on his tax returns in 2007 and 2008.  The indictment further alleges that during three separate interviews with special agents with the Internal Revenue Service – Criminal Investigation, (NAME Redacted by author) falsely told agents that he possessed original and legitimate documents to support the deductions on his tax returns, and denied that he had attempted to obtain false documents to support those deductions.

This case presents a number of challenges.    This case seemingly involves a situation analogous to the ‘cover-up being worse than the original crime.’   From the criminal tax attorney’s perspective, negotiation of a plea agreement or providing defense thru trial, this taxpayer’s special knowledge of investigations and rights and oath of duty will have to be dealt with and presented in a way that will mitigate potential upward sentencing adjustments.    Note, there are additional elements to this case that are not discussed here which should be considered.  

For now and perhaps more importantly, this fact pattern shows how a seemingly simple tax dispute over a tax deduction can spiral into a very serious criminal tax matter.   As here, an IRS audit or inquiry has led to criminal tax allegations and related crimes being charged where the defendant, now faces prison and monetary fines.  

In conclusion, we can all agree that giving to charities is a good thing.   It helps many people and causes and is basically an American way of life.   Legislators agree and provide charitable givers with the incentive of a tax deduction.  However, there are requirements you need to know in order to take advantage of the tax benefits and otherwise protect and assert your rights.   

If you're not sure how to account for charitable donations in your 2013 tax planning, or believe that the IRS has unjustly withheld this deduction in a past return, consult an experienced tax attorney at Moskowitz LLP in San Francisco. These tax attorneys and tax professionals can help you navigate the complexities of tax law.

Disclaimer:  Because of the generality of this blog post, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations. Prior results do not guarantee a similar outcome. Furthermore, in accordance with Treasury Regulation Circular 230, we inform you that any tax advice contained in this communication was not intended or written to be used, and cannot be used, for the purposes of (i) avoiding tax related penalties under the Internal Revenue Code, or (ii.) promoting, marketing, or recommending to another party any tax related matter addressed herein.

DISTRICT COURT DECIDES FBAR PENALTY ASSESSMENT CASE - BOTH A WIN FOR THE GOVERNMENT & FOR OVDP PARTICIPANTS

By:  Stephen M. Moskowitz, Esq., LL.M & Anthony V. Diosdi, Esq., LL.M

Here at Moskowitz LLP, A Tax Law Firm based in San Francisco, CA, we have been following just how the Internal Revenue Service will collect FBAR penalties once imposed outside the scope of any Offshore Amnesty Program.      

In its decision November 8, 2012, the District Court for the District of Utah found in United States v. McBride that the assessment of FBAR penalties was lawful and that the IRS may proceed with its collection efforts.   In order to establish the lawfulness of FBAR penalty assessments, the United States has strategically ‘cherry picked’ the cases it has brought against taxpayers.     Both in United States v. Williams, (4th Cir. 2012) [non-precedential opinion], and now in United States v.  McBride, regardless of the evidentiary used by the court, it is hard to see how the Government couldn’t win its cases.   McBride is another case of “low hanging fruit” with case facts establishing conduct of blatant lying by the taxpayer(s) to the IRS agents, clear intent to underreport income via offshore accounts, etc.   

However, there does appear to be a significant victory in both McBride and Williams for taxpayers with unreported offshore accounts. It appears that neither court has agreed that it is permissible to impute knowledge simply because a taxpayer checked “no” on Schedule B.

It should be noted, in the right case, an interesting argument can be made that the willful penalty of $100,000 per year or 50 percent of the value of a foreign account may violate a taxpayer’s right to Due Process under the Fifth Amendment of the United States Constitution. In considering how the willful penalty infringes upon an individual’s right to due process, a taxpayer could analogize to due process theories applied in the punitive damages context. In BMW of North America v. Gore, 517 U.S. 559 (1996), the United States Supreme Court discusses whether a punitive damages award could be grossly excessive in proportion to related compensatory damages award. The Court asserted that “[p]unitive damages may be properly be imposed to further a State’s legitimate interests in punishing unlawful conduct and deterring its repetition……Only when an award can fairly be categorized as ‘grossly excessive’ in relation to these interests does it enter the zone of arbitrariness that violates the Due Process Clause.” Id. At 568. In evaluating whether evaluating whether an award is “grossly excessive,” the United States Supreme Court has instructed courts to consider three guideposts: “(1) the degree of reprehensibility of the defendant’s misconduct; (2) the disparity between the actual or potential harm suffered by the plaintiff and the punitive damages award; and (3) the difference between the punitive damages award by the jury and the civil penalties authorized or imposed in comparable cases.” State Farm Mutual Automobile Ins. Co. v. Campbell, 538 U.S. 408, 418 (2003).

In the right case, the above standard enunciated by the Supreme Court will not be too difficult to satisfy. Let’s assume that a taxpayer simply did not know he or she had a duty to report a foreign account on an FBAR. In that case it cannot be said that the taxpayer’s conduct was “particularly reprehensible.” Further if the taxpayer cooperated with the Internal Revenue Service, it would be extremely difficult to argue that the Government suffered a harm. Even in cases where the Government were to contend actual economic harm for the lost tax on a foreign account, the willful penalty seems ripe for a Constitutional challenge. The Supreme Court has traditionally held that “an award of more than four times the amount of compensatory damages might be close to the line of constitutional impropriety.” State Farm, 538 U.S. at 425. Given the way the willful penalty is drafted, it is not too difficult to imagine a situation where the Government intends to impose a willful penalty that exceeds four times the value of an undisclosed foreign account. Finally, there are no comparable cases to draw upon to determine the civil penalties for a taxpayer who simply didn’t know that they had to disclose foreign accounts on an FBAR. So, we are just going to have to wait and see if the Government attempts to impose the willful penalty against a taxpayer who simply did not know that the account had to be disclosed on an FBAR.

The strategies the tax law firm of Moskowitz LLP employs in defending our clients from offshore account related investigations vary according to the facts and circumstances of the case, the comfort zone of our client, and our experience.    

Disclaimer:  Because of the generality of this blog post, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations. Prior results do not guarantee a similar outcome. Furthermore, in accordance with Treasury Regulation Circular 230, we inform you that any tax advice contained in this communication was not intended or written to be used, and cannot be used, for the purposes of (i) avoiding tax related penalties under the Internal Revenue Code, or (ii.) promoting, marketing, or recommending to another party any tax related matter addressed herein.

IRS Form 1099 Enforcement Program - Another Fishing Expedition?

By:  Stephen M. Moskowitz, Esq., LLM & Chris Housh, Enrolled Agent

We will be speaking on this issue and would like to personally invite you to attend. As our guest, you are eligible for 20% off the registration fee!

IRS Form 1099 Reporting: What You Need to Know
November 27, 2012
San Francisco, CA
Holiday Inn San Francisco International Airport North, 275 South Airport Boulevard

Register online: http://www.lorman.com/389645
Call: 866-352-9539
Discount code: S7490185
Priority code: 15999

The Housing Assistance Tax Act of 2008 included a new IRS mandate that requires certain companies that settle payments for merchants and other payment processors to report the gross sales of the transactions to the IRS each year.   This reporting form was generally targeted towards closing the tax compliance gap for online commerce by having companies like PayPal, Amazon, Credit Card Merchants, etc. report to the IRS all gross ‘sales’ or other transactions.    Starting in 2011, the gross amount of payment cards and third-party transactions were recorded on the 1099K.     This reporting is just another ‘loophole’ the IRS has closed for individuals who were not reporting their online sales businesses for tax purposes. 

Now that the IRS has the data, as practitioners of tax law defense, we can anticipate the corollary impact of reporting programs on taxpayers such as, double reporting problems when duplicate forms are filed for the same transactions, erroneous forms being reported to the IRS, mismatched tax forms when merchant data does not match the taxpayer data, and unfortunately, the IRS utilizing its access to this new data for investigations of civil and criminal tax crimes.    

True to form, it has come to our attention that the IRS is now embarking on an enforcement program for Forms 1099K by utilizing the data collected from the credit card companies, Pay Pal and similar companies to, in the IRS’s own words,  “make sure taxpayers are compliant."  This new 1099K enforcement program will allow the IRS to ‘fish for information’ regarding the 1099K data in regards to efforts to further combat tax evasion or under-reported income as well as how to better collect delinquent taxes from individuals. 
 
It is our understanding that the IRS will begin issuing notices to individuals which will:

  • Request information regarding the accuracy of the 1099K; or,
  • Request that taxpayer’s provided a worksheet and answer questions regarding the transactions indicated on 1099K; or,
  • Issue Matching Notices requiring a response or face imputed income and therefore an  additional tax assessment. 

The Form 1099K will have the credit card company or payment processing company inform the IRS how much you grossed in sales or other transactions on a monthly basis.  The IRS will then assume that all of those funds that are reported should be in the same Schedule C.  However, if you sell material on eBay, and then have a friend put his share of the nice meal out on the town into your PayPal account, the IRS will treat it as taxable income that you should report on your business.

We also anticipate that if your business has a customer that does some purchases by check and some by credit card, and that customer issues a Form 1099-MISC at the end of the year for all of the purchases, the IRS can respond that the portions that were paid by credit cards and show on the 1099-K are not reported in an effort to increase your taxable income.  Keeping strong records on your sales and how people pay you will be an important part of your business going forward.

Moskowitz LLP is a Tax Law Firm representing clients in all aspects of tax disputes with the federal, state and local tax authorities. We have 30 years of experience in representing individuals and businesses in audits, coordinated exams, administrative appeals, and both civil and criminal tax cases.

We begin every engagement by clearly understanding the client’s priorities, both short term and long term. Our clients benefit from our unique legal teams, made up of experienced tax attorneys with advanced credentials, CPA’s, and other team members who work together to provide a sophisticated solution and/or defense to that tax situation at hand.

We have over 35 years of extensive experience in disputes involving:  Tax Controversies; Tax Litigation; Audit Representation; Criminal Tax Representation; Current Tax Returns; Delinquent Tax Returns; Innocent Spouse; Tax Shelters; State Tax Representation; Tax Planning; Tax Aspects of Family Law; Tax Settlement; Offer in Compromise; International Tax Representation


Disclaimer:  Because of the generality of this blog post, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations. Prior results do not guarantee a similar outcome. Furthermore, in accordance with Treasury Regulation Circular 230, we inform you that any tax advice contained in this communication was not intended or written to be used, and cannot be used, for the purposes of (i) avoiding tax related penalties under the Internal Revenue Code, or (ii.) promoting, marketing, or recommending to another party any tax related matter addressed herein.

Prop. 30 proposes higher income tax for well off in California

Next week, Californians will vote on two tax-based proposals.It's no secret that the state of California is in a dubious position, facing considerable debt in the wake of our Nation’s recent recession. In order to increase revenue, Governor Jerry Brown has proposed a series of tax increases that will appear on voting ballots next week.

One of the most talked about reforms has been Proposition 30, an amendment to the state constitution that will increase income tax rates among wealthier Californians for the next seven years. The proposal is officially described as a temporary measure to replenish state finances. The extra money will reportedly be directed to schools and universities that would otherwise have to face the budget cuts that are currently necessary for 2012-13, The Huffington Post states.

As explained by the state voter's guide, advocates praise the bill as a means to balance the government budget, promote education and preserve public safety efforts. However, those against the measure have expressed skepticism about whether the revenue will be devoted to schools, and that taxpayers will not be able to account for how the money is actually spent.

While Prop. 30 would raise income taxes for California households making at least $250,000 a year, another tax bill on the ballot - Prop. 38 - proposes that Californians across income brackets see a gradual tax increase over the course of 12 years. That money will reportedly be distributed among K-12 schools across the state, reports the news outlet.

As election day looms, both parties are campaigning hard to sway California residents who remain undecided on this issue. The experienced tax attorneys at Moskowitz LLP in San Francisco will be paying close attention to the results on November 6, and are readily available to help California residents resolve their income tax issues.