We previously posted on November 7, 2016 we posted Swiss Bank Rats Out NYU Business Professor - Results in Fine of $100M & Up To 5 Yrs in Prison - What Are You Waiting For? where we discussed that a former client of Credit Suisse Group AG who pleaded guilty to hiding $200 million from U.S. tax authorities was sentenced to seven months in prison after a judge granted him leniency for cooperating with prosecutors, a Justice Department official said.

Dan Horsky, a retired business professor from Rochester, New York, pleaded guilty on November 4, 2016 to using secret Swiss bank accounts to hide assets and income from the Internal Revenue Service and New York tax authorities. Prosecutors urged a judge to send him to prison for 20 months. Horsky’s lawyers said he deserves probation because he helped with a criminal investigation of the bank and will pay at least $124 million in penalties.

Now according to TaxProToday citing Bloomberg, U.S. District Judge T.S. Ellis III is set to impose a sentence on Friday in federal court in Alexandria, Virginia. Dozens of wealthy U.S. tax defendants who used offshore accounts have avoided prison or received terms far below those recommended by advisory guidelines, as judges have consistently ruled against Justice Department prosecutors.

What sets apart tax cheats who use offshore accounts from other felons is often the large checks they write in back taxes, fines and penalties. In Horsky’s case, he’s paying at least $124 million, and could pay more. Prosecutors don’t want that to be a get-out-of-jail-free card.

Horsky began cooperating in an investigation on three continents in which he provided “voluminous historical, financial, and communications records and his contacts within the financial community,” his lawyers said in a Feb. 4 court filing. The precise nature of his cooperation is described in sealed memos.

Prosecutors are examining how Credit Suisse hid Horsky’s accounts from the Justice Department even as a subsidiary pleaded guilty in May 2014, paying $2.6 billion and admitting it helped thousands of Americans evade taxes, according to people familiar with the matter who weren’t authorized to discuss it publicly. A monitor appointed by New York’s banking regulator continues to review Credit Suisse’s operations after his initial two-year appointment was extended.

Horsky spent almost four decades at the University of Rochester’s Simon Business School, where he became a renowned scholar in quantitative marketing. He researched Internet startup companies, particularly in Israel, where he once lived. He lost money in 17 companies he invested in, running up credit-card debt and taking a second mortgage, according to the memo from his lawyers. In 2000, he invested in a British company through a Swiss account, sticking with the firm even as he ran up $350,000 in debts, often using margin loans.

In 2005, shares in the company began to take off, and by 2008, his holdings were worth $80 million after a second firm bought the company. He then reinvested in the second company, and his assets grew to $200 million by 2014. Even as he hid those assets, “he lived his modest life as a university professor,” according to his attorneys.

The case is U.S. v. Horsky, 16-cr-224, U.S. District Court, Eastern District of Virginia (Alexandria). Related court documents and information may be found on the website of the District Court for the Eastern District of Virginia or on PACER by searching for Case No. 1:16-cr-224.

Now TaxNotes discusses the idea is that U.S. companies that import goods in VAT countries (i.e., almost every other country in the world) are being charged with import VAT. This import VAT is creditable/recoverable for domestic importers, but not for U.S. importers. Therefore, U.S. companies that import goods elsewhere are significantly worse off than domestic traders. This is protectionism and must be retaliated against.

Trump indicated that as president he would respond to these allegedly "unfair trade practices" by imposing retaliatory tariffs on goods and services coming into the U.S. from any country that imposed an import VAT on American businesses exporting goods or services to their country.⁵ More than 160 countries have a VAT, and all of them impose an import VAT. Trump is, essentially, promising a global trade war. He vows to set U.S. tariffs at a rate that would force governments and businesses to take notice.

For example, Trump indicated that he would retaliate against Mexico's 16 percent import VAT with a 35 percent tariff, and respond to China's 17 percent import VAT with a 45 percent tariff. These rates appear to be far more than would be called for to level the playing field. Nevertheless, the president has the authority to set tariffs. In some instances, he needs the consent of Congress. In other cases, he does not. Trump could conceivably set tariffs this high -- or higher.

To Read More...

 

On September 12, 2016 we posted US Probe Resulted In EU Apple Tax Assessment where we discussed that the European Commission’s probe into Apple, which resulted in an order for the tech giant to pay up to €13 billion ($14.5 billion) in back taxes to Ireland, was prompted by a U.S. Senate investigation, European Union Competition Commissioner Margrethe Vestager said on Friday.  

Now according to TaxNotesthe European Commission's recent decision in its state aid case against Apple has not only been detrimental to Ireland's tax sovereignty, but it has also been damaging to the effective implementation of the OECD's base erosion and profit-shifting project, according to the tax director of a major Irish accounting body.

To Read More...

 

 

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The campaigns spotlight a variety of issues such as tax credits for advanced energy projects, people who withdraw from or are denied entry to the Offshore Voluntary Disclosure Program, TV broadcasters and channels who claim film production tax credits for distributing shows produced by third parties, and micro captive insurance.

The IRS is not necessarily saying that when any of the campaign items appears on a return, that’s a sure sign of noncompliance. “What we are saying is that we either believe or have indication that there is risk or concern that there could be, and we need to look at it in more depth,” said O’Donnell.
He gave the example of transfer pricing, in which the IRS recognizes the tax strategy is broadly used for conducting business internationally for pricing transactions between affiliates. “We look at the ones where we think there is risk and then we respond according to what we see, and that response typically in LB&I has been an examination,” said O’Donnell.

The IRS wants to change taxpayer behavior from noncompliance to compliance, he added. The new “treatment streams” will not be limited to audits, he noted. They will include letters alerting taxpayers that the IRS is questioning an item.

“We’ve talked about continuing to do examinations, but we use terms like ‘soft letters,’ where we might write to a group of taxpayers that have a particular item or issue on their return to ask them whether they meant to report it the way that they did, or is there something more to it,” said O’Donnell. “We might take up a guidance project where we’ve noticed that there’s a lack of clarity in an area and we want to pick that up. That could for example flow from an industry issue resolution, which is one of the items that came out in this first group, or we might be working on forms changes and instructions changes to the extent that that’s relevant and necessary.”

He noted that the LB&I division has responsibility for businesses with assets above $10 million, along with wealthy individuals who have international tax compliance obligations. “We span a pretty broad spectrum of taxpayers with a lot of different compliance risks," he said.
Accounting Today asked O’Donnell about the impact on the IRS and the LB&I division of President Trump’s executive order Monday requiring any new regulation to be offset by the withdrawal of two older regulations.

“The executive orders are coming out and being reviewed by the Service,” he said. “The manner in which we'll respond to them is still under consideration, so at this point I’m not sure how that’s all going to play out.”

He was also asked whether the campaigns would be considered a new regulation or just a new approach to compliance.

“My understanding is that the word ‘regulation’ has a pretty specific meaning, and that what we’re talking about is what we view as a new way of conducting business as usual,” he said. “So it is new. It’s something we’ve talked about, but it’s going about dealing with issues of potential noncompliance and how we go about responding to them. That’s part of what our administrative charge is at the IRS, and that’s what we are going to continue to do going forward. We think we are well within the administrative responsibilities in dealing with the taxpayer base that we've got in our division, Large Business and International.”

The IRS restructured the division last February, allowing it to better evaluate items of noncompliance to determine where there might be the most risk. O’Donnell noted that even though the IRS has a limited number of people who have expertise in areas such as transfer pricing, the new structure enables them to provide training and mentorship to others within the division.

Brian Kittle, a tax controversy and transfer pricing partner at the law firm Mayer Brown, reviewed the new IRS guidance. “This long-awaited guidance provides a glimpse into the IRS’s campaign process,” he said in a statement. “But what is perhaps most interesting about this document is what it does not provide. Most importantly, it does not elaborate on how issue-based campaigns will be conducted and how they will fit into the already-established IRS audit and appeals structures, even though the IRS has stated orally that campaigns are not intended to completely replace or revamp the examination process. While the formal document briefly (and vaguely) describes the campaigns and generally how the IRS intends on approaching the issues, taxpayers are provided with little information on what to expect going forward and how the campaign implementation will take place. In essence, the formal document simply frames the Large Business and International division’s focus areas, rather than providing substantive guidance. Taxpayers are left simply hoping that the IRS will be more transparent in the future about how this new process will actually be put into action.”
The IRS chose the campaigns through data analysis, suggestions from IRS compliance employees and feedback from the tax community, the IRS noted. As part of the effort, leaders of the LB&I division plan to continue discussion with the tax community to work on these areas to best meet the needs of the taxpayers along with tax administration.

The 13 campaigns selected for the initial rollout are:

• IRC 48C Energy Credit Campaign
This campaign ensures that only those taxpayers whose advanced energy projects were approved by the Department of Energy, and who have been allocated a credit by the IRS, are claiming the credit. These credits must be pre-approved through extensive application to the DOE. The treatment stream for this campaign will be soft letters and issue-focused examinations.

• OVDP Declines-Withdrawals Campaign
The Offshore Voluntary Disclosure Program allows U.S. taxpayers to voluntarily resolve past non-compliance related to unreported offshore income and failure to file foreign information returns. The campaign addresses OVDP applicants who applied for pre-clearance into the program but were either denied access to OVDP or withdrew from the program of their own accord. The IRS will address continued noncompliance through a variety of treatment streams including examination.

• Domestic Production Activities Deduction, Multi-Channel Video Program Distributors (MVPD’s) and TV Broadcasters
Multi-channel video programing distributors and TV broadcasters often claim that “groups” of channels or programs are a qualified film eligible for the IRC Section 199 deduction. Taxpayers are asserting that they are the producers of a qualified film when distributing channels and subscriptions packages that often include third-party produced content. Additionally, MVPD taxpayers maintain that they provide online access to computer software for the customers’ direct use (incident to taxpayers’ transmission activities, including customers’ use of the set-top boxes). LB&I has developed a strategy to identify taxpayers impacted by these issues and will develop training to aid revenue agents in examining them. The treatment streams for this campaign include the development of an externally published practice unit, potential published guidance, and issue based exams, when warranted.

• Micro-Captive Insurance Campaign
This campaign addresses transactions described in Transactions of Interest Notice 2016-66, in which a taxpayer attempts to reduce aggregate taxable income using contracts treated as insurance contracts and a related company that the parties treat as a captive insurance company. Each entity that the parties treat as an insured entity under the contracts claims deductions for insurance premiums. The manner in which the contracts are interpreted, administered, and applied is inconsistent with arm’s length transactions and sound business practices.

• Related Party Transactions Campaign
This campaign focuses on transactions between commonly controlled entities that provide taxpayers a means to transfer funds from the corporation to related pass through entities or shareholders. LB&I is allocating resources to this issue to determine the level of compliance in related party transactions of taxpayers in the mid-market segment. The treatment stream for this campaign is issue-based examinations.

• Deferred Variable Annuity Reserves & Life Insurance Reserves IIR Campaign
The IRS and Chief Counsel have agreed to accept the Deferred Variable Annuity Reserves and Life Insurance Reserves issues into the IIR program (pursuant to Rev. Proc. 2016-19) to develop guidance to address uncertainties on issues important to the Life Insurance Industry. The issues include amounts to be taken into account in determining tax reserves for both deferred variable annuities with Guaranteed Minimum Benefits, and Life Insurance contracts. The campaign's objective is to collaborate with industry stakeholders, Chief Counsel and Treasury to develop published guidance that provides certainty to taxpayers regarding these related issues.

• Basket Transactions Campaign
This campaign addresses structured financial transactions described in Notices 2015-73 and 74, in which a taxpayer attempts to defer and treat ordinary income and short-term capital gain as long-term capital gain. The taxpayer treats the option or other derivative as open until a barrier event occurs, and, therefore, does not recognize or report current period gains. The gains are deferred until the contract terminates, at which time the overall net gain is reported as a Long Term Capital Gain. LB&I has developed a training strategy for this campaign. The treatment streams for this campaign will be issue-based examinations, soft letters to Material Advisors and practitioner outreach.

• Land Developers - Completed Contract Method (CCM) Campaign
Large land developers that construct in residential communities may be improperly using the Completed Contract Method (CCM) of accounting. A developer, whose average annual gross receipts exceed $10 million, may only use the CCM under a home construction contract. In some cases, developers are improperly deferring all gain until the entire development is completed. LB&I will provide training for revenue agents assigned to work this issue. The treatment stream includes development of a practice unit, issuance of soft letters, and follow-up with issue based examinations when warranted.

• TEFRA Linkage Plan Strategy Campaign
As partnerships have become larger and more complex, LB&I has regularly revised processes to assess tax on the terminal investors. Recent legal advice provides an opportunity to make significant changes to how we approach this process. This campaign focuses on developing new procedures and technology to work collaboratively with the revenue agent conducting the TEFRA partnership examination to identify, link and assess tax to the terminal investors that pose the most significant compliance risk.

• S Corporation Losses Claimed in Excess of Basis Campaign
S corporation shareholders report income, losses and other items passed through from their corporation. The law limits losses and deductions to their basis in the corporation. LB&I has found that shareholders claim losses and deductions to which they are not entitled because they do not have sufficient stock or debt basis to absorb these items. LB&I has developed technical content for this campaign that will aid revenue agents as they examine the issue. The treatment streams for this campaign will be issue-based examinations, soft letters encouraging voluntary self-correction, conducting stakeholder outreach, and creating a new form for shareholders to assist in properly computing their basis.

• Repatriation Campaign
LB&I said it is aware of different repatriation structures being used for purposes of tax free repatriation of funds into the U.S. in the mid-market population. It has also been determined that many of the taxpayers do not properly report repatriations as taxable events on their filed returns. The goal of this campaign is to simultaneously improve issue selection filters while conducting examinations on identified, high risk repatriation issues and thereby increase taxpayer compliance.

• Form 1120-F Non-Filer Campaign
Foreign companies doing business in the U.S. are often required to file Form 1120-F. LB&I has data suggesting that many of these companies are not meeting their filing obligations. In this campaign, LB&I will use various external data sources to identify these foreign companies and encourage them to file their required returns. The treatment stream for this campaign will involve soft letter outreach. If the companies do not take appropriate action, LB&I will conduct examinations to determine the correct tax liability. The goal is to increase voluntary compliance by foreign corporations with a U.S. business nexus.

• Inbound Distributor Campaign
U.S. distributors of goods sourced from foreign-related parties have incurred losses or small profits on U.S. returns, which are not commensurate with the functions performed and risks assumed. In many cases, the U.S. taxpayer would be entitled to higher returns in arms-length transactions. LB&I has developed a comprehensive training strategy for this campaign that will aid revenue agents as they examine this IRC Section 482 issue. The treatment stream for this campaign will be issue-based examinations.

These campaigns represent the first wave of LB&I's issue-based compliance work. The IRS said more campaigns will continue to be identified, approved and launched in the coming months.

AccountingToday

IRS rolls out Large Business and International campaign audit strategy

New Audit Campaign Issues.

IRS's Large Business and International (LB&I) division has described the issues it will be targeting in a new audit strategy known as “campaigns.” IRS identified 13 specific issues spanning a broad range of topics including partnerships, insurance, an energy tax credit, tax techniques used by the television broadcast industry, and foreign businesses and taxpayers. These issues were identified through extensive data analysis, suggestions from IRS compliance employees, and feedback from the tax community.
 
New campaigns. The campaigns are the culmination of an extensive effort to redefine large business compliance work and build a supportive infrastructure inside LB&I. These campaigns represent the first wave of LB&I's issue-based compliance work, and more campaigns will continue to be identified, approved, and launched in the coming months. The 13 campaigns selected for this initial rollout are:

• (1)  Code Sec. 48C energy credit campaign. This campaign ensures that only those taxpayers whose advanced energy projects were approved by the Department of Energy, and who have been allocated a credit by IRS, are claiming the credit. The approach for this campaign will be soft letters (generally, warning letters intended to encourage self-correction and voluntary compliance) and issue-focused examinations.
• (2)  OVDP declines-withdrawals campaign. The Offshore Voluntary Disclosure Program (OVDP) allows U.S. taxpayers to voluntarily resolve past non-compliance related to unreported offshore income and failure to file foreign information returns. This campaign addresses OVDP applicants who applied for pre-clearance into the program but were either denied access to OVDP or withdrew from the program of their own accord. IRS will address continued noncompliance through a variety of approaches including examination.
• (3)  Domestic production activities deduction, multi-channel video program distributors (MVPDs) and TV broadcasters. MVPDs and TV broadcasters often claim that “groups” of channels or programs are a qualified film eligible for the Code Sec. 199 deduction. Taxpayers are asserting that they are the producers of a qualified film when distributing channels and subscriptions packages that often include third-party produced content. LB&I has developed a strategy to identify taxpayers impacted by these issues and will develop training to aid revenue agents in examining them. The approaches for this campaign include the development of an externally published practice unit, potential published guidance, and issue-based exams, when warranted.
• (4)  Micro-captive insurance campaign. This campaign addresses transactions described as transactions of interest in Notice 2016-66, 2016-47 IRB 745, in which a taxpayer attempts to reduce aggregate taxable income using contracts treated as insurance contracts and a related company that the parties treat as a captive insurance company. Each entity that the parties treat as an insured entity under the contracts claims deductions for insurance premiums. The approach for this campaign will be issue-based examinations.
• (5)  Related party transactions campaign. This campaign focuses on transactions between commonly controlled entities that provide taxpayers a means to transfer funds from the corporation to related pass-through entities or shareholders. The approach for this campaign is issue-based examinations.
• (6)  Deferred variable annuity reserves & life insurance reserves IIR campaign. IRS and Chief Counsel have agreed to accept the deferred variable annuity reserves and life insurance reserves issues into the Industry Issue Resolution (IIR) program to develop guidance to address uncertainties on issues important to the Life Insurance Industry. The campaign's objective is to collaborate with industry stakeholders, Chief Counsel and Treasury to develop published guidance that provides certainty to taxpayers regarding these related issues.
• (7)  Basket transactions campaign. This campaign addresses structured financial transactions described in Notice 2015-73, 2015-46 IRB 660 and Notice 2015-74, 2015-46 IRB 663, in which a taxpayer attempts to defer and treat ordinary income and short-term capital gain as long-term capital gain. The taxpayer treats the option or other derivative as open until a barrier event occurs, and, therefore, does not recognize or report current period gains. The gains are deferred until the contract terminates, at which time the overall net gain is reported as a long term capital gain. LB&I has developed a training strategy for this campaign. The approaches for this campaign will be issue-based examinations, soft letters to material advisors, and practitioner outreach.
• (8)  Land developers; completed contract method (CCM) campaign. Large land developers that construct in residential communities may be improperly using the CCM of accounting. A developer, whose average annual gross receipts exceed $10 million may only use the CCM under a home construction contract. In some cases, developers are improperly deferring all gain until the entire development is completed. LB&I will provide training for revenue agents assigned to work this issue. The approach includes development of a practice unit, issuance of soft letters, and follow-up with issue-based examinations when warranted.
• (9)  TEFRA linkage plan strategy campaign. As partnerships have become larger and more complex, LB&I has regularly revised processes to assess tax on the terminal investors. Recent legal advice provides an opportunity to make significant changes to how IRS approaches this process. This campaign focuses on developing new procedures and technology to work collaboratively with the revenue agent conducting the TEFRA partnership examination (i.e., the uniform partnership audit rules under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA, P.L. 97-248, 9/3/1982)) to identify, link, and assess tax to the terminal investors that pose the most significant compliance risk.
• (10)  S corporation losses claimed in excess of basis campaign. The law limits S corporation shareholders' losses and deductions to their basis in the corporation. LB&I has found that shareholders claim losses and deductions to which they are not entitled because they do not have sufficient stock or debt basis to absorb these items. LB&I has developed technical content for this campaign that will aid revenue agents as they examine the issue. The approaches for this campaign will be issue-based examinations, soft letters encouraging voluntary self-correction, conducting stakeholder outreach, and creating a new form for shareholders to assist in properly computing their basis.
• (11)  Repatriation campaign. LB&I is aware of different repatriation structures being used for purposes of tax-free repatriation of funds into the U.S. in the mid-market population. It has also been determined that many of the taxpayers do not properly report repatriations as taxable events on their filed returns. The goal of this campaign is to simultaneously improve issue selection filters while conducting examinations on identified, high risk repatriation issues and thereby increase taxpayer compliance.
• (12)  Form 1120-F non-filer campaign. Foreign companies doing business in the U.S. are often required to file Form 1120-F (U.S. Income Tax Return of a Foreign Corporation). LB&I has data suggesting that many of these companies are not meeting their filing obligations. In this campaign, LB&I will use various external data sources to identify these foreign companies and encourage them to file their required returns. The approach for this campaign will involve soft letter outreach. If the companies do not take appropriate action, LB&I will conduct examinations to determine the correct tax liability. The goal is to increase voluntary compliance by foreign corporations with a U.S. business nexus.
• (13)  Inbound distributor campaign. U.S. distributors of goods sourced from foreign-related parties have incurred losses or small profits on U.S. returns, which are not commensurate with the functions performed and risks assumed. In many cases, the U.S. taxpayer would be entitled to higher returns in arms-length transactions. LB&I has developed a comprehensive training strategy for this campaign that will aid revenue agents as they examine this Code Sec. 482 issue. The approach for this campaign will be issue-based examinations. 

LB&I Rolls Out New Issue-Based Compliance Campaigns; Considering Impact of Regulatory Freeze