Monthly Archives: October 2021

According to Law360, as of the end of June, 734 people had expatriated from the U.S. since March, slightly more than tripling the number from the first quarter of the year, the Internal Revenue Service said in a notice.

This rise in expatriations in the last quarter represents a turnaround in the number of people losing or renouncing their U.S. citizenship, coming after a series of decreasing expatriations that bottomed out at 228 people from January through March. Each quarter has up to this point shown a drop since the first quarter of 2020, in which there were about 2,900.

Read more at: Tax Times blog

According to Law360, significant changes to international tax policy included in the $3.5 trillion budget reconciliation bill containing President Joe Biden's top legislative priorities could encourage multinational companies to shift intangible assets abroad, according to a Penn Wharton Budget Model report released October 1, 2021.

Proposed changes to the foreign-derived intangible income regimes and an increase in corporate taxes contained in the Build Back Better Act could make foreign countries more attractive to multinational firms and encourage the shifting of intangible assets to low-tax locales, the analysis said. The bill is making its way through the House of Representatives.

Specifically, reducing the FDII deduction to roughly 22% next year rather than 2026 and increasing the corporate tax rate from 21% to 26.5% would result in a nearly 21% tax rate for such income, according to the analysis. Countries with tax rates below that threshold could attract more multinationals and encourage profit or asset shifting, Penn Wharton said.

The analysis detailing the potential disadvantages of changing the international tax provisions under the 2017 Tax Cuts and Jobs Act comes as progressive and moderate Democrats squabble over the size of the reconciliation bill, which contains some of Biden's top priorities. Those priorities include enhanced child care and extensions of the supercharged child tax credit, which the Internal Revenue Service is currently issuing to some families on a monthly advance basis.

Under the TCJA, global intangible low-taxed income, or GILTI, is intended to behave like a global minimum tax for U.S. corporations by allowing companies to claim a 50% deduction for such income subject to a 21% rate. A 37.5% FDII deduction, meanwhile, effectively reduces the tax rate for multinational intangible income to 13.125%.

The reconciliation bill would change those regimes by lowering the FDII deduction to 21.875% in 2022 instead of 2026, when it was originally set to decrease, and by lowering the GILTI deduction to 37.5%. The Penn Wharton analysis found that the lowered FDII deduction, combined with increased corporate taxes, would effectively increase the FDII tax rate to 20.7%.

This increased rate would likely encourage multinational corporations with intangible assets to locate those assets elsewhere, the analysis said.

Representatives of the chairman of the House Ways and Means Committee, Rep. Richard Neal, D-Mass., and its ranking member, Rep. Kevin Brady, R-Texas, did not respond to requests for comment Friday. But one of the moderate Democrats withholding his support for the reconciliation bill, Sen. Joe Manchin, D-W. Va., criticized the changes to international tax included in the legislation in a statement Wednesday. 

"Our tax code should be reformed to fix the flaws of the 2017 tax bill and ensure everyone pays their fair share, but it should not weaken our global competitiveness or the ability of millions of small businesses to compete with the Amazons of the world," Manchin said in the statement.

Read more at: Tax Times blog

TIGTA released its report on September 30, 2021, Suggest Improvement to IRS Correspondence Examinations.  

Correspondence examinations are generally narrower in focus than a traditional in-person audit of a taxpayer’s return and enable the IRS to reach more taxpayers at a lower cost.

The IRS relies heavily on correspondence examinations as a more economical means to address taxpayers with suspected underreporting of tax liabilities. 

From Fiscal Year2017 to Fiscal Year 2019, The IRS Conducted Almost 2 Million Correspondence Examinations And Recommended Approximately $12.2 Billion In Additional Taxes.

In Fiscal Years 2017 through 2019, correspondence examinations accounted for nearly 80% of all IRS examinations completed but accounted for less than one-half of the recommended additional  tax after examination. 

TIGTA’sreview of the Small Business/Self-Employed Division’s correspondence examination case selection process found that the issues the IRS examinedmost frequently were not the most productive issues. This was due in part to the IRS not prioritizing the annual workplan based on prior year results.

In addition, TIGTA’s analysis of 743,648 examinations closed fromFiscal Year 2017 to Fiscal Year 2019 found that the IRS conducted 139,492 (19 percent) subsequent examinations identified by the subsequent return process, and 23,741 (17 percent) of these examinations were closed with the taxpayers agreeing to the additional tax assessed. 

However, the IRS did not open the correspondence examination on the subsequent year return until after it closed the examination on the currentyear. This increases the burden to the taxpayers, subjecting them to two separate correspondence examinations instead of one examination for multiple tax years.

According to the Internal Revenue Manual, IRS correspondence examiners are to consider subsequent year returns containing the same issues as in the year examined. However, TIGTA interviewed 15 tax examiners who stated that they are instructed only to review the specific issue and year that was selectedfor the examination and     not to expand their work into the following year. TIGTA identified 53,969 correspondence examinations, that had an issue on an individual tax form or the taxpayerwas identified as a non-filer. Further reviewshowed these examinations had a subsequent year tax return with the same potential issue that had not been examined and     met the IRS’s criteriafor potential audit selection.

TIGTA recommended that the IRS: 

1) evaluateclosed correspondence examination cases to identify the issues that result in the most significant noncompliance and develop a workplan to includemost of these cases; 

2) change the subsequent returnprocess to only address returns about which the taxpayer did not respond; and 

3) provide a reminder to ensure that employees are following processes for subsequent year returns during the correspondence examination process.

The IRS agreed with two of the three recommendations, including ensuring that tax examiners and managers are following processes for subsequent year returns during the correspondence examination process. 

However, the IRS disagreed with TIGTA’s recommendation to evaluateclosed correspondence examination cases to identifythe   issues that result in the most significant noncompliance, stating thathistorical business results are already utilized in the case selection process.

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According to Law360, victims of recent natural disasters will have an extra 11 weeks to file Reports of Foreign Bank and Financial Accounts for the 2020 tax year, the U.S. Treasury Department's Financial Crimes Enforcement Network announced.

Read more at: Tax Times blog