According to Law360, the Internal Revenue Service updated internal guidance for how the agency should account for deferred compensation expenses for purposes of calculating the deduction available for foreign-derived intangible income. (FDII)

Companies that claim the FDII deduction should account for deferred compensation expenses, or DCE, by applying them in the taxable year when they claim the deduction even if those expenses relate "to personal services performed for the taxpayer" in years prior, according to the IRS memo dated May 3, 2022 and published May 6, 2022

The memo is a reconsideration of a generic legal advice memo, or GLAM, that the IRS issued in 2009 indicating DCE could be accounted for in years prior to the taxable year for when a deduction was claimed under Internal Revenue Code Section 199. Section 199 was repealed by the 2017 Tax Cuts and Jobs Act.

Read more at: Tax Times blog

On May 30, 2018 we posted The Us Is Now The 2nd Largest Tax Haven And Is Scheduled To Be Blacklisted By The Eu!, where we discussed that the U.S. is the world’s second-largest tax haven, behind Switzerland and just ahead of the Cayman Islands, according to a report released May 15, 2018. 

Now according to the Tax Justice Network the U.S. is considered the best country in the world in which to hide income from tax and government authorities, according to this year's index unveiled on Tuesday May 18, 2022 listing the most financially secretive jurisdictions.

The U.S. has risen to the top of the index that identifies jurisdictions "most complicit in helping individuals to hide their finances from the rule of law," according to the Tax Justice Network, a U.K.-based organization that says its goal is to fight injustice in tax systems.

The Financial Accountability and Corporate Transparency, or FACT, Coalition held a panel discussion to discuss the latest annual TJN index with officials from both organizations and Global Financial Integrity, a research group based in Washington, D.C.

A statement from the FACT Coalition suggested that the U.S. position at the top of the index is due to "unaddressed loopholes and lax rules in U.S. anti-money laundering and tax laws."

The U.S. was considered the second-best jurisdiction in which to hide money based on the Tax Justice Network's 2020 data, but the FACT Coalition said the U.S. has since taken steps to try to improve its anti-money laundering enforcement. Those include enacting legislation known as the Corporate Transparency Act, which will establish reporting requirements for certain beneficial owners.

That legislation is designed to create a national beneficial ownership registry, and to combat, to the broadest extent possible, the proliferation of anonymous shell companies that facilitate the flow and sheltering of illicit money in the U.S.

Although that legislation has been enacted, the entirety of implementing regulations has yet to be issued by the U.S. Treasury Department, the coalition noted in its release. Treasury issued the first set of rules on the CTA in December.

Read more at: Tax Times blog

The Government Accountability Office published a report on trends in IRS audit rates, audit results, and resources used for audits across individual taxpayer income levels. (GAO-22-104960)

With the IRS examining or auditing a decreasing proportion of individual tax returns, concern has been raised over "the potential for declining taxpayer compliance, as well as whether IRS is equitably selecting taxpayers for audit, as audit rates for higher-income taxpayers have decreased more than audit rates for lower-income taxpayers," the GAO said.

According to the report, from tax years 2010 through 2019, audit rates of individual income tax returns decreased for all income levels. On average, the audit rate for these returns fell to 0.25% from 0.9%. "IRS officials attributed this trend primarily to reduced staffing as a result of decreased funding," the report noted.

The Biggest Decrease in Audit Rates Was Found Among
Taxpayers With Incomes of $200,000 and Above!

"These Audits Are Generally More Complex And Require Staff's Review" While "Lower-Income Audits Are More Automated, Allowing IRS To Continue These Audits Even With Fewer Staff."

The GAO found that "generally" the IRS still audited higher-income taxpayers at higher rates than lower-income taxpayers. "However, the audit rate for lower-income taxpayers claiming the earned income tax credit (EITC) was higher than average. IRS officials explained that EITC audits require relatively few resources and prevent ineligible taxpayers from receiving the EITC," the report said.

From fiscal years 2010 through 2021, the majority of the additional taxes recommended by the agency came from taxpayers with incomes below $200,000. The report noted that additional taxes recommended per audit rose as taxpayer income increased.

"The average number of hours spent per audit was generally stable for lower-income taxpayers but more than doubled for those with incomes of $200,000 and above," the GAO said. 

So what happened to to the IRS Wealth Squad? 

According to Law360, Rep. Bill Pascrell, D-N.J., who chairs the House Ways and Means Committee's Oversight Subcommittee, said the GAO's report raises concerns about the national tax system and called for lawmakers to implement a more fair tax regime. Pascrell requested the report ahead of a subcommittee hearing on taxpayer fairness that representatives for the GAO are scheduled to testify at on Wednesday, May 25, 2022.

Read more at: Tax Times blog

According to Law360, the wealthiest 400 American families paid an average 8% tax rate on income earned from 2010 through 2018. The estimates, crafted by economists from the Office for Management and Budget and the White House's Council of Economic Advisers, included income from unsold stock in its computation of the average tax rate on the wealthiest families in the U.S. 

The White House made the case for increasing tax rates on capital gains income and dividends, as well as partially eliminating a tax break for inherited assets known as stepped-up basis, in order to close the gap between taxes paid by wealthy Americans and the less wealthy. The step-up in cost basis raises an heir's basis in an inherited asset so the heir doesn't owe capital gains on its appreciated value, and President Joe Biden has proposed to partly chip away at that advantage.

The estimates from the OMB and CEA economists relied on figures from the IRS and the Federal Reserve as well as Forbes Magazine, according to the White House. The wealthiest 400 families paid $149 billion in federal income taxes for 2010 through 2018, paid roughly $46 billion in state and local taxes during the same period and earned roughly $1.8 trillion in income.

The analysis noted that the estimates are lower than similar figures released by the Congressional Budget Office, the Joint Committee on Taxation and the U.S. Department of the Treasury. For instance, the JCT has estimated that tax rates for families earning at least $1 million is 26%, according to the analysis.

But these groups largely exclude unrealized capital gains from their computations, the analysis said. For people making $100,000 to $200,000 in income this year, the JCT estimated they'd pay a roughly 16% tax rate on earnings including income, employment and excise taxes. 

Read more at: Tax Times blog