Category Archives: criminal tax law

In a Baker & McKenzie client alert, they point out that are Estate & Family planning opportunities amidst the economic environment created by the coronavirus pandemic.

On Wednesday, April 29th, 2020, the U.S. Bureau of Economic Analysis (BEA) released data showing that the United States economy shrank in Real GDP terms at a 4.8% annualized pace in the first quarter of 2020.

At the same time, the International Monetary Fund reported the Real GDP slide in the U.S. was even higher. In response to this economic decline, the U.S. federal reserve reduced its target federal funds interest rate on March 16th, with the benchmark U.S. Treasury 10-year bond hitting a record low yield on March 9th, 2020.

This has resulted in the IRS reducing the Applicable Federal Rate (AFR) to record lows.  Now, while this might not be welcome news on a whole, it does present an opportunity for certain families to take advantage of the depressed current fair market valuations and record low interest rates from a U.S. gift and estate tax perspective.

More specifically it can affect: 

• Definition of fair market value and timing of FMV assessment.
• Value of businesses for gift tax purposes.
• Interfamily sales and loans.
• Shareholder loans
• Grats

Due to COVID-19, the IRS’ People First Initiative provides relief to taxpayers on a variety of issues from easing payment guidelines to delaying compliance actions.

• Existing Installment Agreements – Under an existing Installment Agreement, payments due between April 1 and July 15, 2020 are delayed. Those currently unable to meet the terms of an Installment Payment Agreement or Direct Deposit Installment Agreement may cancel payments during this period with no default. By law, interest will continue to accumulate on any unpaid balances
• New Installment Agreements – People who can’t pay all their federal taxes can establish a monthly payment agreement.
•  Pending Offer in Compromise applications – Taxpayers have until July 15, 2020, to provide additional information for a pending OIC. The agency generally won’t close any pending OIC request before July 15 without the taxpayer's consent.
• OIC payments – Taxpayers can delay all payments on accepted OICs until July 15, 2020. Interest may accrue, and missed payments are due when the suspension period ends. Taxpayers can call the number on their acceptance letter to address their needs.
• Delinquent return filings – The IRS will not default an OIC for taxpayers who are delinquent in filing their tax return for 2018. However, they should file any delinquent 2018 return and their 2019 return by July 15, 2020.
• Non-filers – More than 1 million households who haven't filed tax returns in the last three years are owed refunds. The deadline to get refunds on 2016 tax returns is July 15, 2020.  Those who owe taxes on delinquent returns may visit IRS.gov for payment options. The longer the debt is owed, the more penalties and interest accrue.
• Field collection activities – IRS stopped field revenue officer enforcement actions, such as liens and levies. Revenue officers will continue to pursue high-income non-filers and perform other similar activities where necessary.
• Automated liens and levies – IRS delayed issuing new automated and systemic liens and levies. Taxpayers experiencing a hardship due to a levy should reach out to their assigned IRS contact or fax their information to (855) 796-4524.
• Certifications to the State Department – IRS has delayed new certifications of taxpayers who are considered seriously delinquent. This affects a person’s ability to receive a new or renewed passport. Existing certifications will remain in place unless their tax situation changes. 
• Private debt collection – IRS will not forward new delinquent accounts to private collection agencies during this period.

On the IRS website "Transfer Pricing Documentation Frequently Asked Questions (FAQs)" (updated 4/14/2020), the IRS has issued a series of frequently asked questions (FAQs) concerning the best practices and common mistakes in preparing transfer pricing documentation.

IRC Sec. 6662(e)(1)(B)(ii) provides that there is a substantial valuation misstatement if the net section 482 transfer price adjustment for the tax year exceeds the lesser of $5 million or 10% of the taxpayer's gross receipts ("net adjustment penalty"). 

The 20% (or 40%) Code Sec. 6662 penalty for underpayment of tax attributable to a substantial valuation misstatement (or a gross valuation misstatement) applies to Code Sec. 482 
company pricing adjustments.

 
Generally, if the dollar thresholds of the net adjustment penalty are met, a taxpayer potentially can avoid the penalty if the taxpayer's APA has satisfied the transfer pricing documentation requirements of Code Sec. 6662(e)(3)(B) and Reg. §1.6662-6 (sometimes referred to as the 6662(e) documentation). Reg. § 1.6662-6(d)(2)(iii)(B) sets forth the principal documents that must be maintained by a taxpayer to satisfy the 6662(e) documentation requirements.

The documentation must also be assessed for adequacy and reasonableness. To satisfy the documentation requirement of the penalty regulations, taxpayers must select and apply a method in a reasonable manner and document the fact they reasonably selected and applied the best method for their analysis. (Section A of Transfer Pricing Documentation Frequently Asked Questions (FAQs))

The IRSAC LB&I Subgroup recommended the IRS provide information to taxpayers to promote higher quality transfer pricing documentation. (Section B of Transfer Pricing Documentation Frequently Asked Questions (FAQs))

• The suggestions and recommendations are consistent with the requirements in the regulations to provide adequate and reasonable support for the arm's length nature of intercompany pricing.
• Many taxpayers would benefit from insights on the information that could be provided to the IRS to increase the chance of audit deselection or more efficient audits.
• The IRS believes the potential for deselection of issues earlier in the examination process could be a powerful incentive for many taxpayers to improve their transfer pricing documentation.
• These FAQs and responses are illustrative and are being shared in the spirit of transparency to encourage cooperative compliance by taxpayers. The responses, and examples therein, are high-level only and should not be relied on to analyze actual transactions.

Q 1  What benefit(s), in addition to potential protection against penalties pursuant to IRC § 6662(e)(3)(B), might there be for taxpayers who invest in robust transfer pricing documentation?

 

A 1  Transfer pricing reports that comprehensively document the reasonable selection and application of a transfer pricing method, consistent with the requirements of § 6662(e), help demonstrate low levels of compliance risk and in turn help support early deselection of the transfer pricing issue from further examination. High-quality transfer pricing documentation allows the examining agent to rely on the taxpayer's analysis of functions, risks, intangibles, value drivers, etc., saving both the taxpayer and the IRS time examining low-risk transfer pricing issues. Thus, robust transfer pricing documentation facilitates more efficient transfer pricing risk assessments and examinations for both taxpayers and examiners...
 

Q 2  How can a "self-assessment" help to anticipate questions and prepare better 6662(e) documentation?
 

A 2  Taxpayers may want to consider conducting a "self-assessment" of the potential indicators of transfer pricing non-compliance. If taxpayers undertake a basic sensitivity analysis around the parameters of their application of the best method, they can potentially anticipate and proactively address concerns the IRS might raise. A starting point is a sensitivity analysis of the parameters used. For example, if the tested party's results would fall outside the benchmark range with the removal of just one company from the comparable company set, the taxpayer should consider re-evaluating the strength of the comparability analysis of the benchmark companies...
 

Q 3 What is the IRS's guiding principle in establishing arm's-length prices were charged in intercompany transactions?

A 3  The IRS's guiding principle is to ensure taxpayers are complying with § 482 and the regulations thereunder. Under the arm's length standard, related taxpayers must report income based upon intercompany prices unrelated parties would have charged under the same circumstances.
In this paradigm, taxpayers determine the best method and use that method to check the controlled prices applied during the year achieved results consistent with those that would have been achieved if uncontrolled parties had engaged in the same transactions...

Q 4  What are some areas the IRS has identified in transfer pricing documentation reports that could benefit from improvement?

A 4  Below are some, but by no means all, of the areas the IRS has identified that could benefit from improvement. Strengthening the sections identified below will not provide a safe harbor against either a continued examination or imposition of penalties but may result in the deselection of certain audit issues and/or a more efficient audit. The more complex the transaction, the greater the need for detailed analysis and documentation...
 

Q 5  What are some features of the most useful transfer pricing documentation reports?
 

A 5  Notwithstanding that IRC § 6662(e) penalty protection is limited to the information and analysis provided in the 6662(e) documentation, the IRS can and should consider whether there are other sources of relevant data. For example, the examination team should be probing what data and information the taxpayer had access to or should reasonably have identified and considered at the time of the transaction. Knowing what information was or should have been available to the taxpayer assists the examination team in determining if the taxpayer adequately searched for, considered and applied the relevant body of information and whether the taxpayer adequately incorporated and addressed that data in its 6662(e) documentation analysis...
 
Q 6  Can you provide an example of a presentation of a company's intercompany transactions that would be a helpful summary for examiners to use in risk assessment?
 
A 6  In general, making transfer pricing documentation more "user friendly" will make the IRS's review and assessment of the return positions as efficient as possible. Providing something as simple as a summary of information about the intercompany transactions at the beginning of the transfer pricing documentation helps IRS examiners understand the taxpayer's transactions. An intercompany transaction summary can help focus review and examination on the most significant transactions...
 

Need Expert Tax Advice on Preparing Your 482 Documentation to Avoid a 20% or 40% Penalty?

 

 

Contact the Tax Lawyers at 
Marini & Associates, P.A.

 

for a FREE Tax Consultation Contact us at

 www.TaxAid.com or www.OVDPLaw.com

or Toll Free at 888-8TaxAid (888 882-9243)