Category Archives: IRS Audits and Litigation

The Government Accounting Office (GAO) released it's report GAO-14-732: on September 18, 2014 indicating that the IRS needs to improve its audit and efficiency of partnerships.

What GAO Found

The number of large partnerships has more than tripled to 10,099 from tax year 2002 to 2011. Almost two-thirds of large partnerships had more than 1,000 direct and indirect partners, had six or more tiers and/or self reported being in the finance and insurance sector, with many being investment funds.

Historically the Internal Revenue Service (IRS) audited few large partnerships. Most audits resulted in no change to the partnership's return and the aggregate change was small. the study also found that the IRS audited just 0.8% of large partnerships, those with at least 100 partners and $100 million in assets, as compared to a 27.1% audit rate for corporations with at least $100 million in assets. Most of those partnership audits resulted in no additional taxes, and the GAO said it wasn’t sure whether that was because of high compliance or the agency’s inability to find noncompliance.

According to IRS auditors, the audit results may be due to challenges such as finding the sources of income within multiple tiers while meeting the administrative tasks required by the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) within specified time frames.

For example, IRS auditors said that it can sometimes take months to identify the partner that represents the partnership in the audit, reducing time available to conduct the audit. TEFRA does not require large partnerships to identify this partner on tax returns.

Also under TEFRA, unless the partnership elects to be taxed at the entity level (which few do), IRS must pass audit adjustments through to the ultimate partners. IRS officials stated that the process of determining each partner's share of the adjustment is paper and labor intensive. When hundreds of partners' returns have to be adjusted, the costs involved limit the number of audits IRS can conduct. Adjusting the partnership return instead of the partners' returns would reduce these costs but, without legislative action, IRS's ability to do so is limited.

A 3-year statute of limitations governs the time IRS has to conduct partnership audits, which is about equally split between the time from when a return is received until the audit begins and the time to do the audit. IRS then has a year to assess the partners their portion of the audit adjustment. 

What GAO Recommended

Congress should consider requiring large partnerships to identify a partner to represent them during audits and to pay taxes on audit adjustments at the partnership level. IRS should take multiple actions, including: define large partnerships, track audit results using revised audit codes, and implement project planning principles for the audit procedure projects. IRS agreed with all the recommendations, but noted that revision of the audit codes is dependent upon future funding.

Now the Congress & the President Have Responded

The Internal Revenue Service will now have an easier time auditing large partnerships, including private-equity firms and hedge funds, under a recently passed legislation. Budget legislation (H.R. 1314) signed by President Barack Obama on November 2, 2015, simplifies the procedures for the IRS to audit and collect adjustments from complex partnerships.

Under the bill, the IRS would apply changes in audits to the partnership itself, not individual partners. Small partnerships with fewer than 100 partners could exempt themselves from the new regime, which would begin in 2018. This new audit program could however subject partners to pay tax for years they didn't have an ownership interest. Furthermore, it is expected to have the biggest impact on partnerships where there is high turnover, such as master limited partnerships and hedge funds.

The new audit process doesn't require the IRS to notify every partner about an audit. All communication will go through a point person selected by the partnership, which is similar to current IRS audits of C corporations, where the actual shareholders are not notified the tax audit and the audit is handled by the officers of the C Corporation.

The Congressional Budget Office estimates that this measure and one other item, would raise $11.2 billion over the next decade.

The new audit program would be effective for partnership taxable years beginning in 2018, which allows advisers 2 years to review partnership agreements for their clients and possibly for their own firms, as many professional firms are structured as pass-through entities.

 

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Sources

GAO

The WallStreet Journal

Yahoo News

Since OVDP Began in 2009, 
There Have Been > 54,000 Disclosures!

 
We previously discussed this in our post Offshore Compliance Programs Generate $8 Billion and IRS Urges People to Take Advantage of Voluntary Disclosure Programs... You Think? However, the figures have risen sharply since the IRS' last progress report in January this year, when it announced that the OVDP schemes had attracted 54,000 disclosures and USD7 billion in tax.

It is believed that most of the additional 30,000 taxpayers who have volunteered since then, have been attracted by the 'streamlined' program launched in June 2014 for 'non-wilful' taxpayers. This program originated from the IRS' recognition that there were large numbers of American taxpayers expatriates living outside the United States, whose non-compliance with the offshore reporting rules was entirely unintentional and who could be drawn into compliance by offering them immunity from any penalties. 

This strategy has been aided by the Foreign Account Tax Compliance Act (FATCA),which requires foreign banks to report to the IRS accounts held by US taxpayers, which is provided additional incentive for the taxpayers to come clean.

US taxpayers can also not enter the program where the IRS has already received information regarding their bank account from their offshore bank.

With FATCA coming into force, the Swiss bank amnesty program under which Swiss banks can avoid US prosecutions if they pay appropriate penalties and cooperate with the investigations of the US Department of Justice, the number of US taxpayers barred from voluntary disclosure is increasing all the time.

For these US taxpayers to enter the program they must now face having to pay penalties of 50 % of their undeclared foreign assets, instead of the 27.5% offered by the OVDP.

The streamlined procedures, initiated in 2012, were developed to accommodate a wider group of U.S. taxpayers who have unreported foreign financial accounts but whose circumstances substantially differed from those taxpayers for whom the OVDP requirements were designed. More than 30,000 taxpayers have used streamlined procedures to come back into compliance with U.S. tax laws. Two-thirds of these have used the procedures since the IRS expanded the eligibility criteria in June 2014.
 
Separately, based on information obtained from investigations and under the terms of settlements with foreign financial institutions, the IRS has conducted thousands of offshore-related civil audits that have produced tens of millions of dollars. The IRS has also pursued criminal charges leading to billions of dollars in criminal fines and restitution.
 
The IRS remains committed to stopping offshore tax evasion wherever it occurs.  Even though the IRS has faced several years of budget reductions, the agency continues to pursue cases in all parts of the world.

 

• You have a balance due.
• You are due a larger or smaller refund.
• They have a question about your tax return.
• They need to verify your identity.
• They need additional information.
• They changed your return.
• They are notifying you of delays in processing your return.

2. Read the Entire Notice or Letter Carefully.

Typically, the IRS only needs a response if you don’t agree with the information, the IRS needs additional information, or you have a balance due. If the IRS changed your tax return, compare the information the IRS provided in the Notice or Letter with the information in your original return. If the IRS receives a return that they suspect is identity theft, the IRS will ask you to verify your identity using the web address provided in the letter.

3. Contact the IRS if You Have Questions or Disagree With the Notice.

The IRS provides their contact phone number on the top right-hand corner of their correspondence.

4. Respond Within the Required Time Frame.

6. Turn Over the Right Paperwork

6. Contacting an Experience Tax Attorney Can Help

Dealing with IRS involves navigating the complicated maze of U.S. tax law. A Tax Attorney has the knowledge of tax law and expertise needed to negotiate with the IRS on your behalf to reduce Tax debt & IRS Problems.

The Internal Revenue Service has an army of employees and tax attorneys representing them

and as a taxpayer, you should have the same benefits which result from hiring an Experienced Tax Attorney to represent You, your Business & your Family.

The IRS released IR-2015-116 on Oct. 16, 2015, to remind U.S. taxpayers with undisclosed offshore accounts, that with more than 54,000 taxpayers coming in to participate in offshore disclosure programs since 2009, they should strongly consider existing paths established to come into full compliance with their federal tax obligations.

Both the Offshore Voluntary Disclosure Program (OVDP) and the streamlined procedures enable taxpayers to correct prior omissions and meet their federal tax obligations while mitigating the potential penalties of continued non-compliance. There are also separate procedures for those who have paid their income taxes but omitted certain other information returns.

Under the Foreign Account Tax Compliance Act (FATCA) and the network of intergovernmental agreements (IGAs) between the U.S. and partner jurisdictions, automatic third-party account reporting began this year, making it less likely that offshore financial accounts will go unnoticed by the IRS. We previously posted FATCA - U.S. Began Reciprocal Automatic Exchange of Tax Information On Sept. 30, 2015!, where we discussed that the Internal Revenue Service announced the exchange of financial account information with certain foreign tax administrations, meeting a key Sept. 30 milestone related to FATCA, the Foreign Account Tax Compliance Act.

In addition to FATCA and reporting through IGAs, the Department of Justice’s Swiss Bank Program

continues to reach non-prosecutionagreements with Swiss financial institutions that facilitated past non-compliance. As part of these agreements, banks provide information on potential non-compliance by U.S. taxpayers. Potential civil penalties increase substantially if U.S. taxpayers associated with participating banks wait to apply to OVDP to resolve their tax obligations.  

OVDP offers taxpayers with undisclosed income from offshore accounts an opportunity to get current with their tax returns and information reporting obligations. The program encourages taxpayers to voluntarily disclose foreign accounts now rather than risk detection by the IRS at a later date and face more severe penalties and possible criminal prosecution. 

Since OVDP began in 2009, 
there have been more than 54,000 disclosures. 

The streamlined procedures, initiated in 2012, were developed to accommodate a wider group of U.S. taxpayers who have unreported foreign financial accounts but whose circumstances substantially differed from those taxpayers for whom the OVDP requirements were designed. More than 30,000 taxpayers have used streamlined procedures to come back into compliance with U.S. tax laws. Two-thirds of these have used the procedures since the IRS expanded the eligibility criteria in June 2014.
 
Separately, based on information obtained from investigations and under the terms of settlements with foreign financial institutions, the IRS has conducted thousands of offshore-related civil audits that have produced tens of millions of dollars. The IRS has also pursued criminal charges leading to billions of dollars in criminal fines and restitution.
 
The IRS remains committed to stopping offshore tax evasion wherever it occurs.  Even though the IRS has faced several years of budget reductions, the agency continues to pursue cases in all parts of the world.