Category Archives: Tax Law

Higher Taxes Means More Tax Evasion?

Does it take a fission engineer to deduce that more people would be willing to risk jail time to save 60% of their income than would be willing to risk jail time to save 25% of their income? Tim Lister of CNN.Opinion writes in Tax Evasion is a National Pastime in Southern Europe (emphasis added): "Wherever […].. To continue reading this legal news please click Read full information...

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DISREGARDED ENTITIES ARE NOT ALWAYS DISREGARDED

Under the check the box rules, entities owned by one person can often be disregarded for federal tax purposes. Such entities are referred to as "disregarded entities." As time has progressed since the passage of the check the box rules, the IRS has created more and more exceptions to the disregarded treatment. For example, disregarded entity status is ignored or modified in regard to employment and withholding taxes of a disregarded entity. The IRS has now issued final treasury regulations that provide that an entity whose disregarded status is ignored for employment tax purposes will be treated as a corporation. Treas. Regs. §301.7701-2(c)(2)((iv)(B). It would be helpful to put in one place the several exceptions that now exist to disregarded entity status. The following is a summary of the principal exceptions, but is not intended to be exhaustive. If any readers think I have missed anything major, please feel free to comment to this posting and let us know what the item is. A. Status is modified if the single owner of the entity is a bank. Treas. Regs. §301.7701-2(c)(2)(iii). B. Status is modified for certain tax liabilities. Treas. Regs. §301.7701-2(c)(2)(iii). These include: (1) federal tax liabilities of the entity with respect to any taxable period for which the entity was not disregarded; (2) federal tax liabilities of any other entity for which the entity is liable; and (3) refunds or credits of federal tax. C. Disregarded status ignored or modified for taxes imposed under Subtitle C-Employment Taxes and Collection of Income Tax (Chapters 21, 22, 23, 23A, 24, and 25 of the Internal Revenue Code) and taxes imposed under Subtitle A, including Chapter 2-Tax on Self-Employment Income. Treas. Regs. §301.7701-2(c)(2)(iv)(A). D. Status is modified for certain excise taxes, as described in Treas.Regs. §301.7701-2(c)(2)(v). Although liability for excise taxes isn't dependent on an entity's classification, an entity's classification is relevant for certain tax administration purposes, such as determining the proper location for filing a notice of federal tax lien and the place for hand-carrying a return under Code §6091 . E. Conduit financing proposed regulations will treat a disregarded entity as separate from its single member. Code §7701(l). F. Special rules will apply in hybrid situations. Hybrid situations are circumstances where an entity is not disregarded in one jurisdiction but is disregarded in another. (1) Hybrid payments made between a CFC and its hybrid branch, or between two hybrid branches of a CFC, would be recharacterized as subpart F income in the same amounts, if the conditions of the regulations are met. Those conditions are as follows: (1) the hybrid branch payment reduces the foreign tax liability of the payer; (2) the payment would have been FPHC income if paid between two CFCs; and (3) a disparity exists between the effective rate of tax on the payment in the hands of the payee and the hypothetical rate of tax that would have applied if the payment had been taxed to the payer. If no tax rate disparity exists, no recharacterization would occur. Proposed Regulations under TD 8827, 1999-30 IRB 120. (2) In certain cases, payments made by domestic reverse hybrid entities to related foreign interest holders are recharacterized as a dividend. Such payments are recharacterized as dividends to the extent of the interest holder's proportionate share of payments by the domestic entity to the domestic reverse hybrid entity that are treated as dividends by either jurisdiction. The recharacterization as a dividend means that the payments cannot be deducted by the domestic reverse hybrid entity. This prevents the use of a domestic reverse hybrid entity to make deductible payments to the foreign interest holder that are taxed at lower withholding tax rates. Treas.Reg. §1.894-1(d)(2)(ii)(B). (3) Special rules relating to allocation of foreign tax credits. Prop.Regs. §1.901-2(f)(3)... To continue reading this legal news please click Read full information...

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Swiss Banks May Pay Billions and Disclose More Accountholder Names

We may soon see a resolution to the US’s continuing probe of the offshore tax evasion through secret banks at prestigious Swiss financial institutions and the ongoing negotiations regarding what kind of monetary payment and account disclosure will settle the criminal probes. See Voreacos, Wille & Broom, Swiss Banks Said Ready to Pay Billions, Disclose Customer Names, San Francisco Chronicle (Bloomberg.com, Oct. 24, 2011)... To continue reading this legal news please click Read full information...

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Talk at University of Louisville Law Review Symposium on Deficit Reduction

This past Saturday (Oct. 22), during a lightning appearance in Louisville to participate in a conference on federal deficit reduction that was sponsored by the University of Louisville Law Review, I presented my paper, previously linked and available here, entitled “Tax Reform Implications of the Risk of a U.S. Budget Catastrophe.”.. To continue reading this legal news please click Read full information...

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IRS is Wrong

Today TaxMama hears from Bret in the Tax Quips Forum, with an IRS rejection letter. To make a long story short – "IRS rejected his Lifetime Learning Credit for 2009 because the Form 1098-T showed -0- in box 1. And because his employer paid the expense – even though he paid taxes on the education expense reimbursement. Should Bret keep fighting? Or is IRS correct?" Dear Bret, I don't believe you are wrong. You paid tax on the money. Therefore you have a basis in the amount paid. Continue to argue this. Use your year-to-date pay stub or W-2 that shows the education expenses were added to your wages. Your argument is – if your employer had actually paid the expenses as a tax-free employee benefit, you understand that you would not be entitled to claim the credit. Quote from IRS Publication 970 – You cannot use any of the tax-free education expenses paid for by your employer as the basis for any other deduction or credit, including the American opportunity credit and lifetime learning credit. However, this was not a tax-free benefit. These expenses were paid from your wages. You paid tax on this income – your company essentially wrote the check on your behalf. Therefore since it was money from your own wages that paid the education costs, you are entitled to the tax credit. And the fact that the 1098-T does not show that you paid the expenses is irrelevant. The colleges are notorious for making errors on their 1098-Ts. You cannot be held responsible for the university's errors. The NY State Society CPA Journal reported on this problem in 2005. Nothing has improved. Stand by. You may get additional tips from other tax pros here in the TaxQuips Forum. And remember, you can find answers to all kinds of questions about IRS Notices and other tax issues, free. Where? Where else? At www.TaxMama.com. [Note: If you were subscribed to the e-mailed TaxQuips, you'd be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it's free!] Please post all Comments and Replies in the new TaxQuips Forum . Ask TaxMama :: Where taxes are fun and answers are free TaxQuips :: The number ONE free tax podcast online TaxQuips Forum :: When you can ask questions, too TaxQuips :: Where you can add your comments, too File Download (0:00 min / 1 MB).. To continue reading this legal news please click Read full information...

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