News and miscellaneous legal topics – current

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Listed below are various legal items, with emphasis on Missouri and federal taxes. You can access these items as an RSS ("rich site summary" or "really simple syndication") feed by pointing your RSS reader to (copy this link and paste it as the RSS feed in your news/RSS reader) http://www.carnahanlaw.com/rss/rss.xml

New IRS video series “Your Guide to an IRS Audit” follows 3 hypothetical small business taxpayers step-by-step through the audit process 9/3/10

2010 Kansas Tax Amnesty Program Begins September 1 8/26/10

The amnesty is for delinquent tax liability (income, withholding, sales, privilege, severance, estate, liquor, cigarette and tobacco products) effective between September 1, 2010, and October 15, 2010, and for tax periods ending on or before December 31, 2008. Amnesty applies to interest and penalties if the delinquent tax liability is paid in full during the amnesty period. Amnesty is not available for certain liabilities that exist on or after September 1, 2010, such as audits, tax liabilities subject to administrative or judicial appeal, those in bankruptcy, or in criminal investigation or certain criminal or civil litigation. Taxpayers may contact the DOR at (785) 368-8222 to discuss eligibility, and applications may be made via telephone with a department agent.

Illinois Amnesty Will Begin October 1 8/26/10

The amnesty for any taxable period ending after June 30, 2002, and prior to July 1, 2009 runs from October 1, 2010, through November 8, 2010. On payment the department will abate and not seek to collect any interest or penalties that may apply and will not seek civil or criminal prosecution for any taxpayer for the period of time for which the amnesty was granted. Failure to pay all taxes due to the state during the amnesty period invalidates any amnesty granted. Amnesty is not available to taxpayers under criminal investigation or any civil or pending criminal litigation for nonpayment, delinquency, or fraud in relation to any state tax. Participation in the amnesty precludes a taxpayer from claiming a refund on an issue unrelated to the amnesty or for an overpayment of tax by taxpayers estimating a non-final liability. A taxpayer with a tax liability for the amnesty period that does not satisfy it during the amnesty program will be charged double the amount of any interest or penalty that would otherwise apply.

Out-of-state taxpayer should collect and remit Missouri sales tax on sales that are drop shipped by its suppliers to the taxpayer's customers in Missouri 7/27/10

All of out-of-state taxpayer’s sales to Missouri customers are subject to Missouri sales tax because title to the products transfers to taxpayer when the products are delivered in Missouri, and then passes from the taxpayer to the taxpayer's customers. Consequently, the taxpayer should collect and remit sales tax on these sales. Taxpayer's suppliers located within Missouri are the place of business for determining the local sales tax. For sales drop shipped by the taxpayer's supplier from outside Missouri to the taxpayer's Missouri customers, the local sales tax is determined by where title passes for the product and taxpayer should collect the local sales tax in effect at the customer's location. MO Letter Ruling No. LR6271 (May. 20, 2010)

IRS announces one-time filing relief allowing tax-exempts to file Form 990 by Oct. 15 to save exempt status 7/27/10

Two types of relief are available: (1) a filing extension for the smallest organizations (eligible to file Form 990-N); and (2) a voluntary compliance program for small organizations (eligible to file Form 990-EZ). IRS News Release 2010-87, 7/26/10.

Individual marginal income tax rate reductions set to expire 7/27/10

Unless Congress acts, the individual marginal income tax rate reductions under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) will expire In less than six months. President Obama’s proposals to resurrect the top two pre-EGTRRA individual rates of 36% and 39.6% after December 31, 2010 were recently reviewed by Congress’ Joint Committee on Taxation (JCT).

IRS Revokes Notice Regarding Out-Of-Date Addresses For Filing Certain Documents 7/27/10

The IRS issued Notice 2010-53 (see news link) on July 14 containing updates for out-of-date addresses for filing various elections, statements, returns, and other documents. The new notice is effective for such documents filed on or after August 2, 2010. As a result of the IRS Restructuring and Reform Act of 1998, the IRS replaced its national, regional and district structure with organizational units that serve particular industries and taxpayer groups, so the addresses listed in the IRS’s previous notice had provided taxpayers with the addresses to file certain documents as a result of the IRS’s reorganization. However, many of the locations listed are now inaccurate.

Federal Bill Would Bar Discriminatory Taxes on Digital Goods and Services 7/17/10

The “Digital Goods and Services Tax Fairness Act of 2010” (H.R. 5649), introduced by Reps. Rick Boucher, D-Va., and Lamar Smith, R-Texas on June 30, 2010, has been referred to the Judiciary Committee, would prohibit States and localities from imposing multiple or discriminatory taxes on the sale or use of digital goods or digital services. “Digital good” and “digital service” include any good or service delivered or transferred electronically to a customer, including those accessed or used remotely, but not a telecommunications service or an Internet access service, or an audio or video programming service that is provided by, or comparable to programming provided by, a radio or television broadcast station. All taxes on the sale or use of a digital medical service, digital education service, or digital energy management service would be prohibited.

A tax on the sale or use of a digital good or digital service would have to be imposed explicitly, could only be imposed on retail sales, not sales for resale, and only by the jurisdiction whose territorial limits encompass the customer’s “tax address.” Charges for digital goods or digital services that are bundled with charges for other goods and services could be taxed similarly, unless the seller’s books and records could identify the charges for the digital goods or digital services.

A tax on the sale or use of a digital good or digital service. A regulation or administrative ruling could not construe a tax on the sale or use of tangible personal property (or telecommunications, Internet access, or audio or video programming services) to apply to the sale or use of a digital good or digital service.

Oklahoma Rule Proposed for Out-of-State Internet and Catalog Retailers 7/17/10

Oklahoma H.B. 2359, Laws 2010 required “noncollecting retailer” making sales of tangible personal property from a place of business outside Oklahoma for use in Oklahoma and which are not required to collect use tax, must provide notice on their retail Internet Web sites or retail catalogs, and onthier invoices provided to customers, that use tax is imposed and must be paid by the purchaser (unless an exemption applies) on the storage, use, or other consumption of the property in Oklahoma, effective after a corresponding emergency or permanent administrative rule takes eff ect.

The Oklahoma Tax Commission issued a proposed draft of an emergency sales and use tax rule that would govern the notice requirements. If a non-collecting retailer does not provide an invoice to a purchaser, it may send a confirmation e-mail containing the notice. The proposed rule would also apply to any “online auction website". A “de minimis retailer,” currently defined as any non-collecting retailer that made less than $100,000 total gross sales in the prior year and reasonably expects less than $100,000 sales in the current year. Oklahoma Tax Commission, June 30, 2010.

House legislation submitted to implement the Streamlined Sales and Use Tax 7/17/10

The “Main Street Fairness Act” (H.R. 5660) to give member states of the Streamlined Sales and Use Tax (SST) Agreement collection authority over remote sellers was introduced in the U.S. House of Representatives on July 1, 2010 by Rep. William Delahunt, D-Mass., who sponsored similar legislation in the last several Congresses, and the bill has been referred to the Judiciary Committee. A companion bill is expected to be introduced shortly in the U.S. Senate by Sen. Mike Enzi, R-Wyo. Introduction of these bills has been expected since the current 111th Congress convened in January 2009, but has been delayed while the SST Governing Board engages in ongoing negotiations with stakeholders over the parameters of the required vendor compensation, small seller exception, and inclusion of communication services. In addition to the Agreement’s current requirements, the legislation would mandate the following: reasonable vendor compensation for all sellers, which may vary by the complexity of state law and the characteristics of sellers; a small seller exception to the collection requirement; application of the minimum simplification requirements to taxes on communication services; a path to SST membership for any federally recognized Indian tribe that complies with the Agreement; and judicial review of Governing Board actions by the U.S. Court of Federal Claims.

Taxpayer Advocate Mid-Year Report to Congress 7/17/10

IRS News Release IR-2010-83,Internal Revenue Service, (Jul. 7, 2010)

Expanded Business Information Reporting

The Patient Protection and Affordable Care Act (PPACA) eliminates the exception to the reporting requirement for payments of $600 or more made to a corporation in the course of a trade or business, other than for corporations exempt from tax, applicable to payments made after December 31, 2011. Vendors must furnish, and businesses must collect, Taxpayer Identification Numbers (TINs), or the business must impose back-up withholding at 28% of the purchase price. Additionally, businesses will have to keep records of all purchases sorted by TIN and produce and transmit information reports. Busiesses must file Forms 1099 electronically if it makes qualifying purchases from at least 250 vendors during the calendar year.

Tax communications

Olson reported more than 19 million pieces of mail are returned to the IRS as undeliverable every year, including refunds, notices, letters, and other correspondence. Most non-certified mail returned to the agency is generally destroyed and no attempt is made to locate a current address or correct a faulty one. Only selected notices and letters (such as final notices and compliance letters) are processed to try to obtain a possible current address.

Enforcement and services

Enforcement spending makes up more than 2/3 of all IRS spending. The IRS projects enforcement spending will rise by 13.7% while taxpayer services spending will decline by 7.2% over the next 2 years

IRS Will Phase-In Mandatory E-File For Preparers Over Two Years 7/17/10

Mandatory e-filing for tax return preparers under the Worker, Homeownership and Business Assistance Act of 2009 (2009 Worker Act) will be phased-in over two years, and beginning January 1, 2011 for preparers who anticipate preparing 100 or more federal individual or trust tax returns during the year; or January 1, 2012 for preparers who anticipate preparing 11 or more federal individual or trust tax returns during the year. An individual income tax return for purposes of the 2009 Worker Act’s e-file mandate encompasses any return of the tax imposed by Subtitle A on individuals, estates, or trusts.

IRS will not follow district court ruling that severance payments aren't subject to FICA tax 7/1/10

An IRS spokesperson recently stated that IRS is continuing to follow an older decision by the Court of Appeals for the Federal Circuit that held that payments made to involuntarily terminated workers should be classified as “wages” for FICA tax purposes. IRS will not follow a recent pro-taxpayer district court decision to the contrary. Mary Gorman, Assistant Division Counsel, Office of Chief Counsel, for the IRS Small Business/Self-Employed Division, indicated during the Forum on Federal Payroll Issues at the American Payroll Association's (APA) 28th Annual Congress, that IRS is still denying claims that seek a refund of FICA tax paid on severance payments. She said that IRS will appeal the district court case.

In 2002, the Court of Federal Claims held that severance pay was not subject to FICA. (CSX Corp. v. U.S., (Ct of Fed Cl 4/1/02) 89 AFTR 2d 2002-1935 (4/18/2002). Iin 2008, the Court of Appeals for the Federal Circuit reversed and held that the severance pay involved in the taxpayer's various downsizing programs was subject to FICA. ((CSX Corp. v. U.S., (CA FC 3/6/2008) 101 AFTR 2d 2008-1120 (3/13/2008). In February of 2010, a federal district court ruled in U.S. v. Quality Stores, Inc., (DC MI 2/23/2010) 105 AFTR 2d 2010-1110 (3/04/2010) that payments made to involuntarily terminated workers by a company going out of business should not be classified as “wages” for FICA tax purposes. The district court said that “where severance payments are intended to serve the same purpose as Social Security benefits, i.e., support for workers in lieu of a lost ability to earn wages, the collection of social benefit taxes on the wage-replacement benefits makes little sense.” The court believed that the severance payments at issue were properly viewed as wage-replacement social benefits, not taxable remuneration for the employees' services or wages. Therefore, the court reasoned that the severance payments were not subject to taxation for FICA purposes.

Taxpayers should consider filing a protective claim to preserve their opportunity to receive a refund if the courts were ultimately to decide that severance payments aren't subject to FICA tax. Protective refund claims are filed to preserve a taxpayer's right to claim a refund when the taxpayer's right to the refund is contingent on future events (e.g., future litigation), and may not be determinable until after the statute of limitations expires. Without a protective refund claim, taxpayers will only have a three-year statute of limitations in which to seek a refund.

IRS to prepare for joint country audits of multinational corporations 7/1/10

IRS Commissioner Douglas H. Shulman said the groundwork was being prepared for joint country audits of multinational corporations in prepared remarks delivered on June 8 before the OECD (the Organization for Economic Cooperation and Development)/BIAC (the Business and Industry Advisory Committee to the OECD). The IRS is now working on developing a protocol for joint audits with other countries. He stressed that a joint audit wouldn't be a simultaneous exam but, rather, two or more countries joining together to carry out a single audit of a company with cross-border business activities. Shulman summarized the Foreign Accounts Tax Compliance Act (FATCA), which was enacted as part of the HIRE Act ( P.L. 111-147 ), as making it much more difficult for U.S. individuals to hide assets in offshore accounts by:

increasing information reporting by U.S. taxpayers holding financial assets outside the U.S. and imposing stiff penalties for failure to comply;
expanding due diligence standards, so that IRS has a better line of sight to U.S. beneficial owners of accounts; and
ramping up the stakes for foreign financial institutions that will “have to agree to disclose U.S. investors to IRS or feel the pain of a substantial new withholding tax on U.S. income and gains.”

Shulman also believes that the mere enactment of FATCA should “prompt preparers and advisors to expand their due diligence regarding offshore account issues, including, but not limited to income tax reporting.”

The Seventh Circuit holds spouses must request innocent spouse relief within 2 years of first collection activity 7/1/10

The Court of Appeals for the Seventh Circuit has reversed a Tax Court decision that invalidated Reg. § 1.6015-5(b)(1), which provides that a spouse must request equitable relief under Code Sec. 6015(f) no later than two years from the first collection activity against the spouse. Lanz v. Comm., 105 AFTR 2d 2010-2780 (7th Cir. 6/08/2010).

The IRS announced the implementation of the Quality Examination Process (QEP) 7/1/10

“a systematic approach for engaging and involving Large and Mid-Size Business (LMSB) taxpayers in the tax examination process, from the earliest planning stages through resolution of all issues,” replacing IRS's Audit Planning Process, and the LMSB Guide for Quality Examinations in Internal Revenue Manual § 4.46 is being updated to reflect this change. In the Pub, IRS explains that the examination can generally be divided into 3 phases: planning, execution, and resolution.

Planning phase:

Pre-exam analysis. The exam team gathers and reviews information about the taxpayer that is available publicly and within IRS.
Initial planning meeting. The exam team holds an initial planning meeting with the taxpayer, reviewing the preliminary risk analysis and the anticipated exam process for the issues identified.
Subsequent planning meetings. The exam team and the taxpayer discuss prior audit cycle or exam results, materiality thresholds relating to identification and selection of examination issues, other potential compliance issues and required compliance checks, affirmative issues and/or claims the taxpayer expects to file, strategies the parties will use for resolving compliance issues, and the use of a mid-cycle risk analysis.
Taxpayer orientation. The taxpayer provides the exam team with a comprehensive orientation of its business operations. IRS's Quality Examination Reference Guide says this taxpayer information should include:
- A general overview of business activities.
- A list of significant transactions for the current examination and any other information that is new and/or different from previous examination(s) (e.g., acquisitions, dispositions, tax shelters, accounting method changes - Forms 3115, etc.).
- Access to general ledgers; a complete audit trail from these ledgers and financial statements to taxable income; identification and full description of all significant Schedule M-3 book/tax differences and the requisite supporting documentation; breakdown of all general ledger accounts aggregated in Schedule M-3, and reconciliation of Schedule M-3 items to disaggregated general ledger accounts; and any other tax reconciliation workpapers and/or other workpapers in accordance with the Service Policy outlined in IRM 4.10.20.3 ( Requesting Audit, Tax Accrual, or Tax Reconciliation Workpapers).
- Financial information (such as the general ledger) in electronic format.
- List of known and anticipated claims and requested audit adjustments (with all supporting documentation made readily available) to ensure that these items are included in the audit plan.
- Exchange of additional transactional and financial information. The taxpayer provides the exam team with business and financial information on acquisitions, dispositions, accounting method changes, tax shelters, book-to-tax reconciliations, etc.
- Finalizing the exam plan. The exam team develops and finalizes an examination plan that specifies the issues to be examined, time frames, personnel required, processes to be followed, and the respective responsibilities.

The execution phase includes:

Changes to the exam scope. The exam team keeps the taxpayer aware of any potential scope and/or depth changes.
Ongoing monitoring. The exam team and the taxpayer regularly review their progress towards achieving the agreed upon milestones.
Discussion of issues. Once the examination of a compliance issue begins, the exam team explains to the taxpayer why the issue was selected for examination.
Information Document Requests (IDR). The exam team and the taxpayer reach agreement on the procedures for administering IDRs (e.g., notification, IDR content, time frames for IDR responses, etc.).

The resolution phase includes:

Confirming the facts. Before issuance of a Form 5701, Notice of Proposed Adjustment, the taxpayer and the exam team discuss the issues under the proposed adjustment. The taxpayer confirms the facts and clarifies its position.
Engaging specialists and experts. If appropriate, the exam team engages specialists (e.g., economists, engineers, and financial products experts), technical advisors, counsel and/or other experts.
Issue resolution strategies. The exam teams encourage the use of appropriate issue resolution strategies (i.e., Fast Track, Rules of Engagement, Early Referrals to Appeals, etc.) while exams are in progress.
Other issues. The exam teams discuss with taxpayers any potential identified issues that may warrant settlement initiative treatment.
Determining areas of agreement. The exam teams memorialize the final determinations of issues (i.e., agreed, unagreed, no change).
Next/final steps. The exam teams inform taxpayers of next steps in the examination process up through resolution of remaining issues, issuance of the final report and exam case closing.

The IRS also noted that LMSB “Quality Examination Process Reference Guide” (a tool for LMSB revenue agents and exam teams) is available.

Tax lien without filed notice of tax lien continues to apply to excluded property after chapter 7 bankruptcy discharge 6/30/10

The Tax Court in Wadleigh v. Comm. found that the automatic section 6321 tax lien continued in effect against taxpayer's pension excluded from his chapter 7 bankruptcy estate even absent IRS filing of a notice of tax lien.

New Accounting Standard Affects Leased Space 6/23/10

The Financial Accounting Standards Board is working to merge its generally accepted accounting principles (GAAP) with the International Accounting Standards Board standards, with an impact on the accounting for leases. Currently, American and foreign companies list many leases as footnotes in their financial statements. A new standard to be completed next year and enacted in 2013 that will require companies using GAAP to book leases as assets and liabilities on their balance sheets. Companies will record the cost of rent over the remaining term of the lease as a liability (reducing over the term) and their right to use the space as an asset. There will be no grandfathering under the rule, so any active leases will have to be recorded on the balance sheet.

Landlords will record the obligation to provide space as a liability and rents they are to receive as an asset. Landlords currently book their revenue as rental income, but under the new standard rents received will be recorded partly as interest income and partly as a reduction in the obligation to provide space.

A renewal option term must be included in the term and thus included on the balance sheet if it is likely that the lessee will execute the renewal option. Because this increases debt on the balance sheet, renewal options could become less popular. Retailers with contingent rents based on a percentage of sales will have to estimate their sales numbers over the entire term of the lease to book the contingent rent on their balance sheet. These estimates will have to be reviewed and adjusted annually. Having to estimate the likelihood of exercising a renewal option or future sales requires forecasting what the lessee is going to pay rather than their legal obligation to pay.

The new rule is meant to stop significant off-balance-sheet lease activity and remove many of the differences in the way companies account for property that they own and property they lease. It may most heavily affect companies already struggling under heavy debt loads, large retailers with hundreds or thousands of leases, and commercial banks with multiple branches. It may cause more companies to buy their offices and drive down demand for leased space, and shrink the length of leases to diminish the amount required to put on the balance sheet.

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