Tax Law Blog | IRS Tax Attorneys

AIG has revealed that they are suing the IRS for $329 million, claiming a refund for back taxes and penalties. Hmm, I wonder if they’ll return some of that bailout money if they win?

Oh wait. They won’t win.

That’s because the IRS has already labeled the transactions “abusive” and penalized the company for taking tax credits associated with “cross-border financing transactions.” Though details are sketchy, the WSJ suggests that AIG was allowing its overseas subsidiaries to pay foreign taxes and then claiming a US tax credit for paying those taxes which they then split with foreign lenders. The IRS claims this means that US taxpayers are effectively subsidizing the lending through the shared tax credit.

Former IRS commish Everson testified about these deals in Congress last year, noting that they are “designed to exploit inconsistencies between U.S. and foreign laws.” And, under proposed regulations passed last year, such transactions wouldn’t be allowed.

And yet AIG is pressing on with its claims.

The years at stake are 1997 through 1999. AIG noted in securities filings that it expects the IRS to expand its investigation to later years (of course it will). The taxes and penalties attributable to the first investigation total $329 million; neither the AIG nor the IRS has indicated the additional taxes and penalties which could be assessed for any later years. My bet is that it’s huge. Huge, huge, huge.

If that were to happen, it would mean additional funds that AIG would have to pony up this year. I say additional because AIG owes between $34 million and $100 million for a tax shelter dispute that was settled this quarter. The tax shelters, called Lilo (short for lease-in/lease-out) and Silo (short for sale-in/lease-out) allowed lenders to buy assets from municipal government agencies including those in Chicago, New York and San Francisco, and then lease those assets back to the agencies, often through sophisticated “on paper only” arrangements. The lenders, like AIG, took a tax deduction on the transaction. The IRS claimed that those deductions were not allowable and were eventually successful in banning Lilo and Silo altogether.

So let’s do the math. $329 million in “cross border financing transactions” + (up to) $100 million in tax shelter disputes = $429 million in taxes and penalties, so far.

But it will be fine, just fine. Don’t worry about those poor AIG execs scrambling to find coins under the sofa cushions. We’re buying, remember? We’re handing AIG more money so that they can pay off debts that they owe… to us. This whole scenario reminds me of the time that my brother wrecked my dad’s truck, so my parents bought him a new one so that he could work to pay them back. Some guys get all the luck.

Great post from The Tax Girl

Venture capital and other securities investment funds organized as domestic partnerships (”Domestic Funds”) often have foreign persons as limited partners. In addition, domestic fund managers often establish investment partnerships outside the United States (”Offshore Funds”). In recent months, there has been substantial controversy surrounding: (i) the potential application of a 35 percent excise tax (the “Excise Tax”) under Section 1491 of the Internal Revenue Code (the “Code”) in respect of Domestic Fund distributions to certain foreign limited partners; and (ii) reporting obligations (the “Reporting Obligations”) under Section 1494 of the Code in respect of capital contributions by domestic persons to Offshore Funds as well as Domestic Fund distributions subject to the Excise Tax.

On February 24, 1997, the Internal Revenue Service released Notice 97-18, which addresses these issues as well as certain others arising under Sections 1491 and 1494 of the Code. This memorandum briefly describes the background to Notice 97-18, its impact on Domestic and Offshore Funds, and the steps that such funds should take to deal with remaining uncertainties.
More.

If you negotiate an installment plan that is not backed by the proper legal documentation, the IRS can continue to levy and lien your property and assets.

It is important that any agreement you enter into with the IRS is signed both by the company and by an IRS official.

You need the assistance of an IRS Lawyer.

Nontaxable Interest

Interest earned on bonds issued by a state, territory, municipality or any political subdivision is free from federal taxes. These are generically called municipal bonds, and their tax benefit increases in value as your marginal tax rate goes higher. (In other words, the bonds are worth more to you as your overall income rises.)

Assume you’re in the 35% bracket, the top rate through the year 2010. A 5% tax-free rate becomes the equivalent of a taxable rate of 7.69%. In the 15% bracket, the taxable equivalent is only 5.88%. If you check out this page at investinginbonds.com, you can compare taxable and tax-free yields. Compare the after-tax rates on alternative investments of equivalent risk.

Car Pulling
Commuting to work? Bring a friend — and his wallet. If you form a carpool to carry passengers to and from work, any dollars received from these passengers aren’t included in your income.

Commuting costs are generally not deductible. But if you establish a carpool and you’re reimbursed in amounts sufficient to cover the cost of your repairs, gas and similar items used in connection with operating your car to and from work, then you’ve converted personal nondeductible expenses into excludable income.

Selling Your Home

Under a tax law enacted in 1997, if your house was your principal residence for two of the last five years, you can exclude as much as $250,000 in gain($500,000 on a joint return) when you sell it.

You don’t have to reinvest the money, and you can claim the exclusion every two years. (If you’ve got $500,000 in gain every two years, I want to meet your real estate agent and go shopping!)

More

If you need IRS legal representation in Chicago, Visit Horowitz & Weinstein. Or you can visit the National Tax Firm of Kenneth Sheppard.

Adoption credit.   Beginning in 2007, the credit allowed for an adoption of a child with special needs is $11,390 and the maximum credit allowed for other adoptions is the amount of qualified adoption expenses up to $11,390. The credit begins to phase out if you have modified adjusted gross income of $170,820 or more and is completely phased out if you have modified adjusted gross income of $210,820 or more.

Adoption assistance program.  Beginning in 2007, you may be able to exclude up to $11,390 from your gross income for qualified adoption expenses paid or incurred by your employer under a qualified adoption assistance program in connection with your adoption of an eligible child. This income exclusion starts to phase out if your modified adjusted gross income is $170,820 or more and is completely phased out if your modified adjusted gross income is $210,820 or more.

Collection Financial Standards are used to help determine a taxpayer’s ability to pay a delinquent tax liability.  Allowable living expenses include those expenses that meet the necessary expense test.   The necessary expense test is defined as expenses that are necessary to provide for a taxpayer’s (and his or her family’s) health and welfare and/or production of income.

National Standards for food, clothing and other items apply nationwide.   Taxpayers are allowed the total National Standards amount for their family size, without questioning the amount actually spent.

National Standards have also been established for minimum allowances for out-of-pocket health care expenses.  Taxpayers and their dependents are allowed the standard amount on a per person basis, without questioning the amount actually spent.

Maximum allowances for housing and utilities and transportation, known as the Local Standards, vary by location.   In most cases, the taxpayer is allowed the amount actually spent, or the local standard, whichever is less.

Generally, the total number of persons allowed for necessary living expenses should be the same as those allowed as exemptions on the taxpayer’s most recent year income tax return.

If the IRS determines that the facts and circumstances of a taxpayer’s situation indicate that using the standards is inadequate to provide for basic living expenses, we may allow for actual expenses.

However, taxpayers must provide documentation that supports a determination that using national and local expense standards leaves them an inadequate means of providing for basic living expenses.

The Revenue Agent’s report is not binding. You may appeal the decision at a number of levels. This may be done before the Agent’s manager, before an Appeals’ officer, and before the US Tax Court.

The ability to access these venues is limited due to the timetables involved. Make sure you stay one step ahead of the deadlines to respond so rights are not lost.
Source

Contact Kenneth Sheppard, National Tax Attorney.

In a recent year, the agency processed over 232 million tax returns, collected over $2.1 trillion in revenues and disbursed about $284 billion in refunds. The IRS’s latest report says that during the same period it offered special advice and assistance in response to 94 million requests for assistance that it received by telephone and at 404 walk-in sites.

To perform this truly monumental task the IRS employs about 98,000 employees in ten service centers, two computer centers and and a number of other regional offices.

To persuade the American people to meet their tax obligations, Congress has provided the IRS with a vast range of powers. Tax returns must be filed. Tax returns must be accurate. Taxes must be withheld or paid on time.

To check on the accuracy of returns, virtually all institutions that disburse funds — employers paying salaries, banks paying interest, corporations paying dividends, state taxing agencies paying refunds, publishers paying royalties and city lottery organizations paying winnings — must send a computerized notice to the IRS. Simple math tests and more complex matching programs are then undertaken. A relatively small number of individual taxpayers are selected for face-to-face audits. When discrepancies are discovered as a result of these various examination procedures, the IRS dispatches notices. In addition to the taxes that the IRS says are owed, the notices often include a demand that the taxpayer pay the government a civil penalty along with interest.

Taxpayers can appeal the IRS finding that they owe additional taxes in a number of different ways. But if the targeted taxpayer simply declines to meet the assessed liability, the IRS can initiate a forceful collection process.

In certain circumstances, the IRS concludes that the taxpayer knowingly violated the tax laws. In these situations the IRS can recommend to the Justice Department that the taxpayer be charged with a criminal violation. Some IRS criminal referrals are brought under specific tax violations such as the knowing failure to file a return or the knowing filing of a fraudulent return. More frequently, in recent years, the IRS referrals are based on statutes relating to money laundering, drugs and currency violations.
Source

One of the first actions of any new nation is to collect taxes. This was true for the United States when in March of 1791, shortly after George Washington became president, the brand new Congress approved a law establishing a tariff system on selected imports and an internal excise tax on whiskey.

In the next year, under the authority of that law, Treasury Secretary Alexander Hamilton established the Office of the Commissioner of Revenue, the predecessor to what is today the Internal Revenue Service.

Washington’s tax shortly led to the new nation’s first serious tax protest movement — the Whiskey Rebellion of 1793-1795 that required the dispatch of a ragtag army of about 13,000 federalized state militiamen to suppress.

The Civil War, and the Union’s insatiable demand for revenue, led to the re-creation of the Office of the Commissioner of Revenue, that by 1863 included about 4,000 tax collectors. Federal tax collections soared — from $28.5 million the year before the war to more than $300 million towards its end. One measure helping swell the revenues was the establishment of the nation’s first income tax which was sufficiently complex that eight years after Lincoln’s assassination it was discovered that in 1864, the then-president had overpaid his taxes by $1,250.

The end of the civil war led to the end of that era’s income tax. But in 1894, under heavy political pressure from the populists, Congress approved a modest new income tax. The Supreme Court immediately declared the tax unconstitutional. But broad political pressure for a more muscular federal government led to the ratification of the constitution’s Sixteenth Amendment on February 13, 1913: “The Congress shall have the power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration.”

The creation of the Office of the Commissioner of Revenue in 1862, followed in 1913 by the permanent establishment of the income tax, are two of the three legs that support today’s federal tax system. The third leg came in the middle of World War II when Congress approved a law requiring employees to withhold from salaries and wages the taxes owed by their employees.

Following the war, the IRS was engulfed in a massive corruption scandal that touched almost every level of the agency. After extensive Congressional hearings, the IRS underwent a basic re-organization while at the same time, installing what was then considered one of the most advanced computerized management systems in the world.

In the mid-1990s, the overall performance of the IRS — particularly the way it dealt with individual taxpayers — again became the subject of widespread public concern. The concern led to the formation of a special IRS study commission, a series of oversight hearing by the Senate Finance Committee and the passage by Congress of the IRS Restructuring and Reform Act of 1998. This law authorized a major spending program to improve the agency’s computers.

Just as significant was a basic change in the IRS’s structure. For many decades, the agency had been divided into scores of different districts along geographical lines. Most taxpayers — individual, business, farm, corporation and tax exempt — were processed by the districts where they were located. The 1998 law called for the elimination of this basic geographical system and its replacement by four functional units. In theory, one unit would deal with wage and investment returns filed by individual taxpayers, a second with the returns of small businesses and the self-employed, a third with those of large and mid-sized businesses and the fourth with tax exempt organizations.

In May of 2003, the Senate confirmed the nomination of Mark W. Everson as the 46th commissioner of the IRS. Everson, a Texas business executive who had held several senior positions in the Reagan and Bush Administrations, took over from Charles O. Rossotti.

Reflecting in part the changes that had occurred in the nation’s economic and political situations, the initial vision of the two men about the role of IRS agency was quite different. Rossotti — appointed in the wake of a series of sharply critical Senate hearings and in a boom period when budget deficits were melting — had sought to lead the agency away from its heavy emphasis on enforcement to a more balanced policy where enforcement would be complemented with a systematic effort to make the IRS more hospitable to the taxpayer. The basic idea was that by if it was easier for taxpayers to meet their obligations, that voluntary compliance would significantly improve. Rossotti, however, also argued that enforcement must be an essential component of the government’s tax collection strategy. Just before his 2002 retirement, for example, he said the government would need a massive increase in new employees — 35,000 of them — just to pursue the tax cases it was aware of.

Neither Congress, the outgoing Clinton team nor the Bush Administration were prepared to seriously consider Rossotti’s warning. The dramatic decline in the nation’s economy and the resulting surge in federal budget deficits, however, was a looming reality that demanded some kind of response. (The billions of additional dollars required for homeland security and the war in Iraq may have further contributed to the pressures on the IRS).

So, almost from the first day of Everson’s five-year term, his official statements have reflected the belief that tougher enforcement was required to recover the “many billions of dollars of lost tax revenues.” “We are correcting our course and re-centering the agency,” he told an audience at the National Press Club on March 15, repeating earlier calls for action. The commissioner then outlined his priorities, starting with a a focused attack on the corporations and high income taxpayers who did not abide by the law.

As Everson’s first year in office drew to a close, however, neither the Bush Administration who had appointed him nor Congress had so far seen fit to provide the IRS the substantial boost in financial resources that many experts — in and out of the government — believe the IRS must receive to effectively and fairly enforce the nation.
Source

It’s a moment many taxpayers dread. A letter arrives from the IRS — and it’s not a refund check. Don’t panic; many of these letters can be dealt with simply and painlessly.

Each year, the IRS sends millions of letters and notices to taxpayers to request payment of taxes, notify them of a change to their account or request additional information. The notice you receive normally covers a very specific issue about your account or tax return. Each letter and notice offers specific instructions on what you are asked to do to satisfy the inquiry.

If you receive a correction notice, you should review the correspondence and compare it with the information on your return.

For help fighting the IRS be sure to contact The Sheppard Law Offices. You will receive expert assistance.