What the IRS Commissioner Says About Fin 48

It seems that Doug Shulman, the IRS Commissioner since March, 2008, views FIN 48 in the spirit of full disclosure where large companies will provide documentation in advance of formal audits thereby decreasing costs of IRS oversight.

From the Journal of Accountancy April 2010:

JofA: What can you tell CPAs who are concerned about the proposed reporting regime for uncertain tax positions?

Shulman: I tried to lay it out relatively clearly when I announced it. It’s part of the broader theme of information reporting and having a transparent system that is efficient for us and for the tax system. This issue has been on my mind and on the agency’s mind, and there’s been a public dialogue about it for two years. This is one of the first things people talked to me about when I was nominated—even before I was confirmed: What are we going to do about uncertain tax positions and tax accrual workpapers?

Right now, we issue a lot of IDRs [information document requests], rooting around for information. If we get this information upfront, it should decrease the information we have to request and decrease the time of the audit. Right now, we spend anywhere from 10% to 25% of the time in our large corporate audits looking for information rather than doing what I think we should be doing in a voluntary disclosure and compliance system: You report key information to us, and any dialogues or disagreements are about your facts as they relate to tax law, not playing hide-and-seek and trying to figure out what positions you have taken.

First of all, we’re going to affirm the policy of restraint. We are not going to ask for the full tax accrual workpapers—which a lot of people suggested we should do, because we’re legally entitled to them. Instead, we’ve proposed getting a list of positions and the maximum exposure to those positions. We’re not going to get the risk weighting that taxpayers put on each position. We’re not going to get behind the thoughts and analysis by taxpayers about whether they will win or lose with the IRS, and if they lose, what are the chances that they put on that loss and how they analyzed their position. Those are all things we could have asked for and we didn’t. What we do say is FIN 48 is a fact; people already do this work, and we want more transparency. In the conversations I’ve had since we announced it, generally people have said this makes sense; it’s a natural evolution. We expect that there will be a lot of public feedback.

The real question is, what will the IRS do with this information? I’ve been very clear that this is not going to create a target for taxpayers and that we understand that just because you have an uncertain tax position doesn’t mean that’s an amount of money you owe to the IRS. Rather, it allows us to get a head start on picking the right audits and then being able to focus on the issues.

Tax Implications of The Health Care Reform Bill

There are so many new taxes in this bill targeted at the health care industry both insurance companies and providers that it will literally take months for most people to fully realize the impact of this legislation.

We have a half a trillion dollar cut to Medicare that is supposed to be funded by a decrease in fraud and abuse.

We have a 2.3% national sales tax on medical devices.

We have a 10% tax on tanning salons.

We have a 3.8% Medicare tax on any taxable income over $200,000 for singles and $250,000 for married couples.

We have excise taxes on “Cadillac” health insurance plans, which hit on unions and government workers that have been
delayed until 2018.

All these changes if you’ve noticed will be phased in gradually. We will not know the tax reporting requirements until the IRS comes out with their rules possibly sometime in 2011?

From the Boston Globe:

Jamie Downey March 24, 2010 08:51 AM

Whatever your thoughts are on the health care legislation that has passed, everyone has to agree that it is expensive. The Congressional Budget Office estimates that the legislation will cost $950 billion over a ten-year period.

Health care reform comes in two pieces of legislation, The Patient Protection and Affordability Act (the Original Bill) which was signed into law by the President yesterday and the HR 4872 Health Care and Education Affordability Reconciliation Act of 2010 (the Amendment) which passed the House and is expected become law in the near future. To offset the costs of government’s increased role in health care, there are several tax increases being imposed (or as politicians like to say “revenue provisions”). Here are a few, but certainly not all, of the more significant “revenue provisions” that I saw while looking through the texts’ of the legislation:

Section 1002 of the Amendment – Individual responsibility: Starting in 2014 everyone will be required to maintain health insurance. If you go without insurance, you will be subject to a tax of $695 per year.

Section 1003 of the Amendment – Employer responsibility: Large companies will be required to provide health insurance as a benefit to its employees. Companies that do not provide this benefit will be imposed a tax of $2,000 a year per employee.

Section 1401 of the Amendment – High cost plan excise tax: Starting in 2018, high cost health insurance plans will be subject to a tax. Plans for single persons that cost in excess of $10,200 and family plans that cost in excess of $27,500 are in this sections crosshairs. The excise tax rate on incremental costs will be 40 percent. In an attempt to appease union dissent, this tax will not be assessed on the individual but will be assessed on the insurance company providing the plan. Ultimately, the costs will still be burdened by the purchaser.

Section 1402 of the Amendment – Medicare tax: Medicare tax will now be assessed on investment income for families making in excess of $250,000 and for singles making over $200,000. Investment income includes interest, dividends, capital gains, rental income and royalties. In the past, Medicare taxes had been assessed on wages only. Earn one dollar of investment income while you are over the threshold limits and you will incur this tax. This tax will commence January 1, 2013.

Section 9015 of the Original Bill – Medicare tax: In addition to the expansion of Medicare tax on investment income as noted in Section 1402 above, the Medicare tax rate has also increased. This tax increases by a third, from 2.9 percent to 3.8 percent.

Section 1404 of the Amendment – Brand name pharmaceuticals: Starting in 2011, the pharmaceutical industry will be subject to a $2.5 billion annual excise tax. The annual excise tax increases in subsequent years, rising to $4.2 billion in 2018. The tax is assessed based on a companies market share and is non-deductible for federal tax purposes.

Section 1405 of the Amendment – Excise tax on medical device manufacturers: Sales of medical devices will be subject to a 2.9 percent national sales tax. This will apply to sales occurring after December 31, 2012.

Section 1406 of the Amendment – Health insurance providers: Starting in 2014, the health insurance industry will be subject to an $8.0 billion annual excise tax. The excise tax increases to $11.3 billion annually for 2015, 2016, and 2017. The excise tax increases to $14.3 billion in 2018 and rises by inflation thereafter. The tax is assessed based on a companies market share and is non-deductible for federal tax purposes. Does anyone think this will create inflation in the health insurance premiums?

Section 9013 of the Original Bill – Modification of itemized deduction for medical expenses: For those incurring significant medical costs, your ability to deduct these expenses will be decreased. This legislation increases the adjusted gross income threshold for claiming an itemized deduction from 7.5 percent to 10 percent.

Section 10907 of the Original Bill – Excise tax on indoor tanning services: This is a sales tax of ten percent assessed on your trip to the tanning salon. This tax begins July 1, 2010.
tags healthcare reform tax impact

Prime Reason There Are Less Corporate HQ’s in Mass.: Businesses in Mass. Outsource More

The reason there are less corporate HQ’s in Boston than in previous times is that with the advent of instant communication and competitive prices for top expertise many entrepreneurial companies in sectors such as software and web development (Web 2.0),IT management companies and wholesalers, venture capital and real estate entrepreneurs are choosing to outsource their tax reporting, fulfillment, management reporting, tax planning, payroll, sales/use, and independent contractor tax reporting to an expert third party administrator.

Rather than creating an “internal department” with all the personnel costs associated with doing that including social security and medicare taxes, unemployment taxes, and worker’s compensation insurance premiums not to mention finding somebody actually competent in this high demand industry, they will seek a professional practice to economically manage these functions. If you hire an accounting outsourcer they pay their own taxes as well as dealing with the vagaries of hiring competent people in the first place.

If the overall viability of the business enterprise is managed by the owners certain functions such as tax, financial reporting, audit prep, and financial analysis may be outsourced. In addition other functions such as web presence, media buys, computer and data management are often purchased from outsourcers rather than being internally directed so that the owners of the enterprise can do their best job as general managers without being distracted by functions that can be purchased on the open market with a low price for a very high level of expertise.

The idea of eliminating the company HQ is not a new one and has not exactly caught on in large cap public companies, but technological advances in communications may inevitably overcome the advantages of the economies of scale of having a large concentration of administrative personnel in a big building, as tens of thousands of layoffs have recently shown.

Better Them Than Us? Or Are We Next?: IRS Targets Wealthy Taxpayers

WASHINGTON (Reuters) – A new Internal Revenue Service unit set up to catch rich tax cheats hiding their wealth in complex business entities is rapidly taking shape with the hiring of hundreds of employees.

The IRS high wealth unit, part of a broader effort to combat international tax evasion, is focusing on “the entire web of business entities controlled by a high wealth individual,” IRS Commissioner Doug Shulman told a tax conference this week.

Another IRS official told Reuters “hundreds” of people have already been hired to staff the new unit, including some from within the agency.

“We have drawn top talent within the IRS that have expertise involving wealthy individuals as well as examination of their related entities,” said Mae Lew, an IRS special counsel.

The high-wealth unit is focusing on trusts, real estate investments, privately held companies and other business entities controlled by rich individuals.

While use of sophisticated legal structures can be legal, in other instances they “mask aggressive tax strategies,” Shulman said.

Tax authorities in Japan, Germany and the UK have also created similar units.

The U.S. House of Representatives on Thursday approved a $387 million boost for the IRS for the fiscal year that started October 1, in part to fund the high-wealth unit. The Senate is expected to vote on the measure on Sunday.

NEW GLOBAL FOCUS, JOINT CORPORATE AUDITS

The IRS is also opening new criminal offices in Beijing, Panama City and Sydney to focus on funds flowing out of Europe and into Asia, in part because of a heightened focus on international enforcement in Europe.

The goal is to get those up and running during this fiscal year, which ends September 30, according to Barry Shott, IRS deputy commissioner for international issues for large and midsized business.

At the center of the agency’s offshore effort is its legal cases against Swiss banking giant UBS AG. UBS agreed to turn over nearly 5,000 names of individual American clients and paid $780 million to settle a criminal case for aiding tax evasion.

The IRS has also begun initial steps to join forces with other governments to scrutinize corporate tax filings to prevent “tax arbitrage” by companies seeking the best regime.

President Barack Obama has proposed tightening tax rules for U.S. multinationals, including one in which companies delay paying taxes on income earned offshore, a legal practice known as deferral that officials say is abused.

Some tax practitioners expressed worry about such coordination.

“With any new thing, you never want to be the guinea pig,” Mary Lou Fahey, general counsel for the Tax Executive Institute, comprised of business executives, said.

Shott said a likely scenario will likely be two countries getting together and decide to examine a narrow issue. In the beginning it will operate like a pilot program where the corporation examined would agree to take part.

“With rare exception … the taxpayer will absolutely know they are subject to a simultaneous examination,” Shott said.

Still, he said there could be cases where the audit needs to be kept quiet, such as when a criminal probe is ongoing.

Initial partners would likely include Canada, the UK and Australia, Shott said.