Withholding agents and payments to foreign persons
The Treasury Department and the IRS have announced a temporary voluntary compliance initiative with respect to tax, withholding, and reporting obligations that apply to withholding agents in connection with payments to foreign persons. As detailed in Revenue Procedure 2004-59, the program sets forth procedures for eligible withholding agents to disclose compliance shortcomings in these areas to the IRS, to pay any applicable tax, interest, and penalties, and to develop appropriate remedial procedures to ensure compliance in the future. Under this program, the IRS will review the withholding agent's proposed remedial procedures and, if they are acceptable, will provide the withholding agent with an acknowledgment letter. Applications for the program will be accepted through December 31, 2005.

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...back to 30 September 2004


Further information:
www.ustreas.gov/press/releases/js1968.htm
www.ustreas.gov/press/releases/reports/rp200459.pdf

Tax avoidance transactions
The IRS has provided an updated list of "listed transactions" that have been determined to be tax avoidance transactions. As a result, taxpayers may need to disclose their participation in these listed transactions, and promoters (or other persons responsible for registering tax shelter transactions) may need to register these transactions. In addition, material advisors must maintain lists of investors and other information with respect to these listed transactions.

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...back to 30 September 2004


Further information:
www.irs.gov/pub/irs-drop/n-04-67.pdf

District Court finds in favor of Oracle acquisition of PeopleSoft
In the case US -v- Oracle Corporation, the District Court for the Northern District of California ruled that the Department of Justice, Antitrust Division, had failed to show that the merger of Oracle Corporation and PeopleSoft Inc. is likely substantially to lessen competition in a relevant product and geographic market.

Responding to the decision, the Department of Justice stated "We are disappointed in the Court's decision. We believe the facts and evidence in this case support our position that Oracle's proposed acquisition of PeopleSoft would result in a substantial lessening of competition in the markets for high function Human Resources Management and Financial Management Systems software. The Department is considering its options."

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...back to 16 September 2004


Further information:
www.usdoj.gov/atr/cases/f205300/205388.pdf
www.usdoj.gov/opa/pr/2004/September/04_at_608.htm

Tax Talk Today live webcast on September 14
The next live webcast is entitled "Appeal It! Or, What's Next When - You and the IRS Just Don't Agree?" and will take place on Tuesday, September 14, 2004 from 2 p.m. to 3 p.m. ET.

This program focuses on a taxpayer's right to appeal certain IRS compliance actions. Practitioners and top IRS Appeals officials will describe how to effectively appeal issues and explain what the Appeals Division considers in making its decisions. The discussion will cover appeals of both audit and collection issues (Collection Due Process and Collection Appeals Program) as well as new programs involving Alternative Dispute Resolution options - Fast Track Mediation, Fast Track Settlement, and Post-Appeals Mediation which can speed the process for clients.

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...back to 2 September 2004


Further information:
www.taxtalktoday.tv/index.cfm?pgname=8.738

Employer ordered to pay employment taxes
A federal district court in Denver, Colorado has ordered Colorado Mufflers Unlimited, Inc., of Northglenn, and its officers and shareholders to resume withholding federal taxes from their employees' wages. According to the order, entered August 10, Colorado Mufflers' officers ceased withholding and paying payroll taxes and filing accurate employment tax returns in 2000.

The court's order states that the defendants raised "patently meritless 'tax protestor' arguments" about the applicability of the tax laws to themselves and their business. The order directs the individual and corporate defendants to withhold income, Social Security and Medicare taxes from employee wages, to pay these taxes to the Internal Revenue Service as they become due, and to start filing accurate tax returns, going back to the year 2000. The court also ordered the defendants to make payroll tax deposits within three days of each payroll, to issue Forms W-2 to employees, to post the court's order on their business premises, and to notify current and former employees of the order.

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...back to 19 August 2004


Further information:
www.usdoj.gov/opa/pr/2004/August/04_tax_559.htm

Resolving employment tax discrepancies on acquisition or merger
Following discussions between the IRS and employers under the Industry Issue Resolution (IIR) program, the IRS has announced a new schedule that will make it easier for taxpayers to provide the IRS with information about employment tax discrepancies created by an acquisition, statutory merger or consolidation.

If an acquisition, statutory merger or consolidation creates a discrepancy between what was reported to the Social Security Administration on Form W-2 Wage and Tax Statement and what was reported the IRS on Form 941 Employer's Quarterly Federal Tax Return, the employer can use the new Schedule D (Form 941) Report of Discrepancies Caused by Acquisitions, Statutory Mergers, or Consolidations to explain the discrepancy, even if they e-filed their employment tax returns.

Not every employer experiencing a merger or acquisition should file Schedule D (Form 941). Mergers, acquisitions, and other reorganizations generally fall into one of three categories for employment tax reporting purposes:

1. statutory mergers and consolidations,
   
   
2. acquisitions which satisfy the requirements for predecessor-successor status, or
   
   
3. other acquisitions that are not statutory mergers or consolidations and that do not satisfy the requirements for predecessor-successor status.

Only employers in categories 1 and 2, above, with discrepancies should file Schedule D (Form 941).

The draft Schedule is available to view on the IRS website but should only be used to explain discrepancies for acquisitions, statutory mergers, or consolidations that are effective on or after January 1, 2005.

Revenue Procedure 2004-53 provides guidance on the new Schedule D (Form 941). It also describes both the standard procedure and an alternate procedure for preparing and filing Form W-2 Wage and Tax Statement; Form 941 Employer's Quarterly Federal Tax Return; Form W-4 Employee's Withholding Allowance Certificate; and Form W-5 Earned Income Credit Advance Payment Certificate, in certain acquisitions.

This revenue procedure applies when an employer (successor) acquires substantially all the property (1) used in a trade or business of another employer (predecessor), or (2) used in a separate unit of a trade or business of a predecessor, and, in connection with or immediately after the acquisition (but during the same calendar year), the successor employs individuals who immediately prior to the acquisition were employed in the trade or business of the predecessor.

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...back to 19 August 2004


Further information:
www.irs.gov/pub/irs-dft/d941sd.pdf
www.irs.gov/pub/irs-drop/rp-04-53.pdf
www.irs.gov/pub/irs-drop/rp-03-36.pdf

Non-residents warned of identity theft scam
The IRS has issued a warning of a fraudulent scheme targeting non-resident aliens who have income from a United States source. The scheme uses fictitious IRS correspondence and an altered IRS form in an attempt to trick the foreign persons into disclosing their personal and financial data. The information fraudulently obtained is then used to steal the taxpayer's identity and financial assets.

In this particular scam, an altered IRS Form W-8BEN Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding is sent with correspondence purportedly from the IRS to non-resident aliens who have invested in U.S. property, such as securities or bonds, and therefore have U.S.-sourced income. The correspondence claims that the recipient will be taxed at the maximum rate unless the requested personal and financial data is entered onto the form and the form is faxed to the phone number contained in the correspondence.

The correspondence's threat is baseless. In reality, the rate at which a non-resident alien pays tax to the U.S. depends on the terms of the tax treaty the U.S. has with the foreign person's country.

The legitimate IRS Form W-8BEN, which is used to establish the non-resident alien's foreign status and to determine whether the foreign person is subject to withholding of taxes, does not ask for any personal information except, in some cases, for a Social Security or IRS-generated Taxpayer Identification Number.

In addition, genuine Forms W-8BEN are sent to the recipients by their financial institution, not by the IRS. The financial institution - whether bank, brokerage firm, insurance company or other - acts as the non-resident alien's withholding agent for any income subject to U.S. income tax that the foreign person received from a U.S. source. The W-8BEN is used by the financial institution to establish the appropriate tax withholding or to determine whether their customers meet the criteria for remaining exempt from tax reporting requirements.

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...back to 3 June 2004


Further information:
www.irs.gov/newsroom/article/0,,id=123621,00.html
www.irs.gov/pub/irs-pdf/fw8ben.pdf

Federal Court halts tax-scam promotion
A federal court in Seattle has barred Jack Cohen of Tacoma, Washington, from selling his tax fraud schemes. The schemes are based on a discredited argument, repeatedly found frivolous by many courts, called the "U.S. Sources" or "Section 861 argument." The "argument," named after the provision of the federal tax code it misinterprets, posits that U.S. citizens are not required to pay taxes on income they receive from sources within the United States.

Papers filed in the case show that Cohen, through his "Tax Ax" website (i.e. taxax.org, not taxax.com), told employers to stop withholding federal income and social security taxes from the wages of their employees, and sold products such as the "W-4 Killer Pack," which he advertised as "a kit for employees who wish to stop the withholding process." He also sold the "Tax-Collecting Employer Challenge" for $250, a kit which told employees to send letters to their employers threatening to sue them unless they stopped withholding taxes from their paychecks.

Cohen is barred from selling the Section 861 argument and any other abusive tax schemes. He must post a copy of the injunction on his website and must remove all false statements about the tax laws on the site. The order also requires Cohen send a copy of the court's order to his customers and requires him to give the Justice Department a list of his customers.

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...back to 27 May 2004


Further information:
www.usdoj.gov/opa/pr/2004/May/04_tax_356.htm
www.usdoj.gov/tax/04_tax_092.htm

Bar Manager failed to pay employment taxes
At the federal courthouse in Omaha, Nebraska, U.S. District Judge Thomas M. Shanahan sentenced Michael Dane Webb to serve five months in federal prison, followed by five months of home detention. On February 27, 2004, Mr. Webb pled guilty to a felony charge of willfully failing to account for and pay over employment taxes.

Mr. Webb admitted in his plea agreement that he conducted business through Barry Good, Inc., doing business as Barry's Bar and Grill in Lincoln, Nebraska. He also admitted he had withheld from his employees' wages, Social Security, Medicare, and income taxes, but did not report, deposit or pay over those withholdings during 1996, 1997 and 1998. Mr. Webb admitted he had between 60 and 70 employees during those years. His three-year scheme allowed him to accumulate from their wages approximately $120,000 that he was required to pay to the IRS on behalf of his employees. Instead, he kept it for his own use.

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...back to 27 May 2004


Further information:
www.usdoj.gov/opa/pr/2004/May/04_tax_357.htm

Law firm ordered to disclose client identities
The Justice Department's Tax Division has announced that the U.S. District Court for the Northern District of Illinois ordered the law firm Jenkens & Gilchrist, P.C., to comply with IRS summonses seeking identities and other information relevant to the IRS investigation into certain tax shelters promoted by the firm. Eileen J. O'Connor, Assistant Attorney General for the Department of Justice Tax Division, said "The Court's order affirms the government's position that customers of tax-shelter promoters cannot shield their identities from the government, even if the promoter is a law firm."

The Court's order follows its April 20, 2004, order holding that the identities of Jenkens & Gilchrist's clients are not privileged.

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...back to 27 May 2004


Further information:
www.usdoj.gov/opa/pr/2004/May/04_tax_338.htm

Joint task force to tackle abusive tax transactions
Tax Commissioners of Australia, Canada, the United Kingdom and the United States have established a joint task force to increase collaboration and coordinate information about abusive tax transactions by signing a Memorandum of Understanding in Williamsburg, Virginia on April 23, 2004.

An initial focus of the work will include the ways in which financial products are used in abusive tax transactions by corporations and individuals to reduce their tax liabilities, and the identification of promoters developing and marketing those products and arrangements. Many abusive tax transactions employ strategies that cross borders, and many of the promoters of these transactions operate globally.

Further information:
www.irs.gov/newsroom/article/0,,id=123016,00.html
www.irs.gov/pub/irs-utl/jitsic-finalmou.pdf
...back to 6 May 2004

Failure to pay employment taxes
Employment taxes consist of federal income tax withholding along with Social Security and Medicare taxes and unemployment taxes. Many states also have withholding requirements for various employment related taxes,

Employers must report federal employment taxes withheld from their employees on Form 941 Employer's Quarterly Federal Tax Return. Employers are also responsible for filing Form 940 Employer's Annual Federal Unemployment Tax Return. Employment taxes must be paid to an authorized bank or financial institution according to federal tax deposit requirements, or paid electronically.

According to a recent consumer alert issued by the IRS, there are a number of reasons why some business owners have failed to withhold or pay employment taxes from their employees' paychecks. Among the fraudulent practices listed are

• Pyramiding, where a business withholds taxes from its employees but intentionally fails to remit them, often due to a lack of profit or capital for operating costs. The quarterly liabilities accumulate (or "pyramid") until the employer has little hope of catching up. Such businesses frequently shut down or file for bankruptcy and then start a new business under a different name and start the cycle over.
  
  
• Failure by third-party payers to pay over collected employment taxes. Most Payroll Service Providers and Professional Employer Organizations provide excellent services to employers. However, some of these businesses have not paid the collected employment taxes and have closed, leaving millions of dollars unpaid to the IRS. The IRS advises employers to exercise due diligence in selecting and monitoring a third party payer. When choosing a third party payer, employers should look for one that is reputable and uses the Electronic Federal Tax Payment System (EFTPS), thereby allowing them to verify payments made on their behalf. An employer should never allow their address of record with the IRS be changed to that of the third party payer.
  
  Treating employees as independent contractors to avoid paying employment taxes. Generally, if the payer has the right to control what work will be done and how it will be done, the worker is an employee. Employers who wrongly classify employees as independent contractors remain liable for the employment taxes that have not been deducted from their wages.
  
  
• Paying employees in cash to avoid creating an auditable record. There is nothing wrong with compensating employees in cash, but employment taxes are owed regardless of how they are paid. When investigating fraud of this nature, the IRS uses all available information even if there are no payroll records or checks.
  
  
• Preparing false payroll tax returns and intentionally understating the amount of wages on which taxes are owed or failing to file employment tax returns.

The IRS has also reported a number of cases in recent months involving these practices - such as the restaurant owner who withheld employment taxes from the wages of over 60 employees but failed to pay them over for a three year period, and the company owner who refused "on principle" to withhold collect taxes from his employees' wages.

Further information:
www.irs.gov/newsroom/article/0,,id=122521,00.html
www.irs.gov/irs/article/0,,id=106707,00.html
...back to 8 April 2004

Civil and criminal enforcement against tax cheats
A long list of completed criminal prosecutions is an interesting feature of a recent press release from the IRS and Justice Department. The Justice Department's Tax Division referred 1,129 defendants to U.S. Attorneys for criminal tax prosecution in 2003, an increase of 35 percent over the year 2000. And criminal tax charges were filed in 2003 against 1,036 defendants investigated by the IRS Criminal Investigation Division.

A couple of examples:

• a Florida golf course designer was sentenced to serve more than 10 years in prison, followed by three years of supervised release and ordered to pay $17,000 in costs of prosecution. He had not filed income tax returns since 1977 and, during that 25 year period, had evaded more than $5,000,000 in income taxes, interest and penalties.
  
  
• an Ohio financial planner was sentenced to six years in prison and ordered to pay $728,090 in restitution to the IRS. He had evaded his income taxes and failed to pay employment taxes in his business. He also had closed his business repeatedly, reopened it under new names and used nominees to thwart tax collection efforts by the IRS.

Further information:
www.irs.gov/newsroom/article/0,,id=122541,00.html
...back to 8 April 2004

Penalties for frivolous appeals
The IRS reports that, in the past year, the U.S. Tax Court has imposed nearly $136,000 in penalties on 23 taxpayers for pursuing frivolous cases to delay tax collections.

The Tax Court may impose sanctions of up to $25,000 and, in May 2003, the court imposed this maximum penalty for the first time, finding that the taxpayer's groundless argument was primarily for the purpose of delay, wasting the court's time and resources.

A document, The Truth about Frivolous Tax Arguments, has a section devoted to Collection Due Process cases.

Further information:
www.irs.gov/newsroom/article/0,,id=121380,00.html
www.irs.gov/pub/irs-utl/friv_tax.pdf
...back to 1 April 2004

Tax scam involving 'Corporation Sole' laws
The IRS is warning taxpayers against involvement with promoters of tax avoidance schemes that take advantage of federal and state laws aimed at churches, religious institutions and church leaders.

The idea of such schemes is that individuals apply for incorporation under the pretext of being a "bishop" or "overseer" of a phony religious organization or society and thereby gain exemption from federal income taxes. The scheme is currently being marketed through seminars with fees of up to $1,000 or more per person.

Further information:
www.irs.gov/newsroom/article/0,,id=121566,00.html
...back to 1 April 2004

Cooperation on abusive tax transactions
The commissioners of the tax administrations of Australia, Canada, the United Kingdom and the United States have begun discussions to form a joint task force to increase collaboration and coordinate information about abusive tax transactions. While the tax administrations operate primarily within their own borders, many abusive tax transactions employ strategies that cross borders, and many of the promoters of these transactions operate globally without regard to national boundaries.

Further information:
www.irs.gov/newsroom/article/0,,id=121227,00.html
...back to 18 March 2004

Tax return errors and frivolous tax arguments
The IRS has made a number of guidance documents available on its web site to help taxpayers avoid a variety of scams, schemes and errors when filing their tax returns. There is a concern that some people may be victims of con artists and promoters who sell such schemes and then leave the taxpayer to face the consequences.

One document, The Truth About Frivolous Tax Arguments, addresses false arguments about the legality of not paying taxes or filing returns and provides a summary of the law and relevant legal decisions involving these false claims. For example, one of the 37 different tax arguments listed is that wages, tips and other compensation received for personal services are not income, allegedly because there is no taxable gain when a person exchanges labor for money.

A further eight documents present authoritative legal guidance for taxpayers and preparers who may encounter the false positions in promotional materials or news accounts. The rulings deal with a variety of frivolous arguments. These include claims that

• United States citizens and residents of the United States are not subject to tax on their wages and other income earned or derived within the United States (known as "the Section 861 position"), and
• otherwise nondeductible personal, living or family expenses are deductible because they relate to a purported home-based business of the taxpayer that, in fact, is not a bona fide home business.

In a recent update of its annual consumer alert, the IRS is urging taxpayers to avoid falling victim to one of the "Dirty Dozen" tax scams and a variety of other schemes. Several new scams have reached the top of the consumer watch list. In addition, the IRS has taken a new step and issued 10 new pieces of legal guidance involving scams in the "Dirty Dozen" and other tax schemes. Examples of such schemes are

• the "claim of right" doctrine, whereby people file returns and attempt to take a deduction equal to the entire amount of their wages by labelling deductions as "a necessary expense for the production of income" or "compensation for personal services actually rendered".
• employment tax evasion, where employers are instructed not to withhold federal income tax or other employment taxes from wages paid to their employees, taking "the Section 861 position" mentioned above. Employer participants could be held responsible for back payments of employment taxes, plus penalties and interest.

Other mistakes are "math errors", entries that are obviously wrong and that the IRS has the authority to correct as it processes the returns. For example, a taxpayer may

• choose the wrong filing status, such as claiming claim "head of household" filing status without meeting the requirements for that status, or
• list an incorrect Social Security number (SSN) for a dependent, enter the wrong tax amount, or claim the Earned Income Tax Credit when the return shows no earned income. The IRS can deny the dependent's exemption amount until the taxpayer provides the correct SSN, change an incorrect tax amount, or remove an improperly claimed tax credit.

Further information:
www.irs.gov/newsroom/article/0,,id=120802,00.html
www.irs.gov/newsroom/article/0,,id=120803,00.html
www.irs.gov/pub/irs-utl/friv_tax.pdf
...back to 4 March 2004

Website information on abusive tax shelter schemes
As part of its effort to combat abusive tax shelter schemes and transactions, the IRS launched a new section on its website containing important information about abusive schemes involving employee retirement plans. The site is intended to warn promoters and plan professionals about the consequences of participating in such schemes.

The new employee plans (EP) information is located in the Retirement Plans section under "EP Abusive Tax Transactions." In the new section, the IRS identifies so-called "listed transactions" involving employee retirement plans. It also provides recently issued guidance, such as Treasury regulations and IRS revenue rulings, intended to shut down transactions the IRS deems abusive.

Further information:
www.irs.gov/newsroom/article/0,,id=120358,00.html
www.irs.gov/retirement/article/0,,id=118821,00.html
www.irs.gov/retirement/index.html
...back to 12 January 2004

The fight against abusive tax avoidance
IRS officials have announced that they have started sharing leads on more than 20,000 taxpayers engaged in abusive tax avoidance with tax agencies in 45 states, the District of Columbia and New York City. The sharing of leads was the first large transfer of information under the terms of the new IRS-state partnership unveiled in September.

The IRS also announced today the latest results of its Offshore Voluntary Compliance Initiative (OVCI). During the period of the initiative, January 14 to April 15, 2003, more than 1,300 taxpayers came forward, amended their returns, paid taxes, interest and penalties and furnished the IRS with information regarding the person who promoted the offshore arrangements to them. So far the initiative has yielded more than $170 million in taxes, interest and penalties to the U.S. Treasury, and provided the names of 479 scheme and scam promoters, nearly half of whom were previously unknown to IRS investigators.

Further information:
www.irs.gov/newsroom/article/0,,id=120343,00.html
...back to 12 January 2004

'Enforcement begins at home'
That was the message presented by the IRS when revealing that a number of its own employees have been dismissed from their jobs for reporting false business deductions to reduce their taxes. Tax returns filed by 800 IRS employees are under review.

Further information:
www.irs.gov/newsroom/article/0,,id=119043,00.html
...back to 8 January 2004

Abusive tax avoidance transactions
The Treasury Department and the IRS have issued four items of administrative guidance in their ongoing effort to halt abusive tax avoidance transactions and maximize effective use of IRS audit resources.

The first item is aimed at strengthening the tax system through heightened standards for tax advisors. The proposed rules set out specific requirements and expectations for tax opinions provided by attorneys, accountants and those with supervisory responsibility for a professional services firm's tax practice. To ensure clients are well-advised, the proposed changes will obligate tax advisors to inform clients explicitly about what protections, if any, an opinion provides for them.

The other items are aimed at increasing transparency and disclosure of information to the IRS. For example, for purposes of imposing penalties, a taxpayer's failure to disclose an abusive tax avoidance transaction is treated as a strong indication that the taxpayer acted in bad faith with respect to any additional tax owed as a consequence of the transaction.

Further information:
www.irs.gov/newsroom/article/0,,id=118955,00.html
...back to 1 January 2004

Voluntary tip compliance agreements
The IRS is expanding a new tip compliance agreement nationwide to the gaming industry. Employers are encouraged to participate in the voluntary agreement and employees whose income includes tips are urged to learn the benefits of participation.

For employers, the agreement substantially reduces the recordkeeping and reporting burden. For employees, the improved income reporting procedures could potentially make them eligible for higher Social Security or other pension, Medicare, unemployment and workman's compensation benefits. This could also help qualify them when applying for loans or other financial arrangements.

As long as tips are reported at or above the established tip rate, the compliance agreement generally prevents the IRS from auditing the employee's tip income. In addition, as long as the employer meets certain commitments, the IRS will not assert a liability against the employer with respect to the tip income of participating employees while the agreement is in effect. The agreement may be renewed every three years.

Further information:
www.irs.gov/newsroom/article/0,,id=118908,00.html
www.irs.gov/pub/irs-drop/rp-03-35.pdf
...back to 25 December 2003

Abusive tax shelters
In another written testimony, this time to the Senate Governmental Affairs Committee's Permanent Subcommittee on Investigations, Mark Everson describes the role and efforts of the IRS in enforcing compliance with the laws requiring registration of tax shelters and the keeping of investor lists and with the rules requiring disclosure of transactions that constitute abusive or potentially abusive tax avoidance transactions.

Further information:
www.irs.gov/pub/irs-utl/shelters-nov20.pdf
...back to 27 November 2003