voluntary disclosure

Wake-Up Call - Don't hit the snooze!

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Posted by REM Cycle Staff

Welcome back to another edition of The REM Cycle's Wake-Up Call, our biweekly feature where we bring you a variety current tax-related issues. Let's get it started, shall we?

As the Super Bowl approaches, it’s time to examine our priorities… Specifically, how will the new tax structure affect your ability to get reasonably-priced craft beer? How the Tax Cuts and Jobs Act could impact small and independent craft brewers [Brewers’ Association]

A young Swiss banker allegedly abetted dozens of Americans in hiding millions of dollars from the IRS between 2009 and 2013 (hey, take advantage of offshore voluntary disclosure programs, guys!). Here’s what happened when he was extradited and brought to trial [New York Times]

Why is tax day April 17 this year? Tax returns for 2017 are due a couple days later than usual this year. Here’s why. [MSN.com]

SALT news for New York taxpayers: Representatives Nita Lowey (D-NY) and Peter King (R-NY) introduced a bipartisan piece of legislation last week to “restore the full state and local tax (SALT) deduction, which is limited by the new tax law that President Trump signed last month.” NY lawmakers offer bill to restore state and local tax deduction [The Hill]

How does blockchain technology work? Political scientist and blockchain researcher Bettina Warburg was challenged to explain the central concepts of blockchain to five different people: a child, a teen, a college student, a grad student, and a blockchain expert. Blockchain expert explains one concept in 5 levels of difficulty [WIRED-YouTube]

Meet Angel, a kitten who does not like to file her tax returns. Can you blame her? [YouTube]

That’s all for this week. Got a hot tip? Email us at REMCycle@rem-co.com and tell us all about it.

The Multistate Tax Commission’s sales tax amnesty for internet sales has closed

Posted by Courtney Kopec, CPA

Recently, the states have signaled that their sales tax regulations for sellers of online goods will change yet again.

First, the window has closed on the Multistate Tax Commission Online Marketplace Seller Voluntary Disclosure Initiative’s offer for sales tax amnesty.  Twenty-five states offered to waive all past tax, interest, and penalties for companies that agree to register for and collect sales tax for online sales going forward. 

 
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Second, South Dakota has filed a petition to have the Supreme Court overturn the landmark Quill case because the proliferation of internet sales has too much appetizing tax revenue on the table left uncollected by the states.  And so going forward the states’ goal is to force out-of-state-sellers to collect sales tax by expanding the definition of nexus, data sharing, and enforcement which have been the factors that would allow states to compel taxpayers to comply.

When must I collect sales tax?

Taxing authorities require businesses to pay or collect tax based on nexus, which is their connection to the state.  The 1992 Supreme Court case Quill Corp v North Dakota limited the burden of businesses required to collect sales tax to those with a physical presence:  in general, an office, employee, salesperson, or inventory physically present in the state creates physical presence nexus.  However, physical presence is just the starting point and not the only determining factor.  The state’s narrow application of the physical presence test allowed for the creation of economic nexus that is generally triggered when a company has a purposeful direction of its business activities within a state rising to a substantial level.

New York State has been said to lead the way in proposed legislation defining economic nexus.  In 2008, New York State amended the definition of vendor and created “click through nexus” (sometimes referred to as the “Amazon laws”) with the intention that large internet retailers with no physical presence in the state be required to collect sales tax if they pay commissions to in-state residents and gross receipts exceeded $10,000 during the preceding 12 months.  Then in 2015 New York proposed that “marketplace providers” collect and pay New York State sales tax at the point of sale when the transaction takes place whether the actual seller is located within or outside the State.   In October 2017, the state of South Dakota filed a petition for certiorari in the U.S. Supreme Court urging it to "abrogate Quill's sales-tax-only, physical-presence requirement."  In its appeal South Dakota noted that advances in computer technology have made it easier to determine appropriate sales tax based on the purchaser's location and requiring such "poses a minimal obstacle."  For a foreign seller of goods:  “Tax treaties do not cover the taxing activities of the States” (1983 Supreme Court, Container Case).   Therefore, because no international treaty provisions apply to sales tax, foreign sellers are subject to the same rules as domestic sellers.

Cover your bases

If you engage in internet sales and this is confusing to you, join the club.  The statutes are evolving continually in reaction to the changing landscape of retail sales.  However, the evolving concept of nexus may also apply to income and franchise tax, so being aware of and understanding the regulations is critical.

Another important thing to keep in mind is that when a transaction is complete, it is impossible to go back later and collect sales tax for which the taxpayer may be responsible.  Under audit, what should have been a tax collection process becomes an expense to the seller.

The analysis and interpretation of these changing laws is challenging. If your business has transactions out-of-state and you would like to review whether your business has compliance requirements in another state, contact your CPA or trusted advisor to review the latest guidelines.

Worried About Undisclosed Foreign Assets? The Offshore Voluntary Disclosure Program May Offer a Solution

Posted by Evan Piccirillo, CPA

As I've said before: Being a good tax citizen is important.  Sometimes it is difficult to navigate the stormy seas of compliance to achieve that end.  One such hazard is the difficulty of adhering to complex international reporting requirements.

I must pause here to note that if you do have significant international compliance issues, you should consult legal counsel in addition to a tax professional due to the many civil and criminal consequences imposed by the Department of Justice and Department of the Treasury.

Imagine a normal day in the life of a hard-working taxpayer.  She always files her tax return on time and doesn’t take any undue deductions.  One day she learns a wealthy relative left her interest in a profitable commercial property in Croatia.  How fortunate!  But wait, this wealthy relative left it to her a couple of years ago and it has been generating income this whole time.  Oh no!  There are full pages in the IRS instructions detailing penalties for the forms she didn’t file over that period that could amount in many thousands of dollars and even jail time.  What is our hard-working taxpayer to do?

The IRS, in an effort to provide a bridge to compliance, has enacted the 2012 Offshore Voluntary Disclosure Program (“OVDP”), modified effective July 1, 2014.  This program is designed to incentivize taxpayers (entities and individuals) to come to the IRS with undisclosed assets and accounts rather than the IRS having to hunt them down; it offers a reduction in penalties and potential elimination of the risk of criminal prosecution.  The penalties described in the Internal Revenue Code for failing to comply with foreign reporting are incredibly brutal; in some cases 100% of the highest value of an asset during a given year, plus other penalties, plus interest, plus criminal prosecution.  That, coupled with the increasing risk of being detected by the US Government by their new, more aggressive approach to treaties and policy, creates a very compelling argument for taxpayers to come forward.

This relief a taxpayer receives from this program is not completely painless.  Paying the offshore penalty of 27.5% plus the accuracy-related penalty of 20% is a hard pill to swallow, but when weighed against the alternative (potentially 100% and criminal prosecution), it should go down a little easier.

Eligibility for the OVDP is contingent upon coming forward before the IRS is aware of the unreported foreign assets; if they find you, OVDP is off the table.  In some cases, a taxpayer may have already amended and submitted reports, referred to as a “quiet disclosure.”  These taxpayers still run the risk of full penalties and criminal prosecution if they don’t apply to the OVDP.

In our example, the hard-working taxpayer has the ability to compile all information on the property and the unreported income and then submit an application via Forms 14454 and 14457 to the IRS OVDP.  If accepted, original and amended tax returns accounting for the foreign income and forms reporting the foreign transactions and activity must be prepared and submitted. In addition, the taxes, penalties, and interest due must be paid or arrangement to pay must be made.  All this just to be a good tax citizen!

The Offshore Voluntary Disclosure Program offers a bumpy path to compliance that is not without its difficulties.  It is important for someone considering this path to enlist the counsel of professionals in law and accounting.

Voluntary Disclosure Programs: A Saving Grace

Image courtesy of iStock.

Image courtesy of iStock.

Being a good tax citizen is important for businesses. However, businesses do not always adhere to that notion in practice. When a taxpayer does business in a jurisdiction, the decision to comply with applicable tax law is many times governed by the risk of exposure. This is especially true when businesses operate in multiple jurisdictions; compliance is assessed on a case-by-case basis. The cost burden of compliance resulting from registering to do business and filing tax returns in every required state can outweigh the benefits of the activities performed in those jurisdictions. Perhaps at that point, the decision not to register or not to file is made by the taxpayer and business goes on. However, over time the risk of exposure for not filing due to tax liability and mounting interest and penalties may grow to an unacceptable level. In addition, not registering to do business may have certain legal repercussions that can interfere with operations.

The questions then become:

  • Should I start filing now?
  • Should I have started filing already?
  • If I don’t file, will the tax man come after me?
  • What if the taxing authority requires me to have registered previously?
  • What if information requested from prior years reveals additional liability?

Luckily, many states have a viable answer: Voluntary Disclosure Programs. These programs allow a taxpayer to come to the taxing authority, with hat in hand, and diminish some of the exposure. Specifics vary by state, but generally the taxpayer is forgiven of penalties in exchange for payment of tax and interest due over the applicable look-back period. Look-back periods can also vary, but most fall into a 3- to 4-year range. Other conditions include, but are not limited to:

  • Registering to do business with the appropriate department
  • Continued future compliance
  • Not having been contacted in the past by that jurisdiction
  • Not currently being under audit

A taxpayer can anonymously apply to most programs through a representative (usually their accountant or lawyer). Once accepted, the taxing authority will set forth a timeline and list of what the applicant must do in order to complete the agreement. Generally, a signed document disclosing the identity of the taxpayer and outlining required compliance must be sent. The tax returns, tax due plus interest that apply to the look-back period must also be submitted.

Voluntary disclosure programs offer a path to compliance that can limit a significant amount of exposure. If you believe that you are noncompliant and your exposure risk is too high for comfort, you should consider entering into a voluntary disclosure program via a trusted representative.