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Archive for September, 2011

US Tax Regulations Raise Privacy Concerns in Canada

September 30th

Canada has recently stepped up its opposition to US tax evasion laws by engaging with the American media. Most notably, the Canadian Finance Minister, Jim Flaherty, wrote an opinion piece, which was published in several major American newspapers, complaining that the new regulations are “wasteful and raise privacy concerns.”

Earlier this year, Flaherty had announced that he was in talks with US officials to exempt Canada from the new Foreign Account Tax Compliance Act (FATCA), which requires overseas banks to report any American clients to the Internal Revenue Service. However, the recent letter clearly indicates that Flaherty’s requests for exemption were not met.

Foreign Account Tax Compliance Act Violates Canadian Privacy

Flaherty’s chief argument against FATCA is that compliance would simply turn Canadian banks into extensions of the Internal Revenue Service, thereby creating significant privacy concerns for Canadian clients. In addition, he argues that Canada is not a tax shelter but merely has a large population of dual Canadian-American citizens.

The letter written by Jim Flaherty also takes significant offense with the requirement that dual citizens file tax returns with the IRS, claiming that the little-known law threatens ordinary, innocent citizens with debilitating penalties on supposedly unpaid taxes. Instead of pursuing serious perpetrators, he claims that US resources are misdirected toward those who are simply victims of ignorance.

 

 

Progress is Made in Tax Dispute with Switzerland

September 30th

After a long dispute, a settlement might finally be in reach for Swiss and US parties involved in the argument over the release of American customer data. The Internal Revenue Service (IRS) has been placing pressure on a number of Swiss banks they suspect of conspiring with American citizens to dodge US taxes.

There are currently ten Swiss banks in particular who are suspected of sheltering money on behalf of US citizens attempting to evade taxation. The United States has recently been redoubling their efforts to repatriate funds illegally sheltered overseas. However, those who did not submit to the IRS amnesty program now face substantial penalties, including jail time and fines on any unpaid taxes.

US Threatens Charges Against Swiss Banks

Two weeks ago, the United States offered an ultimatum to Switzerland, which stated that the ten banks in question needed to surrender detailed information on US tax evaders or else face substantial criminal charges and fines.

The United States authorities have announced that they would be willing to settle the dispute if the banks in question paid a heavy fine and voluntarily turned over the desired client data. While the amount of the fine has not yet been decided, experts expect that the amount could be as much as two billion Swiss Francs.

The number of client names and associated data to be transferred is also still under negotiation, though the current estimate is that the amount will number between 1,000 and 10,000 names.

 

Save on Taxes

September 30th

Last year the biggest trend in retirement fund management was to convert existing, traditional IRAs to Roth IRAs. Everyone’s tax attorneys and financial advisors begged their clients to move their funds over, claiming such a move would save a significant margin at tax time. Now, however, all the experts are advertising that it is time to move money back.

Originally, the reason behind moving funds to a Roth IRA was to save tax money. When the experts saw the potential for tax increases down the road, a Roth seemed like the logical solution. With a Roth, investors are able to lock down the current tax rate and avoid paying any future tax hikes. In addition, with a Roth IRA, investors are not required to begin withdrawals at the age of 70 ½, as they are with a traditional IRA, and any leftover funds are passed, tax-free, to heirs.

The Problem with a Roth IRA

However, the chief problem with this plan, and its fixed tax rate, is that investors could end up paying taxes on money they no longer hold. Even if the money depreciates in value, investors will still be paying the tax rate fixed for the total amount originally deposited. For example, if an original deposit of $100,000 lost half its value, the investor would not be paying a tax rate based on this new amount, but rather on the original $100,000. In addition, taxpayers could be forced to pay a higher rate than is offered to new investors if the tax rate decreases after the Roth tax rate is fixed.

As a result, many tax lawyers and financial advisors are now telling their clients to move money back into a traditional IRA. For those who converted last year at the peak of the craze, money may be converted back, or “recharacterized,” until October 17. In order to get money back, taxpayers should file an amended return with the IRS in order to “recharacterize” the invested money.

 

House Speaker Boehner Rules Out Tax Increases

September 29th

Earlier this week, House Speaker John Boehner pre-empted President Obama’s plans to present a budget-cutting plan, by announcing his own ideas for how the nation’s deficit could be slashed. Instead of focusing on tax increases as President Obama is expected to do, Boehner asked the new bipartisan subcommittee to investigate possible cuts in federal spending and entitlement programs. Also, important to Boehner’s plan was the intention to close tax code loopholes.

Boehner Offers Harsh Criticism of Obama Growth Plan

Boehner pointed to tax debt associated with higher tax rates as the cause of US unemployment woes. He suggested that maintaining lower taxes was a crucial component in efforts to stimulate the nation’s job growth. The closure of tax loopholes is to be a key element of this plan, as part of a broader effort to overhaul the tax code and lower personal and business tax rates.

In addition, Boehner offered a harsh criticism of the President and his plan for job growth. Boehner called the President’s plan a “poor substitute” for pro-growth policies and even accused the President of offering solutions that had more to do with winning the 2012 election than with stimulating economic growth.

The White House rebutted these comments by merely pointing out that any successful plan ought to place money in the pockets of middle-class American families and get these people back to work. The Obama Administration maintains that higher taxes on the wealthy are a key component in ensuring deficit reduction and national economic growth.

 

Video Game Corporations Highly Subsidized by IRS

September 29th

The Internal Revenue Service offers significant tax incentives, including tax deductions, write-offs and credits, to numerous industries. Most notably, the US government offers tax incentives to companies conducting medical research, urban redevelopment and exploring alternatives to fossil fuels. However, these tax incentives are also provided to video game developers.

In fact, the video game industry is now among of the most highly-subsidized in the United States. This is chiefly due to video game developers being able to combine tax breaks associated with software development, online retailing, and the entertainment industry in a manner impossible in most other businesses. Video game developers are now receiving such significant tax breaks that even oil companies are questioning why such businesses should be so highly government subsidized.

Debate Continues over Validity of Tax Breaks

In total, the federal government doled out over $123 billion in tax incentives to corporations in 2010. According to the Joint Committee on Taxation, these corporations included those in industries such chicken farmers, as hedge fund managers, automakers, and oil companies. Estimates state that approximately $15 billion of this amount went the video game industry.

Advocates for these benefits actually claim that without such tax breaks, the United States would forfeit its technological edge over other nations; they claim it is these very tax breaks that allow technological innovators to work and operate within the United States. Without them, the supposition is that the companies would start moving their operations elsewhere, to countries like Canada that offer greater tax subsidies.

While the government accedes that these incentives are excessive, it is far easier to create a tax incentive than it is to eliminate it. Video game companies usually have large staffs of qualified tax attorneys who work to navigate the complex tax code to the company’s greatest benefit.

 

 

US Fight Against Tax Evasion Now Includes Israeli Banks

September 29th

tax evasionIn the last few days, the Internal Revenue Service has announced its intention to widen its pursuit of United States tax evaders to include a thorough investigation of Israeli banks. In particular, the IRS will be scrutinizing three of Israel’s largest banks. Investigators suspect that the Swiss branches of these banks have been used by their American clients to avoid paying US taxes.

The focus on Israel represents a major shift, as for years the investigation as been centered on Switzerland.

The investigation is part of a wider crackdown against American citizens who, for years, have been accumulating massive quantities of unpaid taxes by sheltering income overseas.

Investigation Heightens US-Israel Tensions

The shift toward investigating Israeli banks also increases already tense relations between the United States and Israel. While the United States and Israel have historically been close – with the United States functioning as both a close diplomatic and military ally, providing Israel with billions in aid – recently relations have become strained. In the past year, the relationship between these two nations came under pressure when President Obama’s efforts to reopen peace negotiations between Israel and the Palestinians crumbled.

The current investigation is, however, still only in its preliminary stages. As of yet, the US authorities have only requested general statistical data, and have made no demand for anything more specific. The data requested covers the types of accounts disclosed by UBS during a 2009 settlement with the Justice Department over allegations that it enabled numerous wealthy Americans to evade billions of dollars in taxes.

 

 

IRS Revises Approach to Business Cell Phones

September 28th

In the twenty-first century, almost everyone in America seems to have a cell phone. Their use has become especially important to businesses and employees, as a means of constant communication. Some businesses even issue their employees with work cell phones, so that employees may keep in phone contact, check email, and examine documents while away from the office.

Less Oversight Required

However, quite to the disappointment of such institutions, the IRS has, over the past few years, had a strict taxation policy as relates to these cell phones. In fact, until last year, the Internal Revenue Service considered employer-issued cell phones a taxable benefit. This meant that employers who handed out cell phones to their employees had to report the value of each phone as they would income or compensation for other services. In addition, under the same law dating from 1989, employees were also required to keep detailed records of all calls made on employer-issued cell phones. These records needed to pinpoint which calls were for business purposes and which calls were personal.

After an outcry over enforcement efforts in 2009, the IRS laid out more specific rules for the taxation of the personal use of such cell phones. As a result, the IRS released Notice 2009-46, Substantiating Business Use of Employer-Provided Cell Phones, after careful consultation with public opinion.

Now, this year, the IRS has clarified the issue further. Based on feedback, and the 2010 Small Business Jobs Act, the IRS have now taken the position that an employer-issued cell phone is non-taxable to the employee if, and only if, the provided cell phone is bestowed primarily for noncompensatory business reasons.

The IRS has also recently abolished the policy that required employees to keep careful record of cell phone usage in order to ensure they would not accidentally owe, resulting in unpaid taxes. Now, no recordkeeping of business-related cell phone use is required in order for use to be considered tax-free.

 

Saving for College #3: IRS Treatment of Scholarships and Grants

September 28th

college tuition and taxesToday the best chance for an affordable college education is some kind of financial assistance in the form of a scholarship, grant, or fellowship. While these can all be exceptionally helpful in making college a financially viable option, it is also important to understand how such aid will affect your tax bill so you don’t end up with tax debt.

Scholarships and Fellowships

Scholarships and fellowships are only tax-free if the taxpayer is a candidate for a degree at an eligible educational institution, and the taxpayer intends to use the money to pay for qualifying educational expenses. Eligible institutions must have a regular faculty and curriculum and a regularly enrolled body of students. In order to qualify as tax-free, the scholarship or fellowship must be used for qualifying expenses such as tuition or enrollment fees, or any related expenses such as books and supplies.

However, if the scholarship or fellowship is used for expenses like room and board, travel, or research, the money will not qualify for tax-exempt status. There are some exceptions to this rule, so taxpayers who think they might qualify should investigate further. The best option is to consult the IRS website and discuss options with a tax attorney who can investigate your personal situation.

Grants

Whether or not a grant qualifies for tax-exempt status is dependent on the type of grant in question. The most commonly given grants, federal Pell Grants and other Title IV need-based education grants, are typically treated as scholarships for tax purposes. These grants are tax-free, but only during the period for which the grant is given.

 

 

Tips for Organizations with Recently Lost Tax-Exempt Status

September 28th

The Internal Revenue Service announced this summer that approximately 270,000 organizations have lost their tax-exempt status because they failed to file the legally required annual reports for the past three years. While the IRS believes that the vast majority of these organizations are now defunct, they have also released guidelines to aid those that are still in existence in reclaiming their tax-exempt status.

Most tax-exempt organizations are required, under the Pension Protection Act (PPA) of 2006, to file an annual information tax return or notice with the IRS. The IRS is empowered to revoke the tax-exempt status of any organization that has failed to file this return for three consecutive years.

Alerts for Revoked Organizations

Since the law was originally passed in 2006, the IRS has been making concerted efforts to inform the public of the changes. As a part of this effort, the IRS has issued guidance on how organizations may apply for the reinstatement of their lost tax-exempt status. The guidance includes how to obtain retroactive reinstatement.

In addition, the IRS has announced transition measures aimed at smaller, tax-exempt organizations. These measures will be available specifically to those organizations with annual gross receipts of $50,000 or less for 2010. These relief measures allow eligible organization to regain their tax-exempt status retroactively from the date of revocation. They may also pay a reduced application fee of only $100 rather than the standard $400 or $850 fee.

Donors should note, however, that any organization on the revocation list is no longer eligible to receive tax deductible donations. It is important to adjust tax returns accordingly, or else potentially face IRS penalties for the unpaid taxes.

 

Can Payroll Tax Cuts Create Jobs?

September 27th

payroll tax cutLast week, President Obama announced a series of possible policy changes, with the ultimate goal of stimulating job growth. Chief among these is payroll tax cuts, extension of unemployment benefits, and new infrastructure projects. While new infrastructure projects and unemployment benefits are helpful, the real job-creation potential comes from the payroll tax cuts.

New infrastructure projects will not do much to create jobs, but will help to improve infrastructure at a lower price than could be expected once the economy improves.

Likewise, unemployment benefits are a compassionate option but do little to improve job growth as they discourage unemployed people from actively seeking work

Details of the Payroll Tax Cut

Payroll tax cuts, on the other hand, could make a real difference. Annually, the payroll tax typically brings in around $900 billion, approximately 15 percent of all payroll. In fact, most workers pay more in payroll taxes than they do in income tax.

The President’s proposal involves cutting the employer portion of the payroll tax by 3.1 percent, bringing the combined total payroll tax down to approximately 12 percent. This cut will apply only to those employers with less than $5 million in payroll.

The other portion of the payroll tax cut reduces the employer’s portion of the payroll tax by 6.2 percent for any increases in payroll spending. This means that if this cut was put in place, the tax subject to reduction would be the difference between the 2012 and 2011 rates. This cut would thus make any expansion of the 2012 payroll less costly.

 

 
 
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