STATUTE OF LIMITATIONS PART I: How important are they in the tax world?

At Tax Whistleblower Law Firm, we often get inquiries from potential clients with information about taxpayers’ violations that occurred over 10 years ago.  Often times the circumstances dictate that we do not get involved in these types of cases; however, if there are extenuating circumstances we may get involved.  Why?  The IRS only has certain time periods to examine (audit) a taxpayer’s tax liability, and to assess (determine that the taxpayer owes additional tax). 

The following is a summary of the main time periods in which the IRS must act or be barred by statute from assessing additional taxes against tax payers.

General 3 year rule and exceptions:  In general, the IRS has 3 years after the filing of a return to assess additional tax liability against a taxpayer.  See I.R.C. § 6501.  There are 11 exceptions to the 3 year rule, they are as follows:

1. False or Fraudulent Returns with the intent to evade tax, (See I.R.C. § 6501(c)(1));

2. Willful attempt to evade tax, (See I.R.C. § 6501(c)(2));

3. No return is filed by the taxpayer, (See I.R.C. § 6501(c)(3));

4. Extension of the 3 year period by agreement of the taxpayer and IRS, (See I.R.C. § 6501(c)(4));

5. Tax from changes in certain income tax or estate tax credits (i.e. foreign tax credits) (See I.R.C. § 6501(c)(5));

6. Termination of Private Foundation Status, (See I.R.C. § 6501(c)(6));

7. Within 60 days of end of 3 year rule, IRS receives an amended return, (See I.R.C. § 6501(c)(7));

8. Failure to Notify IRS of certain foreign transfers (generally related to a passive foreign investment company/fund), (See I.R.C. § 6501(c)(8));

9. Gift tax liability for unreported gifts, (See I.R.C. § 6501(c)(9));

10. Listed Transactions, (See I.R.C. § 6501(c)(10));

11. Orders of Criminal Restitution under I.R.C. § 6201(a)(4), (See I.R.C. § 6501(c)(11)).

Expanded 6 year rule:  Additionally, the IRS may assess tax beyond the 3 year rule and has 6 years from the date of the filing of the return to assess tax when a taxpayer undertakes the following substantial omissions:

1. Omits income that is in excess of 25% of the amount of gross income stated on the return; (See I.R.C. § 6501(e)(1)(A)(i));

2. Omits at least $5,000 in income, which is reportable under I.R.C. § 6038D, (See I.R.C. § 6501(e)(1)(A)(ii));

3. On a gift/estate tax return, omits amounts from the reported gross estate in excess of 25%, (See I.R.C. § 6501(e)(2));

4. Omits excise taxes due in excess of 25% of the excise tax return reported by the taxpayer, (See I.R.C. § 6501(e)(3));

With respect to taxes, the IRS is not the only who is under a deadline to act.  A taxpayer must also file their claim for refund within certain time limitations as described below.  This also explains why there might be a delay from the time the IRS collects the taxes owed by a taxpayer and when the IRS pays an award to a whistleblower.

Refund Cases and Statute of Limitations:  Generally under I.R.C. § 6511, a taxpayer has 3 years from the time the return was filed or 2 years from the time the tax was paid to file a refund claim.  Exceptions to this 3/2 year period are:

1. 7 year period for refunds related to bad debts and worthless securities deducted on the taxpayer’s return, (See I.R.C. § 6511(d)(1));

2. 3 years from the date the return was filed that generated the Net Operating Loss (NOL) or capital loss carryback to claim a refund related to NOL carryback or capital loss carryback, (See I.R.C. § 6511(d)(2));

3. 10 year period for credits or refunds related to the Foreign Tax Credits, (See I.R.C. § 6511(d)(3));

4. 3 years from the date the return was filed that generated

5. employment tax refunds, (See I.R.C. § 6511(d)(5));

6. 1 year for refunds related to income recaptured from a qualified plan termination, (See I.R.C. § 6511(d)(6));

7. 2 years from the determination date of self-employment taxes by Tax Court, (See I.R.C. § 6511(d)(7)); and

8. 5 years from the date of determination of disability compensation when uniformed services retired pay is reduced, (See I.R.C. § 6511(d)(8)); the unused credit which results in a carryback, (See I.R.C. § 6511(d)(4));

9. 2 years from the date an agreement is made with respect to

If the IRS and/or the Taxpayer misses the deadline to assess tax (IRS) or file refund (taxpayer), then the IRS and/or the Taxpayer is barred from assessing (IRS) or filing for a refund (taxpayer).

If you have specific and credible information about a taxpayer's violation of tax laws and/or failure to pay his/her/its tax liabilities in excess of $2,000,000 you should consider filing a tax whistleblower claim if your information is timely.  Contact us to discuss your case and the timeliness of your information.  You may be entitled to an award between 15-30% of the tax, penalties and interest collected by the IRS.

Backtracking? Donald Trump announced he is willing to take another look at his tax plan.

Trump Tax Plan v. Clinton Tax Plan

As previously discussed in this blog about the differences between Senator Bernie Sanders and Senator Ted Cruz’s tax plans (graduated plan with increase taxes on the rich vs. flat tax), in the recent news, Republican frontrunner and presumptive nominee Donald Trump recently announced that he is willing to backtrack on his proposal to cut taxes for the rich while also cutting taxes for the middle class. See this MSN article.

Last fall, Donald Trump initially announced his tax plan.  See this MSN article.  His original plan would significantly reduce marginal tax rates on individuals and businesses, increase standard deduction amounts to nearly four times current levels, and curtail many tax expenditures. See Tax Policy Center’s analysis of the Trump tax plan. 

A closer look at the original proposed Trump Plan shows that the bulk of the tax cuts would be to rich and wealthy.  As stated by Tax Policy Center, “The highest-income 0.1 percent of taxpayers (those with incomes over $3.7 million in 2015 dollars) would experience an average tax cut of more than $1.3 million in 2017, nearly 19 percent of after-tax income.”  Meanwhile the Trump plan proposed only a modest tax cut for the middle class: “Middle-income households would receive an average tax cut of $2,700, or 4.9 percent of after-tax income.” See Tax Policy Center’s analysis of the Trump tax plan. 

In contract to Trump’s proposed tax plan is Senator Hillary Clinton’s tax proposal.  See Senator Clinton’s website, or the Tax Policy Center’s Analysis.  According to the Tax Policy Center, Senator Clinton’s plan would, “increase taxes on high-income filers, reform international tax rules for corporations, repeal fossil fuel tax incentives, and increase estate and gift taxes.”  Senator Clinton’s proposals would have the following estimated effects for 2017: In 2017, “taxpayers in the top 1 percent of the income distribution (those with incomes above $730,000 in 2015 dollars) would see their tax burdens increase more than $78,000, a reduction in after-tax income of 5 percent. Taxpayers outside the top 5 percent (those earning less than $300,000in 2015 dollars) would see little change in average after-tax income.”  See Tax Policy Center’s Analysis of Senator Clinton’s tax plan.

So the question is: how similar is Donald Trump’s new position to Hilary Clinton’s tax position.  While Donald Trump has not given specifics, he is now willing to incorporate  new taxes on the rich.  See this MSN article.

While the MSN article criticizes Trump for his flip flopping on taxing the rich and federal minimum wage, could Trump’s softening of his position be his appeal to the masses, especially now that he has won the primary audience in getting the Republican nomination?  Or is Trump’s position on taxes merely a “read my lips: ‘No new taxes’” maneuvering?

It remains to be seen what the change in philosophy will mean to the tax world and tax practitioners. 

Regardless of which proposed tax plan wins, if you know of any individual or corporation that is underpaying their tax liabilities, you should report the individual or corporation and collect an award from the IRS.  If you have specific and credible evidence, contact us to evaluate your information and whether it would qualify for an award between 15-30% of the collected proceeds in excess of $2,000,000 paid by the IRS.   

Apple and its European Commission Troubles: hype or real transfer pricing liability for Apple

Since June 2014, The European Commission (“EC”) (European Union's politically independent executive arm, made up of 1 commissioner from each EU country) has investigated Apple, and more specifically the tax authorities in Ireland, to determine if the Irish tax authorities followed the EU rules on state aid in issuing favorable tax rulings to Apple.

As explained in the Permanent Subcommittee on Investigations (PSI) report on Apple, Apple utilizes “key offshore subsidiaries incorporated in Ireland.”  The reason Apple has utilized the Irish subsidiaries is that “Ireland has provided Apple affiliates with a special tax rate that is substantially below its already relatively low statutory rate of 12 percent,” generally negotiated with the Irish government to be at rates at 2% or less. See pg. 20.

Apple CEO Tim Cook, in his 60 minutes interview, has called the investigation “political crap” and has stated that “there is no truth behind it.”  Mr. Cook has also stated in the same interview that “Apple pays every tax dollar we owe.” 

Some news outlets (Bloomberg, Guardian) have stated that Apple could “be on hook for $8 billion in taxes”.  Bloomberg calculated this figure by stating that if the EC terminates the Irish rulings for Apple, and requires Ireland to seek recourse tax payments from 2004-2012 on profits of $64.1 billion at a 12.5% rate, that would generate $8 billion in taxes owed by Apple to Ireland.

While other news outlets (Forbes and in a recent opinion piece in Forbes) has stated that Apple isn’t on the hook for $8 billion, but that the Irish government is being investigated and that the true amounts Ireland may request from Apple, assuming the EC rules against Ireland’s rulings favoring Apple, would be more in the $200 million range, and not the $8 billion figure used by Bloomberg.  Mr. Worstall in the Forbes opinion piece states explains that the reason behind the lower figure is due to the structure employed by Apple, the Double Irish structure.  He states that some profits can be taxable in Ireland and some profits are not taxable in Ireland, so the Bloomberg calculation, which treats the entire amount of profits ($64 billion) as taxable in Ireland is incorrect.  Mr. Worstall explains that Bloomberg’s figure is wrong because it fails to account for transfer pricing even between Apple’s Irish entities, which might shield the non-Irish resident income from being taxed in Ireland.

Two noteworthy observations regarding Apple’s EC investigation are:

1. If as Mr. Worstall states, the game is transfer pricing and the prices allocable between the various Irish entities, then what about the transfer price between Apple Inc. (the U.S. entity) and AOI (Apple’s primary Irish entity identified in the PSI hearings)?  If the EC is examining whether the proper transfer pricing and applicable tax rates are at play, why isn’t the IRS examining Apple to determine if Apple used the proper transfer prices to shift the U.S. developed technologies and intellectual property to its offshore operations to pool an estimated $181 billion dollars offshore through the Irish entities instead of being taxed in the United States.
2. Panama Papers part 2.  Previously I blogged about the Panama Papers and whether U.S. corporations and individuals would be exposed.  Give the exposure Apple has gotten over its use of Irish entities, and the knowledge that other companies and individuals have utilized offshore entities to grow their wealth, why hasn’t there been more disclosures of companies and individuals in the U.S. that have taken advantage of offshore entities.  If PSI can expose Apple’s offshore structure, why couldn’t the IRS expose other companies’ offshore transfer pricing structure?

If you have specific and credible evidence of a corporation’s use of transfer pricing to avoid paying its tax liabilities you should consider filing a tax whistleblower claim.  Contact us to see if your information would permit you to receive a 15-30% award of the amount of taxes, penalties and interest collected by the IRS on your transfer pricing tax whistleblower claim.