Taxpayers should be aware of increased audits — Bloomberg News recently reported about the increasing number of audits conducted on high-net worth individuals. While overall audits have decreased, the IRS is focusing their time where they feel they can get the most bang for their buck. Historically known for utilizing more complex tax strategies, it’s important that high-net worth taxpayers make sure their support documents are readily available to backup potentially aggressive claims.
A representative of Deloitte has listed the IRS’s “favorite issues” of focus. The list includes:
Additionally, the IRS is distributing mass notices that address specific issues. For example, taxpayers claiming large charitable deductions should expect an automated notice requesting support. The best practice for addressing any notices or audit requests that come up is to respond promptly and with thorough support. Should you find yourself on the receiving end of an audit, please reach out to your accountant for support.
For questions or more information, please contact Aronson’s Jennifer Moss at Jmoss@aronsonllc.com.
In a recent news report, the state of Maryland identified 20 tax preparers believed by the state to be electronically filing fraudulent returns, and went so far as to publish the names of those preparing firms. Such returns typically claim deductions and credits that do not exist. While some taxpayers knowingly participate in the fraud, other taxpayers are not aware that it is being done.
We unfortunately live in a world where tax fraud and scams are becoming more brazen and aggressive. The vast majority who play by the rules are the ones who pick up the tab for the revenue lost by government agencies. We bear that cost. To help reduce fraud, we suggest the following:
For more information, contact Aronson’s Laurence C. Rubin, CPA, at 301.231.6200.
The Internal Revenue Service (IRS) LB&I audit division announced a series of campaigns for issues they have identified as ripe for noncompliance. LB&I handles tax examinations for businesses with assets in excess of $10 million. The success of these campaigns typically trickles down to other audit divisions and can become standard procedure.
One campaign is targeting S corporations that report losses to its shareholders, to verify that the shareholder has sufficient basis to deduct the loss. This does not mean every such S corporation will receive an audit notice. Some may be audited while others may receive letters questioning particular items on the return, asking for an explanation or clarification.
If you are a shareholder in an S corporation, we recommend that you review your basis schedule for accuracy or work with your tax advisor to begin maintaining one. It is the shareholder’s responsibility to support any loss claimed on the tax return.
For questions about this topic or more information, please contact Aronson’s Laurence C. Rubin, CPA, at 301.231.6200.
Are you aware of the 2016 tax return due date changes for certain federal and state income tax returns? The changes will have the greatest impact on flow-through entities including S corporations and partnerships, as well as C corporations. Individual income tax return due dates are not impacted. The legislation signed into law by President Obama last year, also known as the Highway Act (P.L. 114-41), generally affects returns with tax years beginning after December 31, 2015. For your convenience, the Aronson tax team has summarized the changes below.
Partnership return due dates have shifted from April 15, to March 15, or the fifteenth day of the third month after a fiscal year-end. This should facilitate timely preparation of Schedule K-1s for individuals and organizational owners or partners whose returns are due on April 15. S corporation income tax returns will remain due on March 15.
Corporate taxpayers’ income tax return is now due on April 15, a month later than the previous March 15, deadline. Corporate income tax returns for fiscal year taxpayers will be due on or before the fifteenth day of the third month following the close of the fiscal year. Certain exceptions apply to C corporations with taxable years ending on June 30.
State Income Tax Returns
Most states have changed their rules to conform to the federal due date modifications, or have existing due dates that do not require changing the rules in order to conform. There are a handful of states that have not conformed to the new federal C corporation return due dates. Notably, Illinois and Massachusetts still have a March 15, deadline for C corporations. Aronson is actively monitoring developments in these jurisdictions and will issue an update early next year.
Other Important Due Date Changes
Other federal due date changes from the Highway Act include:
Adjusting to the new deadlines may be a challenge for some taxpayers. Please feel free to contact Grant Patterson, Michael L. Colavito, Jr., or your Aronson tax advisor at 301.231.6200, if you have any questions or concerns related to these changes.
“Knowledge itself is power,” in its various forms, is a familiar phrase attributed to Sir Francis Bacon. However, in some cases, a lack of knowledge can be just as powerful. On June 13, 2016, the Tax Court again ruled that shareholders were not liable under a transferee liability theory for the taxes generated from a sale of their company’s assets, followed by a sale of all of the company’s stock. The shareholders’ lack of knowledge of the grand tax scheme was an important factor that saved them from a grand tax bill.
Internal Revenue Code §6901 provides for transferee liability on a taxpayer, allowing the Internal Revenue Service (IRS) to collect the tax debts of a transferor of property from the transferee of that property. The definition of a “transferee” includes distributees, such as shareholders of dissolved corporations, successor corporations, and parties to corporate reorganizations.
The Courts have further clarified §6901, establishing a two-prong test that must be met to impose such liability. First, the taxpayer has to qualify as a transferee under §6901. Second, the taxpayer must be liable for the transferor’s debts under state law.
In Slone v. Commissioner, Slone Broadcasting Co., a radio broadcasting company, realized a sizable capital gain on a sale of all of the company’s assets, which generated income taxes of $15.3 million. Prior to the consummation of this transaction, Slone’s shareholders – two trusts, of which Mr. and Mrs. Slone were the grantors and trustees – decided to sell all of their shares to a third party, Fortrend International, LLC. Fortrend represented that it would assume, and reduce, all of Slone’s income tax liability.
When the shareholders asked how Fortrend would accomplish this, Fortrend claimed its methods were proprietary and only assured Slone Broadcasting that the plan for reduction in taxes would not be a tax evasion strategy. An investigation by Slone’s shareholders indicated that Fortrend and its offer were indeed legitimate; subsequently, the shareholders sold their stock.
Shockingly, Fortrend’s tax reduction method failed to withstand an IRS audit, and the IRS failed to collect Slone’s tax debts from Fortrend. The IRS then attempted to collect from Slone’s former shareholders. The IRS argued that the sale to Fortrend was, in fact, a liquidating distribution from Slone to its shareholders — a distribution which should subject the shareholders to transferee liability.
The Tax Court initially heard the case and ruled in favor of the Slones, refusing to apply substance over form to treat the sale as a liquidating distribution. The Ninth Circuit Court of Appeals then remanded the case to the Tax Court to apply the two-prong test, and again, the Tax Court found that no such transferee liability existed.
In applying the state law prong, the Court found that the shareholders had no knowledge of the tax avoidance scheme, and therefore, the form of the stock sale had to be honored. Based on state law, in order to recolor the transaction as a distribution, the IRS had to prove that the taxpayers in question had “actual or constructive knowledge of the entire scheme.” Here, Mrs. Slone was not involved in the business, and Mr. Slone relied on his advisers’ tax expertise and their reasonable inquiries into Fortrend’s plan to reduce the tax liabilities. Based on this due diligence, they had no reason to believe that Fortrend’s strategy was anything but legitimate. Once the Court found that the state law prong was not satisfied, there was no reason to analyze the case under the federal prong, and the transferee liability was denied.
If you believe this situation applies to you, or have any questions, please contact Aronson’s Tax Advocacy team, Laurence C. Rubin, CPA, or Patrick M. Deane, JD, MBA, LLM at 301.231.6200.