IRS Tax Problem Solver Blog - IRS Help

Tax Battle – All Square between P&G and IRS

Darrin Mish — Fri, 30 Jul 2010 18:21:47 +0000

A US District court judge made two separate rulings each favoring one side in the legal tussle between Proctor and Gamble (P&G) and the IRS. Federal Judge Timothy Black is presiding over the $435 million court battle in which he has thus far made two rulings.

On June 25, the Cincinnati federal court judge ruled that P&G is eligible to a $21 million tax break for its research and development expenses that were disallowed by the IRS. In his judgment, Judge Black agreed with P&G’s interpretation of the tax law and overruled the IRS stand on the matter as ‘arbitrary and…not backed up by legislative history’.

In an IRS audit, the agency included P&G’s transfer of its funds between the parent company and its subsidiaries into the company’s gross receipts. This action caused the amount by which P&G’s research and development costs exceeded a percentage of their gross receipts to become lower. As a result, the company’s usual 20% tax credit for 2001 to 2005 was also reduced and P&G paid the IRS $21 million arising from this audit.

Judge Black’s ruling means that P&G is entitled to a refund from the IRS for the $21 million it paid.

However in a separate ruling on July 6, Judge Black sided with the IRS over another matter. In this case, P&G contended that it paid double taxes to Japan and South Korea amounting to $12 million out of the same income stream. But here the court ruled that P&G was obligated to a seek refund from Japan. Since P&G did not seek such a refund, it could not claim a credit for those taxes with the IRS.

Judge Black stated that American companies with business dealings overseas should seek tax reductions from their host countries before claiming foreign business tax breaks at home if the taxes were improperly imposed. If this practice is not carried out, the US government will perpetually be straddled with the expenses.

These two cases are minor compared to the ongoing one where the dispute is over the value of patents P&G donated to various universities and research institutions from 2001 to 2004. In this case, P&G assessed its 28 patents at $908 million but the IRS valued these technologies only at $186 million, a whopping $722 million less. The IRS accordingly levied extra taxes on P&G based on the $722 million.

This case is now set to go to trial this fall.

Darrin T. Mish is a veteran, nationally recognized tax attorney who has focused on providing IRS help to taxpayers for over a decade. He regularly travels the country training other attorneys, CPAs and enrolled agents on how to handle their toughest cases with the IRS. He is highly ranked among the top attorneys in the country, with an AV rating from Martindale-Hubbell and a perfect 10 on Avvo.com. Martindale-Hubbell has also honored him with a listing in their Bar Register of Preeminent Lawyers. He is a member of the American Society of IRS Problem Solvers and the Tax Freedom Institute. With clients on every continent but Antarctica, he has what it takes to solve your IRS problems no matter where you live in the world. If you would like more information about his practice and how he can help you, please call his office at (813) 229-7100 or toll free at 1-888-GET-MISH.

Little-known Tax Deductible Expense

Darrin Mish — Thu, 29 Jul 2010 17:34:18 +0000

Most people are familiar with the usual expenses you can get tax breaks for. For business owners, you get tax relief for business-related expenses. If you are an employee, you would probably enjoy tax deductibles like donations to charities, child relief and so on. But there is one tax break that is not very often spoken about – job search expense deductions. Especially in this shaky economy, this tax break would apply to many taxpayers and come in handy, too. If you have spent any time or effort in looking for a job this summer, you should tally up your expenses because you may be able to deduct some of these job search expenses on your next tax return.
But there are a few conditions that govern which job search related expenses are eligible for the tax break. Here are a few things you should know about deducting costs related to your job search.

Firstly, your expenses must be spent on a job search in your current occupation. You are not permitted to deduct expenses incurred while looking for a job in a new occupation. Therefore, all your expenses like employment and outplacement agency fees you pay while looking for a job in your present occupation are deductible. However, when you find employment and your new employer reimburses you in a later year for the employment agency fees, you must declare the amount you receive as an income up to the amount of your tax benefit in the earlier year.

You can deduct amounts you spend for preparing and mailing copies of your résumé to prospective employers as long as you are looking for a new job in your present occupation. You may also be able to deduct any travel expenses you incur (to and from your area) if you travel to another area to look for a new job in your present occupation. But this only applies if the trip is primarily to look for a new job. Whether the trip is primarily personal or is primarily for job-hunting depends on the amount of time you spend on personal activity compared to the amount of time you spend looking for work.

Secondly, these deductions only apply to current employees looking for a new job. It does not apply to job seekers entering the employment market for the first time.
Finally, you cannot deduct job search expenses if there was a substantial break between the end of your last job and the time you begin looking for a new one. Seek the advice of an IRS attorney for more details. Visit http://www.getirshelp.com or call us at (813) 229-7100 for a free consultation.

No Estate Tax this Year

Darrin Mish — Wed, 28 Jul 2010 15:57:37 +0000

If you are an heir to a large estate this year, count your lucky stars. This year, Congress has allowed the estate tax to lapse so whoever inherits anything from a dearly departed is free from tax as far as the inheritance goes. Some of the biggest gainers in 2010 are the heirs of New York Yankees owner George Steinbrenner who passed away recently. Experts estimate his heirs will save on about $500 million in estate taxes.

Many have debated whether it is more beneficial to tax or ease taxes in difficult economic times. The decision not to impose estate tax, which is a first in almost 100 years, has been questioned by some lawmakers themselves. Sen. Byron Dorgan (D – N.D.) lamented the fact that 4 or 5 of America’s billionaires have died this year and the government has not collected a single cent out of it. According to Forbes, some of the deceased billionaires include California-based real estate magnate Walter H. Shorenstein, Houston oil dealer Dan Duncan and a member of the Minnesota family that founded agricultural company Cargill Inc.

This year’s tax break is quite an aberration. During the term of George W. Bush in 2001, the estate tax was reduced from 55% to 45% and the amount that could be bequeathed without being taxed was raised from $1 million to $3.5 million. This law was put in place and was to expire in 2009. Then the law is to resume to its pre-Bush rate in 2011. But lawmakers have not agreed to any new tax structure this year so the whole tax requirement is suspended.

On one hand the Democrats have stressed the need for funds to help the unemployed whereas the GOP has advocated tax breaks for inheritance tax breaks although there are lawmakers who have broken ranks with their respective parties on this issue.

Republican Jon Kyl of Arizona and Democrat Blanche Lincoln of Arkansas (who faces and upcoming reelection battle) recently introduced measures to further ease estate tax and are now trying to figure out how to make up for some of that lost revenue. But when it comes to employment benefits (that cost the government some $33.9 billion annually), the Republicans are demanding that the government cuts its expenditure instead of increase taxes.

However, the scene now is very different from 2001 when the estate tax cuts were introduced. Back then, the war against terror had hardly begun and the nation was enjoying budget surpluses. But today, the notion of exempting the wealthy from estate tax may be a tough call to make.

Mayweather Jr. Caught between Taxman and Pacman

Darrin Mish — Tue, 27 Jul 2010 17:44:41 +0000

Floyd Mayweather Jr. is pondering this next move. Faced with a deadline by boxing promoter Bob Arum, the American boxer has to make a decision that will have implications on himself both inside and outside the ring. Arum is waiting impatiently, as is the rest of the boxing world, for Mayweather Jr’s decision on fighting famed Filipino boxer Manny Pacquiao, nicknamed the Pacman.

Manny is widely held to be the best pound-for-pound boxer in the world. He has the speed, skill, endurance and power to defeat any boxer in his weight category, including Mayweather Jr. The American’s critics believe that Mayweather Jr is afraid of the Pacman, judging from the failed talks to bring the two boxers together thus far.

But there may be a more subtle reason why Mayweather Jr is ducking Manny Pacquiao. And it has gotten even the battle-hardened, previously undefeated Mayweather Jr. shaking in his boots. It’s the IRS.

The IRS has so far placed two liens on Mayweather Jr’s properties in 2004 and 2008 for unpaid taxes. In 2004, a tax lien worth $3.1 million was placed on a property belonging to Mayweather Jr. And again in 2008, the IRS slapped another lien, this time for $6.1 million on another Mayweather Jr. property. The second lien forced Mayweather Jr. out of retirement. He was about to face dire consequences of his tax problems when he fought Juan Manuel Marquez and from his earnings, paid off the 2008 lien.

Now Mayweather Jr. is considering the implications of fighting Manny Pacquiao this year in another big ticket bout. But the financial implications are just as significant as the sporting ones. According to David Mayo, a Mayweather insider, the American has already made $40 million in his fight with Shane Mosley, so if he goes into the ring again this year, it would do nothing but increase his tax liability. It might make more financial sense to defer fighting the Pacman until next May, in the next tax year.

So Mayweather Jr. is caught between a rock and a hard place. As it is today, the Pacman is waiting for Mayweather Jr inside the ring like a caged tiger while the IRS is gunning for him outside the ring like a sniper. Meanwhile the entire boxing world awaits Mayweather Jr’s decision with bated breath.

Conrad Black Fined $71 million by IRS

Darrin Mish — Mon, 26 Jul 2010 17:26:05 +0000

Former newspaper mogul Lord Conrad Black has been fined $71 million in back taxes, penalties and interest charges by the IRS after his conviction on fraud charges. Black is currently serving a 6 ½ year prison sentence in a federal penitentiary in Coleman, Florida. The unpaid taxes, penalties and interests are from the tax years 1998 to 2003. Black has filed a petition with the Tax Court April 15 to cancel the IRS assessment against him.

Lord Black, the former chief executive of Hollinger International Ltd, contends that he was not required to file tax returns because he was not a US resident. Furthermore, he argues that the IRS assessment was based on ‘sloppy and careless’ findings derived from investigations that led to his fraud conviction.

Meanwhile, the IRS claims that the amount in question was derived from unpaid taxes on income derived from Black’s use of the Hollinger company jet, company funds used to obtain confidential papers of former President Franklin D. Roosevelt and that of his private secretary and his company’s purchase of a luxury $5.9 million apartment in New York for his personal use in 2000.

The total amount also included income from alleged fraud-related theft and came up to $46.5 million in unpaid taxes and a further $24.2 million in penalties. Lord Black was a Canadian citizen until 2001. He is currently a citizen of the UK. While Black believes it is not obligatory for him to file tax submissions because of this, the IRS contends that he still has to submit his tax returns and is liable to pay tax even though he is not a resident.

In 2004, a report entitled, “A Corporate Kleptocracy” was written to expose the dealings of Lord Black, who along with some controlling shareholders, were alleged to have siphoned out $400 million from Hollinger International over a period of 7 years. This amounted to 95% of the company’s income during that period. In his petition, Black claimed that the allegations in the report were ‘hopelessly biased, ignored critical facts and were the product of sloppy and careless investigative work by the special committee’.

Black’s lawyer, Bryan Skarlatos, said that the IRS was trying to pin charges on Black on the basis that the income was derived in the US and therefore subject to US taxes. But Skarlatos is confident the petition would be successful because most of the charges that formed the basis of the IRS figures have been dismissed.

Myrtle Beach Political Campaign under FBI, IRS Investigation

Darrin Mish — Sun, 25 Jul 2010 15:41:24 +0000

The FBI and IRS have begun investigations into campaign contributions amounting to $239,500 for political action committees and area politicians including gubernatorial candidate Gresham Barrett and members of the Myrtle Beach City Council by interviewing at least two individuals thus far. The money appeared to be collectively contributed by 14 corporations with ties to the Myrtle Beach Area Chamber of Commerce. But the queer thing is that some of those corporations did not have money at the time of the contribution. One corporation had even been dissolved for two years for failing to pay their taxes when the contributions were made.

Furthermore, the contributions all came in the form of cashier’s checks issued from the same bank, the Myrtle Beach-based South Atlantic Bank and were all numbered in sequential order. In addition, they also all bore the same date, June 8, 2009. The FBI and IRS want to know where the money actually came from and their investigations are focused on possible money laundering, tax fraud and criminal conspiracy.

One of the persons who have been interviewed by the FBI and IRS is state rep. Tracy Edge (R – North Myrtle Beach) who med investigators on July 7. Edge was the only politician who did not accept any of the cashier’s checks and instead returned them because he was not sure of where the funds came from.

The other individual interviewed thus far is Tom Herron, the spokesman for the group, Business Owners Organized to Support Tourism, who had been vocally critical of the contributions. Herron questioned whether the contributions were kickbacks for politicians who approved a 1% increase in sales tax that goes towards the Myrtle Beach Area Chamber of Commerce marketing programs.

The registered agent for all 14 contributing corporations is Shep Guyton, a Myrtle Beach based lawyer and former chairman of the board of directors of the chamber. At the same time, Guyton is a board member of the South Atlantic bank. He has not responded to investigator’s requests for an interview.

The FBI and IRS will be obtaining records from the South Atlantic bank to facilitate their investigations. Banks are also mandated to file a suspicious activity report if they suspect money laundering or any other criminal activity. The federal Bank Secrecy Act requires all financial institutions to record and report all cash purchases of cashier’s checks amounting to $10,000 and more in a day to the IRS.

US Rep Gresham Barrett received $49,000 in cashier’s checks. Incumbent candidates for the city council including Mayor John Rhodes also received cashier’s checks as did other members of Horry County’s legislative delegation. All these politicians have said they do not believe the contributions were illegal.

Section 9006 Tax Reporting for Small Businesses

Darrin Mish — Sat, 24 Jul 2010 15:19:02 +0000

Section 9006 of the new Health Care Reform bill states that businesses have to submit a Form 1099 for all purchases of goods and services of more than $600 a year made from any vendor. This requirement will take effect in 2012.

This section of the health care reform bill is aimed at closing the ‘tax gap’, which is the difference between what businesses actually should pay in terms of taxes and what the IRS collects each year. By doing so, the government intends to raise the $17 billion to fund the benefits of health care reform bill without raising taxes.

This new regulation was largely unnoticed when Congress passed it together with the health care reform bill. But as the IRS begins to develop the details of how Section 9006 will be enforced, many parties are now voicing their concerns.

The Nebraska Farm Bureau has made known the views of its members by saying that most of them are not keen on revealing their Tax ID to so many more people. The fact is that some farmers do not even have a Tax ID. They only use their Social Security numbers.

Small businesses like the farms, ranches and other petty traders often do not have the manpower to properly track their purchases during the course of the year to properly comply with the requirements of Section 9006. The main thing most small businesses complain about is the administrative headache of tallying up every small purchase and submitting the required 1099s. Suppose a small business buys coffee every Monday. Would it have to tally up their purchases throughout the year then get the Tax ID of Coffee Bean and submit a 1099?

Several lawmakers in Capitol Hill are currently striving to repeal Section 9006. Sen. Mike Johanns (R – Neb) is one such lawmaker. He made a speech to this effect from the Senate floor last week. According to him, the new law creates a “perverse incentive for companies to consolidate suppliers”. Sen. Johanns has also filed an amendment to repeal the provision and will propose an alternative legislation in its place this week.

The 3 House members from Nebraska, namely Lee Terry, Jeff Fortenberry and Adrian Smith, all Republicans are co-sponsors of a House bill that would repeal the new requirements.

At the same time, Sen. Ben Nelson (D – Neb) and several other Senate Democrats called on the IRS to look into ways to reduce the burden possibly by consolidating the forms that are required while at the same time supporting the aim of closing the tax gap.

Possible Outcomes of New 1099 Tax Law

Darrin Mish — Fri, 23 Jul 2010 17:27:02 +0000

Beginning 2012, all businesses will have to submit Form 1099 for every purchase they make of goods or services costing above $600. But this does not apply to purchases made by credit or debit cards. Card transactions will be covered in a separate law expected to be tabled sometime next year. This law was passed by Congress in March along with the health care reform bill and would affect about 400 million businesses including 26 million sole proprietors. This is seen by many as an attempt by Congress to recoup an estimated $300 billion in underpaid taxes each year.

Clearly, there will be a humongous amount of paperwork for both taxpayers and the IRS. For instance, the SMC Business Councils, a Pennsylvania business networking organization, surveyed its members and found that on average, a business submitted 10 Forms 1099 each year. This number is expected to swell to 200 filings per year when the new regulation is enforced.

SMC Business Councils president, Tom Henschke is a harsh critic of the law who says that exempting credit and debit card transactions would hardly make any difference overall because most businesses do not make many credit or debit card purchases, hotel accommodation and airline tickets being the main big ticket exceptions. Henschke was quoted as saying, “Most of the small businesses out there that do small business [purchasing] don't do it by credit card. One of the reasons is the transaction cost is very high – 2% to 3%”.

Henschke feels that one possible outcome of the new law is that credit card companies would benefit the most as people have an added reason now to use their services. Nolan Newman, a Seattle-based CPA specializing in small businesses tends to agree. “If I'm a small business and I use my credit card moderately, would I try to increase my volume with which I pay vendors with it? Maybe”.

Another possible outcome Henschke points out is the intentional reduction of vendors each business deals with in order to cut down on the number of forms to be filled. There have been talks among the business circles of consolidating the purchases from hundreds of vendors to less than 100. This would potentially have a domino effect that might jeopardize the bottom line profits of many small businesses.

The National Taxpayer Advocate Service (NTAS) shares the same concern. Many large corporations have computer systems to track their purchases but small businesses do not. This might discourage business, leaving the economy with only large national players and less overall competition.

Tax Whistleblower Acknowledged in Dillion Case

Darrin Mish — Tue, 20 Jul 2010 08:29:44 +0000

In what is seen as a landmark decision by the US Tax Court, a whistleblower has won the right to be heard for tax information disclosed to the IRS. William Prentice Cooper, a lawyer and boyfriend of Ann Peipers, the widow of a grandchild of Dorothy Dillon Eweson gave information about tax evasion to the IRS on one of the biggest and most famous American fortunes, the one owned by famed Wall Street financier, Clarence Dillon (1882 – 1979). Dorothy Dillon Eweson was one of two of Clarence Dillon’s children who died at age 92. Her estate was worth an estimated $300 million when she died.

Ann Peipers claimed that other members of the Eweson family cheated her minor child of what was rightfully his as an Eweson great grandson. This information was relayed to Cooper who subsequently made a report with the IRS. According to Cooper’s report, the Eweson family left out of Dorothy Eweson’s Grant of Probate a trust established in 1918 by Clarence Dillon himself, thus also not paying $100 million in estate taxes and another large generation-skipping tax. In 2008, this information was disclosed to the IRS along with Form 211, ‘award for original information’ requesting an informant’s reward. But the IRS’s Whistleblower Office sent form letters to Cooper stating statutory language and ruled that this information was without merit thus denied payment.

Cooper subsequently filed 2 lawsuits in the Tax Court to seek judicial review of the IRS decision and orders to compel the IRS to ‘undertake a complete re-evaluation of the facts in this matter, begin an investigation of this matter, open a case file and take whatever steps may be necessary to determine” the validity of his information’. The IRS responded by asking the court to strike out Cooper’s lawsuit. The IRS contended that the Tax Court has no jurisdiction to hear the suit because the IRS had not collected any money. In its submission to the Tax Court, the IRS declared that they had diligently investigated the information provided by Cooper and decided not to proceed with any action against the Eweson estate.

In her 12-page decision on July 8, Tax Court judge Diane L. Kroupa ruled that the Tax Court does have the jurisdiction to hear such a case based on the 2006 law that set up the Whistleblower Office. The judge gave the IRS and Cooper until October 12 to either settle the case or file a joint report detailing the status.

Minnesota State Senator Owes $250,000 in Unpaid Taxes

Darrin Mish — Mon, 19 Jul 2010 08:23:25 +0000

Minnesota State senator Satveer Chaudhary (DFL – Fridley), currently owes the IRS more than $252,000 in back taxes for the years 2007 and 2008. His and his wife, Denise’s unpaid taxes for 2007 amounted to some $100,000 while that for 2008 came up to $151,000.

Senator Chaudhary gained notoriety in the last sitting of the state legislature in May when he pushed through a last minute, end-of-session legislature as part of the natural resources bill that would require walleye possession restrictions in Fish Lake, north of Duluth. Chaudhary is the state chairman of the Senate Environment and Natural Resources Committee and whose own home on Fish Lake would have been affected by his legislation if it had gone through. As it turned out, Governor Tim Pawlenty vetoed the entire fish and game bill.

Senator Chaudhary said that the outstanding tax bill came about primarily because his wife was laid off from her job in a biopharmaceutical company, Celgene. The couple contend that the laying off was unjustified and are challenging it in Equal Employment Opportunities Commission. Chaudhary told the Duluth News Tribune that the company allegedly forced his wife to exercise her options of using her existing stocks to buy into some other stocks, and this directly led to their tax delinquency. This explained the tax bill for 2008 but not 2007. Chaudhary said he was not aware of how the 2007 bill came about and would talk to his accountant over the matter.

Chaudhary’s proposed legislation resulted in vehement protests from residents around the lakeside. Subsequently, Chaudhary admitted to making a hasty decision when he promoted the legislation and even offered to repeal it in the next legislative sitting but Governor Pawlenty had already vetoed the entire natural resources bill, partly because of Chaudhary’s legislation.

Late last month, Chaudhary’s own political party’s committee for the suburban Twin Cities of Minneapolis and St. Paul withdrew their endorsement of his candidacy for a primary election and backed his challenger instead. Whether their decision stems out of Chaudhary’s tax problems could not be immediately confirmed. The state DFL party spokeswoman, Kristin Sosanie said that DFL had no comment about Chaudhary’s back taxes.

Chaudhary himself pledged to settle his tax dues ‘pretty quickly’. He also confirmed that his tax liability is part of the total damages he is seeking in his case against Celgene.

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