New Tax Law Imposes Harsh Penalties on Tax Preparers

The Small Business and Work Opportunity Tax Act of 2007 (PL 110-28) includes a number of favorable provisions for small businesses but it also includes some harsh new penalties on tax preparers who fail to disclose return positions that do not have a “reasonable basis” for the treatment being used in the return. In addition, return preparer penalties now apply to the preparation of estate & gift tax returns, excise tax returns, exempt-organization returns and employment tax returns. A return preparer is now subject to a penalty of the greater of $1,000 or 50% of the income derived from including an item in a return that is an “unreasonable position”. If the preparer is found to have engaged in willful or reckless conduct, the penalty is the greater of $5,000 or half the income derived by the preparer.    

Perhaps it’s needless to say, but the concept of an “unreasonable position” is somewhat subjective and could be used by field agents to bully tax preparers into concessions on disputed issues in a return. According to Practitioners Publishing Company (PPC) a subsidiary of Thomson,

A position is "unreasonable" if:

1. the tax return preparer knew (or reasonably should have known) of the position;
2. there was not a reasonable belief that the position would more likely than not be sustained on its merits; and
3. the position was not disclosed as provided by IRC Sec. 6662(d)(2)(B)(ii), or there was no reasonable basis for the position. (Emphasis added.)

The new law puts a lot more pressure on tax preparers to take a much more conservative position or to insist on disclosing return positions where there is any doubt as to the proper treatment. Little by little, the government is changing the law to force tax preparers into becoming conscripted servants of the IRS and to force taxpayers into paying for that dubious service.  

The American Institute of CPAs has submitted an extensive commentary to the members of Congress involved in the tax committees asking that they reconsider this provision. This change in the law occurred without any warnings or hearings and was a surprise to the tax community.

Year End Tax Planning Tips

Once upon a time, personal tax returns were mostly finished by the middle of August and that marked the beginning of the “Tax Planning Season”. It was the time when clients were encouraged to have a meeting with their tax preparer and/or financial planner to look at opportunities for reducing their taxes and for deferring some taxes to the next year. Now, with extended filing dates for individuals out to the middle of October, there will be less time for planning based on a review of the previous year’s tax return. And, if taxpayers delay the time when they provide all the details to their preparer, the preparer may be working overtime in September and the first half of October – leaving little time to meet with clients to discuss tax planning options.

The alternative is to begin the planning process without the benefit of the previous year’s tax return or to make contingency plans subject to change when the returns are done. Since the government has come down really hard on tax shelter type investments, the planning options have diminished but there are still quite a few available. One of the first articles about year end tax planning for 2007 is available from the Gerber & Co. newsletter.  In addition, I’ve written an extensive report on Year End Tax Planning For 2004 but the numbers in the examples need to be updated – which is my next update project. I’m hoping to have an updated report available by the end of August – but I have to give priority to the tax returns I’m working on. Copies of the 2004 report are available on the subscribers’ web site.   

Jacobs Report Articles

The only duplication of information between the Jacobs Report and the International Wealth Protection Monitor are the links in each issue of IWPM to recent issues of the Jacobs Report.

# 481 – Problem with Form 720 for Premium Excise Taxes

Extra Subscriber Discount for The CFC Tax Boot Camp

I’ve just received a commitment from a third speaker for a seminar/workshop on the U.S. tax treatment of U.S. owners of foreign corporations.  The speakers will include Richard Duke, Thomas McQueen and me. The program will be designed for U.S. investors and entrepreneurs who own (or are thinking of owning) a foreign corporation (or IBC), and for U.S. lawyers, accountants and financial planners who are not specialists in international tax law. The program should also be of interest to foreign professionals and trustees who have U.S. clients.

This is NOT for international tax experts. It’s for those who need a plain English explanation of the CFC tax rules and the alternatives. To the best of my knowledge there is no program like this available from any other source.

The workshop will be held at Caesars Palace in Las Vegas on Friday, December 7, 2007 from 8:00 am to 5:00 pm.  The price is $375 but a discount of $150 is available for the first ten advance registrations. The early-bird discount is on a first-come, first-served basis for the first ten to sign up.  Paid subscribers will receive an additional $50 discount. If you are one of the first ten to sign up, your net cost would be $175. We already have three people who have reserved space.  Further details are available at Offshore Press Tax Workshop for Controlled Foreign Corporations  To reserve space at the early-bird discount rate, please call me at 913-362-9667 (mobile number is 913-481-3480), or send an email to Jacobs – @ – offshorepress.com with CFC Boot Camp in the subject field.

NY Times Predicts Democrats Will Overrule Supreme Court

According to the July 12, 2007 New York Times,

A Supreme Court decision restricting workers’ ability to sue for wage discrimination has prompted Democrats to introduce legislation to counteract the ruling. In May, the Supreme Court ruled 5 to 4 against a supervisor at a Goodyear tire plant in Alabama who discovered, after working there for nearly 20 years, that her male colleagues, including those with less experience, had been receiving higher salaries. Most courts had ruled that each unfair paycheck was a new act of discrimination, effectively a new opportunity for an employee to sue. But the justices said that the clock started running out the first time a worker was paid unfairly and that therefore, the plaintiff, Lilly M. Ledbetter, had waited too long to file suit.

After the ruling, a number of prominent Democrats promised to submit bills that would overturn the Court’s interpretation of when an act of discrimination occurs.

Judge Rules against U.S. Prosecutors in KPMG Case

According to the July 17 issue of the WSJ, The government suffered an embarrassing blow with the collapse of its prosecution of 13 former KPMG LLP executives accused of selling fraudulent tax shelters.

Judge Kaplan ruled that the government had strong-armed KPMG into not paying the legal fees of defendants and had violated their rights and that … government pressure to cut off the legal fees rose to a level of misconduct that ‘shocks the conscience’ (NY Times, 7/17/07).

The Long Arm of the Law

I received the following excerpts from Richard Duke from an article in the STEP Journal (Society of Trust and Estate Professionals) discussing the power of the U.S. government to secure extradition.

"Recent efforts by the US to exercise extra-territorial jurisdiction in corporate crime cases have struck fear into the business community, and a number of high profile cases have hit the headlines. In addition to the NatWest Three, it is estimated that there are presently over 20 people awaiting extradition from the UK to the US for white-collar crimes. The figure will almost certainly increase as the US continues to investigate cases of international corruption and tax evasion. Moreover, professional advisors are equally as vulnerable as the clients for whom they act. … In these circumstances, private client professionals should act to minimize the risks of unwittingly furthering unlawful activity by ensuring that due diligence processes meet international money laundering standards, and by maintaining internal controls and procedures at the highest level. Professionals would also be well advised to become familiar with relevant criminal law applicable in the territory in which the client is undertaking business."

Tax News & Articles

CFC's Partnership Income: Insurance Company Exception (TD 9326)

U.S. and Denmark Sign Social Security Totalization Agreement

IRS Issues Final Regs on Reporting by Foreign Owned U.S. Companies

Worth Reading

Drop in Foreign Demand for U.S. Treasuries Offset by Rising Revenues

Panamanian Man to Repay 5.6 Million to Scam Victims

Letters from Panama by Derek Sambrook

Escape from America Magazine, July, 2007

Is Offshore Legal? By David Tanzer

Court Upholds Warrentless Wiretaps

Know Your Customer and Money Laundering News