What challenges are the IRS facing this year? Apparently not the complexity of the Tax Code.
The Treasury Inspector General for Tax Administration (TIGTA) released its perspective two weeks ago on the most serious management and performance challenges confronting the IRS. The top 10 challenges in order of priority are:
- Modernization;
- Security;
- Tax Compliance Initiatives;
- Implementing Tax Law Changes;
- Providing Quality Taxpayer Service Operations;
- Human Capital;
- Erroneous and Improper Payments and Credits;
- Globalization;
- Taxpayer Protection and Rights; and
- Leveraging Data to Improve Program Effectiveness and Reduce Costs.
In TIGTA’s twelve page memo (downloadable here as a pdf), the agency offers an assessment of the major IRS management challenge areas for fiscal year 2010.
“Complexity of the Tax Law” did not appear on this year’s list of challenges. TIGTA felt that the IRS had bigger fish to fry.
Not surprisingly, TIGTA found that many of the IRS Modernization Project milestones were “significantly over budget” and “significantly behind schedule.” That would explain why it ranks first on the list of challenges faced by IRS.
Also a top challenge? Taxpayer data security. Identity theft is a growing concern as more and more taxpayer data is stored in IRS computer systems and transmitted online. The IRS has demonstrated, through internal audits, that there are concerns with respect to both accessing private data and the stability of the data at IRS sites. Additionally, phishing and other targeted taxpayer scams are on the rise, which is an area of serious concern.
Another challenge worth noting: taxpayers with international activities. It’s no surprise to see this on the list considering the emphasis that the current administration is putting on offshore accounts. As US revenues shrink, US corporate revenues abroad are growing. In fact, TIGTA reports that US-based corporations more than tripled their foreign profits between 1994 and 2004, from $89 billion to $298 billion. Yet, considerably more than half of those profits were earned in low-tax or no-tax jurisdictions. Tracking that income is a serious concern to the acting Commish.
It’s always interesting to see what shows up on the list as top tax concerns. It often serves as a heads up to targeted enforcement practices and other shifts in policy. However, I have to say, this go around, I still can’t wrap my head around tax complexity not remaining a top issue. It’s a huge issue. Maybe the bigger problem is that we’ve become nearly apathetic to the cause. Perhaps it’s so complex that we don’t even think about it anymore? Kind of how we don’t even blink when we hear the word “billion” nowadays. The Code is not becoming less complex, maybe we’re just getting used to it.
The Internal Revenue Service has announced an extension of the deadline for its Offshore Voluntary Compliance Program. The deadline, which was initially September 23, 2009, has been pushed out until October 15, 2009.
While more than 3,000 have come forward so far, the program is expected to garner considerably more taxpayers before the deadline. With that in mind, the IRS has responded to comments from accountants, tax attorneys and other practitioners who believe that some applicants need more time.
Those who have already been tagged as an offender aren’t eligible for the program. But those taxpayers who have not yet been discovered but need to become compliant may disclose under the program and avoid jail time and mitigate penalties.
If you’ve been on the fence about coming forward, consider this a sign.
It’s rare that decisions regarding transfer pricing make big news. But this one is different. An IRS victory in the Ninth Circuit against chip company Xilinx Inc. earlier this week may change the way that companies allocate their costs for purposes of transfer pricing. The decision already has international tax practitioners abuzz.
The facts of the case aren’t terribly good, causing some practitioners to wonder if it’s a case of “bad facts making bad law.” But here goes: Xilinx allocated part of its R&D costs to a subsidiary in Ireland, where corporate rates are much lower than those in the US. So far, so good. Lots of companies do this sort of thing.
Here’s where it turned ugly: for purposes of stock options, Xilinx kept the entire value of tax deductions related to the options inside the US. In other words, none of the deductions were allocated to the Irish company. This, of course, made the IRS go “Hmmm.”
Xilinx argued that these unrelated companies wouldn’t have shared the costs of the stock options. The IRS said differently. A lower court sided with Xilinx but an appellate court overturned that ruling by a vote of 2-1. Not an overwhelming victory for IRS but still a victory.
What gives tax practitioners pause is that the ruling could be considered to give IRS broad powers to adjust corporate tax returns. In an environment that is increasingly hostile for US corporations with foreign subsidiaries in countries with lower tax rates, it could be unsettling that discretion to allocate costs may now be called into question. My guess is that little will happen immediately, pending Xilinx’ decision as to an appeal. The company hasn’t yet indicated that it will appeal but I think we’d all be surprised if it didn’t.
Republicans in the Senate have made it clear that they are not fans of President Obama’s proposals to close international tax “loopholes.” Specifically, Senate Minority Leader Mitch McConnell (R-KY) decried the proposal, claiming that, “Amount to a tax increase during a recession, which would likely drive jobs overseas.”
Of course, the Obama administration is painting the proposal in the exact opposite light. The administration claims that if the cost of doing business abroad was made tax neutral, more companies would do more of their business in the US. Obama says that the current structure “[i]s a loophole that lets subsidiaries of some of our largest companies tell the IRS that they´re paying taxes abroad, while telling foreign governments that they´re paying taxes elsewhere, and then they avoid paying taxes anywhere.”
And how much money are we talking? In 2004, US multinational companies reportedly earned about $700 billion (with a b). They paid tax of $16 billion on those earnings. That works out to a 2.29% tax rate. Compare that to the lowest corporate tax rate of 15% for US companies earning income inside the company (and going up to 38%).
Interesting, no?
But, of course, these are multinational companies who are thriving and not relying on US taxpayers, right? Capitalism at work, right?
Nope. You know who is relying on those tax loopholes? The very companies that you and I are bailing out. Banks like Bank of America and Citicorp have each created more than 100 non-US tax-paying, off-shore subsidiaries (Citicorp has more than 400). That’s right. They’re using US tax dollars to pay bills, when they’re maybe not even paying their fair share.
I say maybe because “fair” is what’s really at issue here. Is the plan fair? Tech companies say no – they’ve been some of the loudest critics of the plan. In fact, the Silicon Valley Leadership Group has gone on record as saying that its members found it “surprising to be construed in the same way as tax cheats.” These tech companies claim that these new regulations will force them to rethink the way that they do business – and no wonder. On a recent list of 50 companies who pay the least in US corporate taxes, tech companies like Apple and Yahoo constituted almost half – 22 – of the list. This, of course, make sense, as it’s easy to move those businesses offshore.
Numbers aside, the Silicon Valley Leadership Group does have a point. Stashing billions of dollars offshore and not reporting it to the IRS is illegal. Using existing tax laws to your advantage is not. It’s very, very legal. It’s one of the things that we tax professionals do: advise how to use the law to your advantage.
So tossing multinational companies into the same pile as tax cheats isn’t fair. We might not like it. But it’s not fair.
On the other hand, perhaps paying 2% in earnings isn’t fair either.
Like Sen. McConnell, I have no real answers. I like the direction we’re moving, to try and level the playing field to bring US jobs back home. As someone who saw her dad’s job more or less be moved to Mexico (thanks, DuPont), I understand that we need to do something to keep US jobs in the US. I just don’t know that this is the way to do it. Your thoughts?
