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With the economy on the slide and tax
revenues decreasing, it is anticipated
that the IRS will step up its audit
activities in 2009. Among the areas in
the Services cross-hairs are: payroll
tax, worker classification, withholding,
reporting of foreign bank accounts,
certain international transactions, and
fraud and abuse by small to medium sized
businesses.
Payroll Tax
Withholding
Payroll taxes are amounts that employers
are required to withhold from employee
wages for federal income taxes, Social
Security, and Medicare taxes. The
willful failure to withhold and pay
payroll taxes is a felony punishable by
up to 5 years imprisonment.
Worker
Classification
The IRS is expected to ramp up its
examination of worker classifications.
Companies often choose to classify
workers as independent contractors to
reduce their payroll tax and compliance
burdens. However, the IRS has specific
guidelines for determining if a worker
is an independent contractor or
employee. If an employer misclassifies a
worker, the IRS can impose substantial
taxes and penalties.
Dividend
Withholding
In December 2008, the IRS named
withholding taxes as a Tier 1 priority
indicating that withholding taxes would
come under closer scrutiny. IRS
Commissioner David Shulman specifically
mentioned that dividend withholding
practices would be a concentration of
IRS audits.
Withholding Agents
Form 1042
The IRS is expected to continue its
scrutiny of US withholding agents. US
withholding agents are responsible for
certain US tax withholding and reporting
requirements on payments of fixed or
determinable payment of annual or
periodic income (FDAP) from U.S.
sources. When a financial institution
makes an FDAP payment to a foreign
person on behalf of a customer, the
financial institution is a withholding
agent that is responsible for the
withholding tax. Withholding agents may
be subject to interest and penalties for
failure to report or withhold tax.
International Transactions and
Structures The IRS is also stepping up
its review of certain cross-border
transactions including transfer pricing,
certain contract manufacturing
arrangements designed to avoid Subpart
F, and hybrid structures that either
exclude income from taxation or double
dip on deductions and credits in
multiple jurisdictions.
Foreign Bank
Account Disclosures
Every US person who has a financial
interest in a foreign financial account,
including bank, securities or other
financial accounts, in a foreign country
must report that relationship each year
if the aggregate value of those
financial accounts exceeds $10,000 at
any time during the year. Many taxpayers
have opened foreign financial accounts
without complying with the
Foreign Bank
Account Disclosure Rules
The IRS has announced plans to step up
efforts to identify taxpayers with
undisclosed foreign bank accounts.
Non-willful violations of the disclosure
rules can be subject to penalties of
$10,000 per violation. Each willful
violation can attract penalties equal to
the greater of $100,000 or 50 percent of
the account balance, and criminal fines
of up to $500,000 and imprisonment of up
to 10 years.
IRS Releases
Fiscal Year 2007 Enforcement and
Services Results
Last month the IRS released its
statistics for audits and enforcement
actions for fiscal year 2007. The IRS
report indicated that the IRS reviewed
more returns of flow-through entities
such as partnerships and S Corporations.
While large corporate audits were down
slightly in 2007, the IRS concentrated
on mid-market corporations which the IRS
defined as companies with assets between
$10 million and $50 million dollars. A
similar focus is expected in 2009.
Contact Us
To speak to a
tax attorney about
our tax
controversy practice, please
contact us here,
or call us at 713.650.9700.
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