Tax Holidays and Tax Amnesty Programs: Do they work or are we just giving tax violators a break?

In recent news, the State of Alabama is considering creating a tax amnesty period from June 30 through Aug. 30, 2016.  The amnesty program will apparently forgive tax liabilities related to individual and business income taxes, sales and use tax, lodgings tax, severance taxes, cigarette taxes and business privilege taxes. While some exclusion from the program are motor fuel taxes and certain healthcare and environmental taxes.  As noted by the Bloomberg blog, other states have also instituted amnesty programs, Massachusetts, or are considering implementing a tax amnesty program, South Carolina.

The IRS also has several amnesty programs in place for people that have not filed their taxes or have not paid their tax liabilities.  The programs are as follows:

1. Domestic Tax Amnesty for unfiled tax returns or unreported tax liability (Voluntary Disclosure, See IRS IRM provisions.  See also blog discussing how far back to file unfiled tax returns.)

2. Offshore Voluntary Disclosure Program

Additionally, Congress has, in the past, instituted a one-time tax holiday to allow U.S. multinational corporations to bring back money the multinational corporations had previously invested in its offshore foreign subsidiaries.  See NY Times article about the 2004 tax amnesty and its effects.  See also the Salon.com article and the Senate PSI report stating that the promised 2004 tax repatriation holiday failed to meet the promised benefits of new jobs, or research and development (R&D) expenditure. 

The 2004 tax holiday allowed corporations to repatriate amounts held offshore at a reduced rate 5.25% instead of the statutory corporate rate of 35%.  The PSI report highlights the fact that the 2004 tax holiday permitted corporations to bring back $312 Billion.  The PSI report also highlights that while the 2004 law prohibited the repatriated funds for stock repurchases or executive pay, there was no mechanism for monitoring the use of the repatriated funds, so most of the funds were used exactly for stock buybacks and increased executive pay.

There have also been recent attempts by Congress to allow another tax holiday to allow U.S. multinationals to repatriate offshore funds.  In 2014, Senators Boxer and Paul introduced an infrastructure bill tied to a tax holiday (a 6.5% tax on repatriation of funds over a five year period).  The Boxer-Paul bill prohibits dividends, shareholder buybacks or executive compensation for 3 years and the revenue generated would by the 6.5% tax would fund infrastructure projects.  However, as presented in the Salon article, and as reported in Bloomberg, the Joint Committee on Taxation determined that such a tax holiday would really cost taxpayers $96 billion over 10 years.

An alternative to a tax repatriation holiday appears to be a transitory tax on “permanently reinvested offshore earnings.  Such a transitory tax was proposed by former House Ways and Means Chairman Dave Camp in the Tax Reform Act of 2014.  As stated in The Center on Budget and Policy Priorities article, “Repatriation Tax Holiday Would Lose Revenue And Is a Proven Policy Failure” by, The Tax Reform Act of 2014 proposed to tax all offshore profits as a transition to a new international tax system that would generate an estimated $170 billion of revenue over 10 years for the Highway Trust Fund. 

President Obama has also introduced a budget proposal (fiscal year 2015) which would utilize revenue from transitioning to a new corporate tax system to finance infrastructure.  See the CBPP article.  The President’s proposal would require multinational corporations to pay a one-time U.S. tax on the profits held overseas prior to changing the permanent way the U.S. would account and tax the offshore profits currently not being taxed.  The President’s proposal allegedly would generate taxes in the amount of $268 billion over 10 years to fund infrastructure improvements.  See this CBPP article comparing transition tax and repatriation tax holiday.

As the CBPP articles reflect, and the PSI’s examination of the 2004 tax holiday, a tax repatriation holiday does not work to generate present and future investment in the United States.  Instead, the empirical data suggests that companies will use the repatriated funds to:

1. Repurchase Shares from Shareholders or pay dividends to shareholders;

2. Increase Executive Compensation;

3. Terminate workers in the United States;

4. More Aggressively transfer profits offshore to increase amounts “held” or “permanently reinvested offshore” to avoid U.S. taxes because Congress will just grant another tax repatriation holiday in the future.

Following the 2004 tax repatriation holiday as an example of what to expect when IRS or States permit tax violators to be forgiven of their tax liabilities through tax holidays or tax amnesty program, the question to ask is: Why are the tax violators getting a break at the expense of compliant taxpayers?  Or alternatively: Shouldn’t government be in the business of rewarding compliance instead of rewarding habitual tax violators?

How can governments reverse or flip the logic behind a tax holiday or tax amnesty program?  Maybe the governing bodies should reward compliant taxpayers by allowing them to reduce their tax rate for each year of compliance.  Or maybe governments could permit additional deductions/exemptions or reduce phase-outs for deductions for the taxpayers that are compliant and based on the length of compliance.  If the goal is compliance and tax collection, shouldn’t the carrot be a reward for compliance instead of rewarding habitual tax violators by giving them a break for their continued tax violations.  Something to think about.

If you know of any individual or corporation that has not paid their tax liabilities or has habitually avoided paying its taxes, you should file a tax whistleblower claim.  The IRS has a whistleblower program that will pay between 15% and 30% of the collected proceeds (that exceed $2,000,000) to whistleblowers that provide specific and credible evidence of the tax violations of the individuals/corporations.  Contact us to evaluate your claim and to file your claim for an IRS award.

STATUTE OF LIMITATIONS PART II: Real case involving a missed deadline and statute of limitations.

As previously discussed in Part I, in the tax world, statute of limitations are extremely important. 

A recent court case (now before the United States Supreme Court to determine whether the Supreme Court will hear the case) illustrates just how important deadlines are with respect to taxes.  See this PricewaterhouseCoopers article.

In Albemarle Corp. & Subs. v. United States, the Taxpayer’s, Albemarle Corporation’s, Belgium Subsidiary paid interest to the U.S. parent company and other subsidiaries from 1997-2001 for securities it issued to the U.S. parent company and other subsidiaries.  The Belgium Subsidiary failed to withhold Belgium taxes at 25% on the dividend payments.  In 2001, the Belgium authorities determined that the Belgium subsidiary should have paid the withholdings at 25% to Belgium.  The Belgium subsidiary disputed the assessment.  Albemarle settled with the Belgium government in 2002 and paid the taxes owed.   Albemarle failed to file protective refund claims in 2002 or amended returns for 1997-2001 in 2002 claiming the foreign tax credit.

For some reason or another (not stated), Albermarle filed an amended return in 2009 for tax year 2002, claiming that the taxes it paid to Belgium in 2002 reduced their liability in 2002 due to the foreign tax credit.  The IRS treated the single amended return as two different refund claims.  First for tax years 1999-2001, the IRS treated the amounts raised in this year as taxes paid to a foreign government and eligible for the foreign tax credit.  For tax years 1997 and 1998, the IRS denied the refund claims (in the amount of $412,923 per year or $825,846) for these years because under I.R.C. § 6511(d)(3) Albemarle’s claim for refund was after the 10 year rule for claiming a refund.

Albemarle paid the additional U.S. taxes associated with the denial of the 1997 and 1998 tax years.  Albemarle then filed suit for refund in the Court of Federal Claims. (Note, if you want to sue the IRS for a refund, there are three ways you can do this: 1. Don’t pay the tax, and sue in Tax Court (specialized Court in Washington DC for tax disputes) for a redetermination of the liability; 2. Pay the tax and sue in your local United States District Court; or 3. Pay the tax and sue in the Court of Federal Claims (a specialized Court in Washington DC for claims against the United States and Admiralty claims)) So Albemarle chose option 3.

In the Court of Federal Claims, the Court of Federal Claims dismissed Albemarle’s case because it agreed with the IRS. See this PricewaterhouseCoopers article.   Albemarle claimed that the 10 year period ran from 2002, when Albemarle paid the taxes to the Belgium government.  IRS stated that the 10 year period ran from the date the return claiming the foreign tax credit was filed, so in this case it would have been, 10 years from the filing of the1997 return (March 15, 2008 b/c the 1997 return was due on March 15, 1998) and 10 years from the filing of the1998 return (March 15, 2009 b/c the 1998 return was due on March 15, 1999). 

Albemarle then appealed the dismissal of its case to the Court of Appeals for the Federal Circuit.  See the PricewaterhouseCoopers article.  The Court of Appeals ruled in favor of the IRS.  Albemarle then asked for a rehearing of its dismissal before the full panel of judges of the Court of Appeals for the Federal District.  The Court of Appeals denied the rehearing request.

Albemarle then filed a petition with the Supreme Court, claiming that Court of Appeals decision was in error, and conflicted with an existing Supreme Court decision in Dixie Pines Products Co. v. Commissioner, 320 U.S. 516 (1944).  Albemarle filed its Opening brief in January 2016 in the Supreme Court, and it is taking the position that like the petitioner in Dixie Pines, Albemarle is an accrual taxpayer and is not allowed to claim a contingent deduction or reduction of its taxes until the underlying liability is resolved with the taxing authority.  So Albemarle claims that it couldn’t have claimed the foreign tax credit in 1997 and 1998 because the liability was contingent.  Albemarle states that initial period to claim the foreign tax credit was in 2002.

The IRS/Department of Justice also filed its brief, stating that the Court of Federal Claims, the Court of Appeal for the Federal Circuit both reached the correct outcome, denial of Albemarle’s claims because it missed the 10 year filing period for a refund claim.

Albemarle has also filed its response brief to the Supreme Court stating that the IRS’ arguments were confusing and ineffectual. See this article about Albemarle’s filing.

What this dispute shows, is that the IRS is strict about its deadlines to assess tax and award refund claims.  Therefore, if you have specific and credible information about a taxpayer’s violation of tax laws and/or failure to pay his/her/its tax liabilities in excess of $2,000,000 you should consider filing a tax whistleblower claim if your information is timely. Contact us to discuss your case and the timeliness of your information.  You may be entitled to an award between 15-30% of the tax, penalties and interest collected by the IRS.

STATUTE OF LIMITATIONS PART I: How important are they in the tax world?

At Tax Whistleblower Law Firm, we often get inquiries from potential clients with information about taxpayers’ violations that occurred over 10 years ago.  Often times the circumstances dictate that we do not get involved in these types of cases; however, if there are extenuating circumstances we may get involved.  Why?  The IRS only has certain time periods to examine (audit) a taxpayer’s tax liability, and to assess (determine that the taxpayer owes additional tax). 

The following is a summary of the main time periods in which the IRS must act or be barred by statute from assessing additional taxes against tax payers.

General 3 year rule and exceptions:  In general, the IRS has 3 years after the filing of a return to assess additional tax liability against a taxpayer.  See I.R.C. § 6501.  There are 11 exceptions to the 3 year rule, they are as follows:

1. False or Fraudulent Returns with the intent to evade tax, (See I.R.C. § 6501(c)(1));

2. Willful attempt to evade tax, (See I.R.C. § 6501(c)(2));

3. No return is filed by the taxpayer, (See I.R.C. § 6501(c)(3));

4. Extension of the 3 year period by agreement of the taxpayer and IRS, (See I.R.C. § 6501(c)(4));

5. Tax from changes in certain income tax or estate tax credits (i.e. foreign tax credits) (See I.R.C. § 6501(c)(5));

6. Termination of Private Foundation Status, (See I.R.C. § 6501(c)(6));

7. Within 60 days of end of 3 year rule, IRS receives an amended return, (See I.R.C. § 6501(c)(7));

8. Failure to Notify IRS of certain foreign transfers (generally related to a passive foreign investment company/fund), (See I.R.C. § 6501(c)(8));

9. Gift tax liability for unreported gifts, (See I.R.C. § 6501(c)(9));

10. Listed Transactions, (See I.R.C. § 6501(c)(10));

11. Orders of Criminal Restitution under I.R.C. § 6201(a)(4), (See I.R.C. § 6501(c)(11)).

Expanded 6 year rule:  Additionally, the IRS may assess tax beyond the 3 year rule and has 6 years from the date of the filing of the return to assess tax when a taxpayer undertakes the following substantial omissions:

1. Omits income that is in excess of 25% of the amount of gross income stated on the return; (See I.R.C. § 6501(e)(1)(A)(i));

2. Omits at least $5,000 in income, which is reportable under I.R.C. § 6038D, (See I.R.C. § 6501(e)(1)(A)(ii));

3. On a gift/estate tax return, omits amounts from the reported gross estate in excess of 25%, (See I.R.C. § 6501(e)(2));

4. Omits excise taxes due in excess of 25% of the excise tax return reported by the taxpayer, (See I.R.C. § 6501(e)(3));

With respect to taxes, the IRS is not the only who is under a deadline to act.  A taxpayer must also file their claim for refund within certain time limitations as described below.  This also explains why there might be a delay from the time the IRS collects the taxes owed by a taxpayer and when the IRS pays an award to a whistleblower.

Refund Cases and Statute of Limitations:  Generally under I.R.C. § 6511, a taxpayer has 3 years from the time the return was filed or 2 years from the time the tax was paid to file a refund claim.  Exceptions to this 3/2 year period are:

1. 7 year period for refunds related to bad debts and worthless securities deducted on the taxpayer’s return, (See I.R.C. § 6511(d)(1));

2. 3 years from the date the return was filed that generated the Net Operating Loss (NOL) or capital loss carryback to claim a refund related to NOL carryback or capital loss carryback, (See I.R.C. § 6511(d)(2));

3. 10 year period for credits or refunds related to the Foreign Tax Credits, (See I.R.C. § 6511(d)(3));

4. 3 years from the date the return was filed that generated

5. employment tax refunds, (See I.R.C. § 6511(d)(5));

6. 1 year for refunds related to income recaptured from a qualified plan termination, (See I.R.C. § 6511(d)(6));

7. 2 years from the determination date of self-employment taxes by Tax Court, (See I.R.C. § 6511(d)(7)); and

8. 5 years from the date of determination of disability compensation when uniformed services retired pay is reduced, (See I.R.C. § 6511(d)(8)); the unused credit which results in a carryback, (See I.R.C. § 6511(d)(4));

9. 2 years from the date an agreement is made with respect to

If the IRS and/or the Taxpayer misses the deadline to assess tax (IRS) or file refund (taxpayer), then the IRS and/or the Taxpayer is barred from assessing (IRS) or filing for a refund (taxpayer).

If you have specific and credible information about a taxpayer's violation of tax laws and/or failure to pay his/her/its tax liabilities in excess of $2,000,000 you should consider filing a tax whistleblower claim if your information is timely.  Contact us to discuss your case and the timeliness of your information.  You may be entitled to an award between 15-30% of the tax, penalties and interest collected by the IRS.