Archive for December 7, 2012

What’s Happening in Canada?

Death and Taxes – the only things sure in life.  But maybe it should be death and changes to sales tax.  The changes in the Canadian sales tax system over the last few years and the upcoming ones for 2013 clearly prove that point.  Many organizations are scrambling to stay in compliance particularly with so many new things in 2013.  There is the unprecedented deharmonization and return to a GST and PST system in British Columbia, as well as new harmonization in Prince Edward Island and a “quasi” further harmonization in the province of Quebec.

Staying on top of these changes can be a daunting task.  Here are some key things to keep in mind:

  • What is the transition plan?
  • What is the business risk for not implementing these changes timely?
  • Who should lead the sales tax transition project?
  • Which systems are impacted (often more than just your invoicing systems)?
  • Who or which departments need to be involved to ensure that all systems are appropriately updated?
  • When is everything effective?
  • What are the transitional rules and when do they kick in?
  • What kind of testing needs to be done?

Some additional questions related to the “deharmonization” of BC from the HST regime on April 1, 2013 are:

  • How do the new registration and filing requirements impact our organization?
  • What’s different from what was effective prior to the harmonization and why can’t the old rules just be put in place?
  • Are there any significant legislative changes that may impact our business?

The PEI harmonization occurs April 1, 2013.  This should mimic for the most part the transition experienced for Ontario and British Columbia in 2010.  However, since each province has some leeway on certain items, organizations need to consider the potential impact of unique changes for PEI.

Quebec has announced that it is further harmonizing its provincial sales tax with the federal GST/HST effective January 1, 2013.  But, be warned.  This is not a true harmonization as Quebec is continuing to administer the QST separately. So the GST and QST must continue to be administered separately (filing, collection, payment and audit).  Therefore, much of the benefit that is usually experienced with  harmonization is lost here, i.e., one legislation and one administration.

If you would like to learn more about how to help your business navigate the ongoing changes in Canadian sales tax and/or evaluate your organization’s degree of readiness, the Sales Tax Institute will be offering a webinar on “Upcoming Changes to Canada’s Harmonization Landscape and What it Means to You” on December 12, 2012 (register here). The webinar will be presented by Christina Zurowski of Veridical Tax Advisors.

Written by | Posted in Sales/Use Tax

Becoming a Weatherman

Despite being a “taxman” for the past 22 years, I find my role in today’s economic climate making me feel more like a “weatherman” assessing a coming storm. The weatherman talks about the huge storm coming and for people to take cover and prepare for the worst. Who listens to the weatherman anyway? The storm sometimes seems so abstract that most people just cannot fathom what potential it carries, and generally believe it will hit somewhere else.

The IRS has been releasing more information about the new taxes in the Affordable Healthcare Act that will be implemented in 2013. Just like the “weatherman,” the tax professional should be reviewing their client’s situation to see if this coming storm will affect them, where, and how hard: preparedness mitigates damage, and saves resources.

The role of the tax professional has changed over the years, and the Affordable Healthcare Act just reinforces the need for your tax professional to be more focused on tax planning for immediate consequences, as well as making adjustments for coming changes in the future.

On the immediate horizon is the new 3.8% Medicare surcharge tax on net investment income for taxpayers with income over $200,000 / $250,000 (single / married filing jointly). One of the key planning hurdles was waiting for what the IRS definition of “net investment income”, which includes most passive income activities. Although this additional tax will not hit the majority of taxpayers, poor planning may make it a trap for some. One very real area is anyone considering doing a Roth Conversion (I rarely advise) after December 31, 2012, which has the potential to make lower income folks subject to the new tax by raising their adjusted gross income (AGI) above the threshold.

Higher income taxpayers will be subject to an additional 0.9% Medicare tax on their wage income over $200,000. If their AGI surpasses the thresholds above, their net investment income will be subject to the 3.8% described previously, and will subject interest, dividend, capital gains, royalties, rental income, as well as any other passive activity income to the additional tax.

The clairvoyant tax planner may also see many other changes on the horizon that taxpayers should mitigate. My senses tell me that we will see fringe benefits like employer-paid healthcare became taxable in the future, as these tax-free benefits become a larger portion of employee compensation. There will also be a coming debate on taxation between those that pay for insurance after-tax from government exchanges versus those that get it from their employer tax-free. The haven of the Subchapter S Corporation will likely end, or be modified so that all income is subject to self-employment tax. As personal tax rates climb, and both political parties talk about reducing corporate rates, partnerships and S Corporation may find the traditional C-Corporation more advantageous. Moreover, if conditions continue to align, it may even challenge the taboo of individual taxpayers holding their rental real estate (passive activity) in a corporation (active trade), which is generally frowned upon because it makes it difficult to refinance property and take tax-free distributions.

Yes, tax planning is the future emphasis on the tax professional. I hope that we do better than the weatherman, who only gets it right 50% of the time. At this point though, with most taxpayers experiencing declining wages and less disposable income, tax planning may be low-hanging fruit to put more dollars back into the taxpayer pocket.

Taxpayers should find an experienced Enrolled Agent in their area that focuses on tax planning and taxpayer representation. Enrolled Agents are the only federally licensed tax professionals with unlimited rights to practice before the IRS and focus solely on taxation. Attorneys and CPAs are licensed to practice by their state only, while Enrolled Agents are licensed in all 50 states.

Written by | Posted in Federal • Individual • Tax Policy

Switzerland Agrees to US FATCA Implementation!

Switzerland has agreed to comply with U.S. disclosure rules on offshore accounts controlled by Americans set for 2014, Swiss president Eveline Widmer-Schlumpf said on Tuesday.

“We have initialled the agreement,” Widmer-Schlumpf said in parliament in response to questions from lawmakers, without providing further details.

The agreement, which will come up for final government approval in January, would reconcile Swiss secrecy rules with U.S. disclosure demands under the Foreign Account Tax Compliance Act (FATCA) enacted in 2010.

The act requires foreign financial institutions to tell the U.S. Internal Revenue Service about Americans’ offshore accounts worth more than $50,000.

Widmer-Schlumpf denied a link between initial agreement on FATCA and separate, ongoing discussions aimed at ending U.S. probes into 11 banks suspected of helping clients dodge U.S. taxes with offshore bank accounts.

Are you a US Person with UNREPORTED INCOME from a Foreign Bank Account???

Have FATCA Problems???

Written by | Posted in TaxConnections

IRS – New Program Targets Underreporting by Form 1099-K Taxpayers

The IRS launched a New Compliance Program targeting the underreporting of income by Merchant taxpayers who receive Form 1099-K information returns from credit card companies and third-party transaction networks.

If you receive a letter or notice from the IRS, it will explain the reasons for the correspondence (Audit) and provide instructions. The notice you receive covers a very specific issue about your account or tax return.

Generally, the IRS will send a notice if it believes you owe additional tax or if there is a question about your tax return.

If you received one or more of these letters and notices because you may have underreported your gross receipts. This is based on your tax return and Form(s) 1099-K, Payment/Merchant Cards and Third Party Network Transactions that show an unusually high portion of receipts from card payments and other Form 1099-K reportable transactions.

It is very important that you respond to the IRS!

Here are some tips to help you in addressing the inquiry.

– Read the notice thoroughly and complete any worksheets.

– Gather your tax records including the 1099-Ks that you have received and determine if you agree with the notice about the underreporting of gross receipts.

– Consult your Tax Professional for Assistance.

– Consult your Tax Professional for Assistance.

– Consult your Tax Professional for Assistance.

The IRS uses the information reported from third parties to ensure individuals and businesses meet their tax obligations. The IRS is integrating the new information supplied on the Form 1099-K into a variety of areas, including its compliance efforts, to ensure fairness and address non-compliance.

All 1099-K activities respect taxpayer rights and provide opportunities for taxpayers and Tax Practitioners to offer explanations or corrections, if they receive a notice or audit related to this effort.

The program involves letters and notices going out to taxpayers who may have underreported their gross receipts.

The IRS posted four different letters on its website.

  1. IRS Letter 5035: Notification of Possible Income Reporting
  2. IRS Letter 5036:      Notification of Possible Income Reporting
  3. IRS Letter 5039:      Notification of Possible Income Reporting
  4. IRS Letter 5043:      Notification of Possible Income Reporting

The letters then require different responses. One letter requests that the information be reviewed and IRS be notified if there are inaccuracies and/or a request to complete a Form 14420, Verification of Income.

Another letter asks the taxpayers to make sure they are fully reporting receipts from all sources, including card, cash, checks, and other sources. This letter also warns that failing to fully account for all income may result in further enforcement action, which may carry additional penalties.

Received one of these IRS Letters?

Written by | Posted in TaxConnections

IRS Treatment of ‘Traders’ and ‘Investors’

While many individual taxpayers claim to be traders in securities as compared to investors, in Henricus C. van der Lee, et ux. v. Commissioner TC Memo 2011-234 we learn in my humble opinion that the facts and circumstances of each and every specific taxpayer’s operation must be reviewed to make a proper determination in these regards. The bottom line is though as best I can tell if you want to be considered a ‘trader of securities’ you must at the very least be able to:

1. show that your activity is for the purposes of profiting from market fluctuation rather than appreciation in underlying investment securities

2. have frequent and regular transactions and

3. elect to use the mark-to-market method of accounting under §475(f).

In Henricus the taxpayer tried to avoid the capital loss treatment of stock transactions due to the $3,000 ceiling on capital losses under §1211(b) as investors in securities cannot treat their losses on the sale of securities in any other way. As an aside ‘Dealers’ in securities are exempt from these rules due to the nature of their business as ‘Securities’ are treated like inventory. ‘Traders’ or those who buy and sell stock on a regular basis to profit from the short-term market fluctuations, are subject to the $3,000 capital loss limit unless they elect to use the mark-to-market method of accounting under §475(f).

Regardless of whether the mark-to-market election is made, traders are allowed to deduct their investment expenses as business expenses on Schedule C under §212. However the ‘trader’ has the burden of proof that these expenditures are ordinary and necessary in the production or collection of income.

In the case of Mr. Van Der Lee the main area of dispute was his trading activity. The IRS reclassified his loss on stock trades as capital losses and disallowed the claimed business expenses because the filed tax return did not have a mark-to-market election under §475(f) attached. The Tax Court considered Mr. Van Der Lee’s intent, nature of derived income, as well as frequency, extent and regularity of the securities transactions. In 2002 148 trades were processed. Of these 35 were sales of shares acquired before 2002. Also not a single security was bought and sold on the same day, a purported norm of the ‘trading’ community. As such it was determined that the potential for profit in these sales was based on the general expectation of market appreciation rather than market fluctuation.

The Tax Court agreed with the IRS that Mr. van der Lee was not a trader, but rather an investor in securities in 2002. The loss of $1,388,327 reclassified by the Service as a capital loss was appropriate and as such only $3,000 per year is available to offset ordinary income under §1211(b).

To add insult to injury the legal, travel and meal expenses were not substantiated sufficiently with no specific business purpose stated and as such were disallowed. Additionally the home office expenses claimed were disallowed under §280A because investing in securities is not a trade or business. The net result of the Court’s findings was a complete dis-allowance of all expenses.

Written by | Posted in Federal • Individual • North America

U.S. companies feel the heat of the European Tax Man

US-headquartered online service providers like Amazon, Apple and Google are having a hard time these days in Europe. There are political hearings going on in the UK, the European Commission is unhappy with the reduced VAT rate on e-books that Luxembourg allows and now France has raised tax issues as well. It is rare that US brands generated so many headlines.

Even brick-and-mortar multinational Starbucks is being scrutinized in the UK and elsewhere.

The reason is obvious: economic times are hard, tax revenues are down and U.S. company trumpet the profits realized in Europe to their shareholders. Tax authorities are then raising red flags when the tax returns show losses – US companies profit, and don’t pay their fair share of taxes!

The gap is not only in the difference between tax accounting and financial reporting (carry-forward of past losses significantly reduce profits for tax for years to come), but also in how US companies deal with their public and shareholder relations. Again, transparency is key to keeping shareholders, the public and the tax man happy.

Nevertheless, now is a good time for US-based retailers of e-services to regroup and contemplate their European business operations!

In what may be Europe’s first such effort, President Francois Hollande’s government says it will look into changing laws next year that will block the ability of online companies to pay levies on French earnings in European countries with lower tax rates. The government is also weighing options for common European value-added taxes.

French politicians, like their European counterparts, have stepped up efforts to go after Internet giants who they say collectively avoid paying hundreds of millions of euros in value-added and corporate taxes using loopholes in European Union laws and different tax regimes across the region.

Google Joins Apple in Drawing French Tax Collectors’ Indignation – Bloomberg.

Days after a U.K. parliamentary committee accused Amazon U.K.’s representative of “hiding” company sales numbers, the same committee publishes the firm’s confidential figures.

http://www.zdnet.com/amazon-confidential-sales-figures-outed-by-u-k-parliament-7000007951/

Written by | Posted in Corporate • Europe, Middle East • Indirect Tax • International
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