Friday, November 18, 2011

Tax Audits on the Rise as Governments Hunt for Additional Income

If your firm recently has been visited by an IRS or state tax auditor, you’re not alone. More than three-fifths of corporate tax execs surveyed in October by KPMG LLP indicated that activities stemming from federal tax disputes had increased over the past year. In addition, 37 percent indicated that the number of state tax audits had jumped.

The IRS’ own numbers, as presented in its Fiscal Year 2012 Budget Request, confirm the increase. The Service increased the number of large corporation audits by 8.1 percent, and the number of foreign corporation audits by nearly 48 percent, between fiscal year 2009 and 2010. (Individuals didn’t get off any easier, as the number of individual returns examined rose 11 percent, to 1.58 million, between fiscal 2009 and 2010.)

From the IRS’ perspective, the heightened enforcement activity is working. In fiscal year 2010, revenue from enforcement sources topped $57 billion, up 18 percent from fiscal 2009.

At the state level, dropping tax collections appear to be prompting state tax officials to heighten the audit efforts. According to a March 2011 report from the U.S. Census Bureau, “State Government Tax Collections Summary Report: 2010,” the amount of money collected through taxes declined two percent between fiscal 2009 and 2010, dropping from $718.9 to $704.6 billion. Indeed, many state budgets are dropping as well. Of 32 states that had enacted 2012 budgets as of June, 2011, 24 included significant cuts, reports the Center for Budget and Policy Priorities.

The heightened audit activity is likely to continue or even intensify, the execs in the KPMG survey said. More than two-thirds expect the number of federal audits to increase, while more than half said they expected the same for state tax audits. Additionally, one-quarter of the respondents expect regulators from outside the U.S. to increase their audit efforts, as well.

Given that the focus on audit activity appears unlikely to settle down any time soon, corporate tax execs “should regularly review their accounting methods, tax returns, risk assessments, and other processes and take the time to identify the documents, people, time and resources that might be needed to handle a potential tax audit,” said Sharon Katz-Pearlman, principal-in-charge of KPMG LLP’s Tax Controversy Services practice, in a statement on the survey.

Saturday, November 12, 2011

WSJ: Special Tax Deductions for Special Education

Wall Street Journal Tax Report, Special Tax Deductions for Special Education, by Laura Saunders:
More than six million children in the U.S. fall into the "special needs" category, and their ranks are expanding. The number of those affected by one developmental disability alone—autism—grew more than 70% between 2005 and 2010.
The tax code can help—if you know where to look. There are numerous tax breaks for education, but the most important one for many special-needs students isn't an education break per se. Instead, it falls under the medical-expense category.

Tuesday, November 8, 2011

Credit Suisse tells U.S. clients it will disclose names

Nov 7 (Reuters) - Credit Suisse AG, Switzerland's second-largest bank, has begun notifying certain U.S. clients suspected of offshore tax evasion that it intends to turn over their names to the U.S. Internal Revenue Service, with the help of Swiss tax authorities. Credit Suisse's notification by letter, a copy of which was obtained on Monday by Reuters, says the handover of names and account details will take place following a recent formal request for the information by the IRS.

The move by Credit Suisse to disclose American client names and account information is the latest twist in a showdown between Switzerland and the United States over the battered tradition of Swiss bank secrecy. U.S. authorities, who suspect tens of thousands of wealthy Americans of evading billions of dollars in taxes through Swiss private banks in recent years, are conducting a widening criminal investigation into scores of Swiss banks, including Credit Suisse.

The letter, on Credit Suisse letterhead, is dated Nov. 2, comes from the bank's Zurich headquarters and is signed by two senior Credit Suisse executives. It cites a formal request made by the IRS to the Swiss Federal Tax Administration, or SFTA, via a tax treaty between the two countries.

Seeking information.  "The IRS is seeking information with regard to accounts of certain U.S. persons owned through a domiciliary company (as beneficial owners) that have been maintained with Credit Suisse AG," the letter said. It added that the recipient of the letter, whose name was redacted in the copy obtained by Reuters, fell into the category of clients sought by the IRS. Domiciliary companies are a type of shell company.

"In connection with the IRS treaty request, the SFTA has issued an order directing Credit Suisse to submit responsive account information to the SFTA," the letter said. "This order is immediately executable and Credit Suisse as an information holder has no right to appeal."

It was unclear how many U.S. clients had been sent the letter. David Walker, a spokesman for Credit Suisse, declined to comment on the matter. The letter says that the IRS request covers accounts maintained at any time over the period from Jan. 1, 2002, through Dec. 31, 2010. The letter was signed by Michel Ruffieux and Stephan Gussman, both managing directors at Credit Suisse.

Credit Suisse in July received a target letter from the U.S. Justice Department notifying it that it was the subject of a federal criminal investigation into its offshore private banking services. Switzerland is trying to craft a deal with the United States that would cover its entire banking industry of some 355 banks.
It is unclear how many American clients of Credit Suisse hold private banking accounts that have gone undeclared to U.S. tax authorities.

Two choices. The Credit Suisse letter gives the client two choices: either agree in writing to the turnover of the client's data to the Swiss tax authorities, which will then forward it to the IRS, or hire a lawyer in Switzerland and contest the process. Under U.S. law, contesting a handover requires the American client to inform the U.S. attorney general that he is doing so — a move that effectively discloses the identity of the suspected tax evader to U.S. authorities.

Switzerland has broadly interpreted its tax treaty with the United States to mean that the United States must generally already possess the names of suspected American tax evaders in order to gain further information on their Swiss bank accounts.

Switzerland recently showed signs of softening on that interpretation. In August, Swiss government officials said they would consider processing treaty requests based on "behavioral patterns," as opposed to concrete names. Many Swiss banks turned over broad statistical data, meaning behavioral patterns, for their American clients in September, following a request from the U.S. Justice Department's second in command, Assistant Attorney General James Cole, to do so.
Scott Michel, a tax lawyer with Caplin Drysdale in Washington, D.C., said that the letter could mean one of two things: either the United States was taking softer steps to bolster the thrust of its target letter to the bank, or Credit Suisse was in the process of reaching a settlement with U.S. authorities. Such a settlement, following the receipt of a target letter, would typically be a deferred-prosecution or non-prosecution agreement. He said the fact that the Swiss tax authorities had ordered Credit Suisse to provide it the data to hand over to the IRS represented "a further erosion of longstanding Swiss bank secrecy."