Prose by Tax Pros - Another Article by Hale E. Sheppard

U.S. taxpayers living, investing or doing business abroad often form corporations in the local country for legitimate reasons. The problem is not establishing the corporations, but rather maintaining full compliance with the IRS thereafter.  This article explains Form 5471 filing duties, stringent standards applied by the IRS and courts, obscure manners in which Form 5471 violations extend assessment-periods, places where taxpayers can and cannot dispute penalties, and a recent Tax Court case, Kelly v. Commissioner, which features several of the key issues.

The IRS believes that partnerships that engage in SCETs are claiming excessive tax deductions. The partnerships, on the other hand, point to congressional support for over 50 years, large amounts of pre-donation due diligence, full disclosure to the IRS, and reliance on a long list of experts. The two sides simply disagree, which is fine. What is not okay, though, is that in attacking SCETs, the IRS is utilizing extraordinary tactics that might negatively affect all taxpayers. The article suggests that those concerned about taxpayer rights, separation of powers, environmental protection and other large-scale matters might question whether numerous “wrongs” by the IRS are achieving a “right.”

To have success against the IRS, taxpayers must understand substantive tax law and procedure. Too many are clueless about the latter, which ultimately causes their downfall. This article analyzes a recent Tax Court case, Crandall v. Commissioner, using it as a springboard for learning important lessons about the effect of Closing Agreements with the IRS, unique steps in rectifying international tax issues, and procedural questions that often arise.

Panicked people do not think clearly, and this applies to taxpayers facing large IRS liabilities. Some assume that they can escape unharmed if they can just keep the IRS at bay until they die or if they simply move their assets abroad. These theories sound good, but they are wrong because the IRS and courts have many tools for pursuing tax debts from parties related to deceased taxpayers and from those who make a run for it. This article explains international obligations that trigger liabilities, recent cases where the IRS pursued surviving spouses, executors, trustees, and fiduciaries, and the use of Repatriation Orders over time.

Getting audited by the IRS is bad enough, but having the IRS tell friends, colleagues, employers, clients and others about it can be worse. Unfortunately, the IRS does this on a regular basis through a process called making third party contacts (“TPCs”). Taxpayers often lack knowledge about TPCs, mandatory warnings, exceptions to general notice requirements, opportunities to supply data to the IRS to prevent TPCs, and various legal procedures for retrieving details about TPCs. This article addresses these critical points.

Globalization is triggering more tax disputes with the IRS, and winning such clashes requires knowledge of both substantive international tax law and complicated procedures.

The IRS continues to challenge partnerships that donate conservation easements, implementing extreme enforcement techniques as part of the process. As this article explains, the newest tactic is depriving partnerships of their general right to seek reconsideration by the Independent Office of Appeals before engaging in long, expensive, complicated tax litigation. To maximize their chances of prevailing against the IRS, taxpayers must remain hyperaware of the evolving enforcement tools.

Substance is important, but procedure is often king when it comes to disputes with the IRS. This is what taxpayers facing large penalties for not reporting foreign accounts have discovered. FBAR duties are not contained in the tax code, yet the quintessential tax agency, the IRS, audits potential violations and asserts penalties. Such disconnect has sparked a number of questions, most of which center on whether FBAR penalties can be treated as a “tax” for certain purposes. This article examines origins of the FBAR, delegations of power, key tax provisions, and four noteworthy cases providing guidance on how, when, and where to fight FBAR penalties.

The Coronavirus revealed several important things, one of which is how much people crave certainty. Aggressive enforcement actions by the IRS have increased insecurity for many taxpayers, particularly partnerships that donated conservation easements. Seeking certainty, some partnerships obtained tax insurance, and the IRS began attacking in three ways. This article analyzes the attacks and the challenges the IRS faces.

Failure by foreign corporations to file Forms 1120-F (U.S. Income Tax Return of a Foreign Corporation) triggers extreme problems. Specifically, in addition to asserting normal penalties for late filing, late payment, and late information returns, the IRS disallows business-related deductions and credits that corporations normally could claim. Thus, the IRS imposes taxes on gross income, instead of net income. This outcome is particularly harsh when one considers that many fledgling businesses operate a net loss for several years. This article explains U.S. filing duties of foreign corporations, the result in a recent Tax Court case, Adams Challenge v. Commissioner, and solutions still available to non-compliant foreign corporations.