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Think You Are Out Of Trouble, Think Again…a continuing article.

By Michael B. Nelson, Esq. - Email Editor

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Date : December 10, 2009

If you are an individual with U.S. Citizenship, Green Card status or are a tax Resident of the United States, you are being focused upon by the U.S. Government, specifically the U.S. Treasury, to contribute yet again to help lower the ever increasing National Debt that is being utilized to finance the failing business practices of large corporations, loan funds to banks who invest the monies for bank profit rather than restructuring personal residential loans currently in default, allowing corporate greed to continue and grow, as well as not monitoring executive bonuses that now top any historic level. Legislation has been promised to stop or provide guidelines, but none are on the horizon. The Executive Branch of our government needs more money to spend, but printing more money and increasing bond sales to foreign individuals and countries are not enough. The task of finding more money has fallen at the door of the U.S. Treasury to go to the American public and find that much-needed revenue.

It gets even worse now, because many American are unemployed or under the threshold of income to file and pay taxes. Those of us who are fortunate enough to have taxable income can expect to shoulder more of the tax burden to make up for those of us who do not make enough to pay any tax, including corporations. Corporate tax rates can climb higher and higher, but what will the tax rate be applied against? Many large corporations are seeking protection in bankruptcy, insolvency or just going out of business entirely; you only pay tax when you have taxable income. If a corporation has a loss for the year, then there is no income to tax. Therefore, it stands to reason that the taxpaying individuals will bear this burden as well.

Robert Frank of the Wall Street Journal stated in his article of November 23, 2009 that:

“…there are only so many times you can go back to the well of wealth to bail out the country. Towns and cities are doing it. Many states are doing it. The federal government is planning to do it through multiple increases, from the increase in the top income tax rate to a health-care surtax and expected restoration of the estate tax to its pre-Bush levels. And without economic growth or employment, the mythical goldmine of lavish salaries and incomes just won’t exist. Also, it seems the government’s definition of wealthy is being defined down, again. First there were “millionaire taxes” on those earning $500,000 (and then $250,000), then the health-care surtax on the rich that kicked in on joint incomes of $350,000 and individual incomes of $280,000. This even as $200,000 just doesn’t buy the lifestyle you might think in some cities.”

The Internal Revenue Service noted the need to seek more sources of revenue for the U.S. Government and has produced a document acknowledging the needs as well as addressing how best to generate tax revenues for the American government. The following was addressed by the Service:

Accelerating globalization U.S.-based corporations more than tripled their foreign profits between 1994 and 2004, from $89 billion to $298 billion, with 58 percent of that profit earned in low-tax or no-tax jurisdictions. Since 1990, the number of multinational corporations worldwide has grown by 20 times to 63,000. U.S. businesses now make wide use of offshoring and outsourcing – often through sophisticated and complex transfer pricing systems. The percentage of Americans’ income originating from foreign sources doubled between 2001 and 2006. Personal income tax returns also show the impact of globalization. The number of individual Americans paying taxes in another country increased by 30 percent between 2003 and 2005. As taxpayers expand into global markets, we must keep up with their ever-diversifying needs – assessing our international presence and developing the skills and relationships needed to ensure that taxpayers with income abroad pay the taxes they owe.

As you may know, we are on a system of self-assessment. We determine and assess our reportable taxable income, file our own tax return and pay that tax liability if one is indicated on the tax return. As we assess ourselves, generally the lower taxable income we have then the simpler the tax return becomes. We now have EZ forms to help us and online e-filing to expedite reporting and payment. However, if we have large incomes and/or complicated tax returns, then we tend to retain tax professionals to help us determine what our reportable taxable income will be on the tax return as well as helping us prepare the tax return. Personally, the tax year 2008 is still ongoing, with the deadline for Americans living and working overseas to file on or before December 15, 2009 and some Americans filing period extended legally into 2010 for tax year 2008. These Expatriate Tax Returns (Americans working and living overseas) are truly complex with the average number of pages in each return exceeding more than 50 and the largest well over 100 pages, which gives rise to clerical and mathematical errors that now subject the individual and the tax professionals to harsh penalties and sanctions by the IRS.

The cost of preparing these tax returns is ever increasing as the cost of doing business as a tax professional soars with more mal-practice insurance premiums and higher risks of preparing these returns inaccurately in view of the ever mushrooming preparer penalties and the lessening of the attorney/client privilege and confidential communication. This, however, will be a subject for another time. The Service did note that between 1993 and 2007, the share of taxpayers who prepared their own returns without a paid preparer or software fell by more than two-thirds, from 41 percent to 13 percent and the utilization of paid preparers rose from 51 percent to 60 percent, and use of software soared from 8 percent to 27 percent. These trends show no signs of abating. Between 400,000 and 500,000 tax professionals – including Enrolled Agents, certified public accountants, and attorneys – now operate under the professional guidelines known as Circular 230. There are a number of penalties being asserted by the Service against tax preparers which can include financial loss, loss of license to practice before the Service as well as criminal penalties. The penalties are vigorously enforced and the penalties are substantial enough to ensure that tax professionals are vigilant and cautious in preparing tax returns. More now that ever the tax professionals are held to a standard of almost being an auditor for the IRS in the collection of evidence and proof for income, expense and deduction claimed by their clientele on the tax returns. The erosion of attorney/client confidentiality and CPA/client confidentiality shocks the conscious of most individuals and their tax professionals.

Similar to the SEC’s efforts to keep pace with the ever changing securities investment models of Wall Street, the IRS acknowledges that business models of the future will be quite different. One characteristic of these future models, as stated by the IRS, will be frustrating the IRS’s efforts to have interactions with business taxpayers.

Already we are seeing a rapid rise in “pass-through” companies, which pass their profits through to their members or shareholders, who then pay the taxes on their individual returns. These companies include sole proprietorships, partnerships, S-corporations and LLCs. The growth rate of these business models is outpacing that of the traditional C-corporation, which, in contrast, pays corporate rather than individual taxes. Between 1998 and 2007, the annual growth rate for S-corporations and partnerships was 5.9 and 5.2 percent respectively, while C-corporations grew at just over 1 percent. These companies are not necessarily small businesses. Pass-through entities make up 64 percent of all large and mid-size businesses in the tax system. The IRS must maintain its effort to help taxpayers understand their obligations, continue its focus on identifying and closing tax schemes that develop with these new models, and ensure that taxpayers whose business models are served by different divisions of IRS receive seamless service. IRS Strategic Plan 2009–2013

CONCLUSION:

For those of us with incomes that rise to the level of “Wealthy” due to the re-definition of what is wealthy income and a lowering of its income threshold, many Americans will be concerned enough to have a renewed look at their current income tax strategies, asset protection planning and estate planning while their tax professionals try to keep abreast of the IRS’s new efforts to find additional taxing sources, increased assessments of massive penalties and the use of dragnets to find new information from Voluntary Disclosure participants for more enforcement actions against entities, individuals and tax professionals.

Feel free to email us at info@trustmakers.com or call to discuss your options.

Taking Action If you have a company, foundation or trust outside the US borders and want to know if you have correctly set it up for structural and/or tax purposes our advisors are now handling these cases. Please reply to info@trustmakers.com.

By John Dietz, CWPP™, CAPP™- Senior Advisor
TrustMakers.com

 

 

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