Foreign Tax Risks and Bringing Money Back

Indonesia just announced its intent to collect $418 million in taxes and penalties from Google. This comes on the heels of the European Union’s intent to collect $14.5 billion from Apple.

uncle-sam-wants-your-tax These events are real-life evidence of the risks international companies are willing to face in order to minimize their overall tax bill and they create support for the ideal, which would be a unified international tax policy agreed to by all the countries of the world, including the United States. Since that is not going to happen, at least not now, let’s focus on how to help the United States’ budget deficit.

The fallout from Apple and Google’s woes will help encourage United States firms to bring more profits home. Recent history suggests the government can do something to help make this happen.

In 2005, George W. Bush’s Homeland Investment Act (HIA) dramatically reduced the amount of taxes paid on repatriated funds. This act aided in bringing back into the United States roughly $300 billion dollars. Yes…. $300 billion!

I still remember the day my finance professor asked the class to identify the single most important factor influencing top level business decisions. The students’ answers included things like cost, reputation of the supplier, market analysis, etc. He just kept shaking his head rather disappointingly. Finally, he said, “the answer is tax. The one factor that most influences top level business decisions is tax.”

tax-burdenEverything I have witnessed in the ensuing thirty years of my career has confirmed the truth of my professor’s words. During elections, as I see the campaigns unfold, I hear his words in the back of my mind as candidates lay out their plans. As elections finish and government ensues, they pass and change tax law. Companies make strategic decisions based not only on current tax law but also what they perceive will happen to those laws in the future. Their objective is to pay the least amount of tax as possible, while keeping another eye on the risks of tax based decisions.

Here is the bottom line. If you want money to stay in the United States, make it advantageous to keep it there. And if it isn’t there, follow George W. Bush’s plan, and make it advantageous to bring it here.

Then, if you are really smart, take some prudent positions in the FX market and make some money with the transfer process.

Hollywood Set Builder Gets Independent Contractor Ability to Schedule C Deductions

Tax Court Movie ProductionThe Tax Court just granted Independent Contractor status to a W-2’d employee. The circumstances are very familiar to all those who have ever worked in Hollywood.

In this case, Jorge Quintanilla was a production worker who worked on approximately 150 commercials shot in Southern California over two tax years. The different productions varied from one day to a month in duration. In addition, the exact job titles varied from assignment to assignment. As is very common with Hollywood productions, producers hired the same payroll company to hire out Mr. Quintanilla and that company gave him a W-2 at the end of the year, showing him to be an employee, with regular employment taxes deducted and paid.

Mr. Quintanilla, when filing his taxes, filed stating that he was an independent contractor and he filed a Schedule C form showing self-employment along with deductions for the expenses that were necessary for him to spend in order for him to fulfill his responsibilities in building sets.

The IRS objected, stating that as an employee, he could only deduct his expenses on Schedule A, with its inherent restrictions, one of which is limiting expenses to the amount that exceeds 2% of Adjusted Gross Income.

The Tax Court looked not at the W-2 versus a 1099 (employee versus independent contractor payer forms) but to the actual relationship between Mr. Quintanilla and his “employers”. The Court considered the following factors in determining whether a worker is an employee or independent contractor:

• The degree of control exercised by the principal over the worker;
• The worker’s investment in his workplace;
• The worker’s opportunity to make a profit or suffer a loss;
• Whether the principal can discharge the worker;
• Whether the work is part of the principal’s regular business;
• The permanency of the relationship;
• The relationship the parties believed they were creating; and
• The provision of employee benefits.

In analyzing the facts, the Tax Court found that even though Mr. Quintanilla received a W-2 for his services, he was in fact an Independent Contractor and could still file a Schedule C that deducted all of his costs associated with performing his duties from the income he received.

NOTE: The “Protecting Americans from Tax Hikes” Act, enacted last month, includes a related provision on motion picture industry employment taxes. New Code Sec. 3512 provides that, for remuneration paid after 2015, motion picture payroll service companies (MPPSCs) that qualify as “motion picture project employers” can be treated as the employer of their film and television production workers for Federal employment tax purposes.

Person Doing TaxesAs a result, all remuneration paid by a motion picture project employer to a worker during a calendar year is subject to a single FICA wage base and a single FUTA wage base, without regard to the worker’s status as a common law employee of multiple clients of the motion picture project employer during the year. This will most likely mean that more and more people who may have been independent contractors before will be considered by production companies as employees as production companies seek to utilize this safe harbor.

Bottom line for these new “employees” in the entertainment industry… Just because you will now get a W-2 does not mean you are not still an Independent Contractor for income tax purposes. Check with your tax adviser. You may still be able to deduct your expenses on Schedule C!

SEC’s Investor Advisory Committee Objects to FASB Materiality Proposals

FASB SEC RULESThe Security and Exchange Commission’s (SEC) Investor Advisory Committee (IAC), in a January 21, 2016 letter to the Financial Accounting Standards Board (FASB), objected to two recent FASB proposals that would give companies more control over what does and does not get disclosed in financial statement footnotes by letting management and auditors determine materiality based on a subjective legal test rather than a mathematical percentage test.

The two proposals were issued in September 2015 as Proposed Amendments to Statement of Financial Accounting Concepts (CON) No. 2015-300, Conceptual Framework for Financial Reporting Chapter 3: Qualitative Characteristics of Useful Financial Information, and Proposed Accounting Standards Update (ASU) No. 2015-310, Notes to Financial Statements (Topic 235): Assessing Whether Disclosures Are Material. The proposals call materiality “an entity-specific aspect of relevance based on the nature or magnitude or both of the items to which the information relates in the context of an individual entity’s financial report.” Information is material “if there is a substantial likelihood that the omitted or misstated item would have been viewed by a reasonable resource provider as having significantly altered the total mix of information.”

The IAC’s concerns are that these proposals would give management too much discretion about the information investors get. They are concerned that this test could be used to give even less information than is currently required… and there are many who believe the current standard does not require enough disclosure as it is.

The FASB plans to hold a roundtable that will discuss all of its disclosure projects, including the guidance for footnote disclosures for fair value measurements, pension liabilities, and income taxes in mid-2016.

IRS Extends Employer/Insurance Company but not Individual Affordable Care Act Reporting Deadlines

Tax Forms Extensions and Due DatesThe IRS has extended the due dates for the 2015 information reporting requirements under the Affordable Care Act for insurance companies, self-insuring employers, and certain other providers of minimum essential coverage. However, no relief from personal reporting was granted, meaning that individuals may have to file their 2015 tax returns based on what information (statements, print-outs, etc.) they might have rather than officially filed and distributed forms.

In question are Form 1095-B and Form 1095-C. These forms contain key information that individuals need to determine their tax liability and/or credit under the Affordable Care Act. Prior to this IRS action, employers and others were required to make these forms available by February 1, 2016. The result would have been that around the end of January most employees would receive both a Form W2, (which they are very familiar with) plus either a Form 1095-B or a Form 1095-C. With this IRS extension, employers and other required entities do not need to make either of these two forms available until March 31, 2016. This means that individuals, unless they file late in the tax season, will have to complete their returns without this key information.

To somewhat protect such individual tax return filers, for 2015 tax year only, they can rely upon other information received from employers, insurance companies and the marketplace in order to determine their eligibility for the premium tax credit/tax penalty when filing their income tax returns. The individuals should keep such documentation (they do not send it in with their tax returns) since, if the information they use varies from the information sent to the IRS base on the forms they receive at the end of March, they may need to prove they reasonably relied on valid sources when preparing their tax returns.

If you have any concerns about your own personal situation, we urge you to seek out competent counsel.

It’s Not Too Late…Three Weeks Left to Make Tax Plans!

There are still three weeks left in 2015 and it’s not too late to reduce the amount of taxes you will owe at the end of the year. While there are still some “extender legislation” issues (last minute congress battles), such as charitable deductions for those age 70 ½ years or more and the above the line deductions for qualified higher education expenses, most everything else is set. Here is a list of things to consider.

  • Nail down losses on investments. Paper losses only look good on paper. If you don’t believe the investment will come back to life, sell and take the loss.
  • Self-employment and payroll issues. Make sure your withholding is correct. Penalties are waiting for those who do not adequately cover the amount they owe.
  • If you are 70 ½ years old, make sure you begin taking required distributions. You don’t want the 50% penalty you’ll pay if you don’t.
  • Make year-end gifts and charitable donations.

Make sure you discuss your situation with your tax planner. Happy Holidays!

The Fifth Amendment Does Not Always Apply

Miranda v. Arizona, 384 U.S. 436 (1966) helped create a generation of citizens that are very well aware of their Fifth Amendment rights against self-incrimination as it became repeated over and over in nearly every crime drama on television and movies. However, as Monday’s Supreme Court ruling continues to affirm, there are exceptions to the rule.

Following a line of reasoning that become a standard with Shapiro v. U.S., (S Ct 1948) 335 U.S. 1, which was further refined in Grosso v. U.S., (S Ct 1968) 21 AFTR 2d 55421 AFTR 2d 554, the Supreme Court has held that the government can compel production of self-incriminating documents so long as a three prong test is met: (1) the reporting or recordkeeping scheme must have an essentially regulatory purpose; (2) a person must customarily keep the records that the scheme requires him to keep; and (3) the records must have public aspects.

On Monday, the Supreme Court continued its support of this exception when it refused to hear an appeal brought by Eli and Renee Chabot, Chabot, (CA 3 7/17/2015) 116 AFTR 2d 2015-5270, cert denied 11/30/2015. The facts show that the IRS made a demand under the provisions of the Bank Secrecy Act for copies of bank statements of accounts the Chabot’s held in an HSBC branch in France. The Chabots refused to produce these statements claiming they had a Fifth Amendment right to not produce documents that could incriminate them as potential participants in illegal activities.

The Third Circuit ruled that the IRS was entitled to demand the documents by ruling that the records were essential to regulatory purposes, that they were required documents, and that they had public aspects. Similar cases in the Second, Fourth, Fifth, seventh, Ninth and Eleventh Circuits have had the same result. (in re Grand Jury Subpoena Dated Feb. 2, 2012, (CA 2 2013) 741 F.3d 339; Under Seal, (CA 4 2013) 112 AFTR 2d 2013-7316112 AFTR 2d 2013-7316; In re Grand Jury Subpoena, (CA 5 2012) 696 F.3d 428; In re Special Feb. 2011-1 Grand Jury Subpoena Dated Sept. 12, 2011, (CA 7 2012) 691 F.3d 903; In re Grand Jury Investigation M.H., (CA 9 2011) 108 AFTR 2d 2011-5880108 AFTR 2d 2011-5880; In re Grand Jury Proceedings, (CA 11 2013) 111 AFTR 2d 2013-794111 AFTR 2d 2013-794)

With the Supreme Court’s Monday ruling, this exception to the Fifth Amendment remains fully in place and enforceable. Basically, if there is a regulatory business purposes of a document, even if it would incriminate you, you will be required to turn it over to the IRS.

IRS Reminds Non-Credentialed Return Preparers of 2016 Limits On Practice

Following up on its June of 2014 announcement, the Internal Revenue Service (IRS) recently reminded non-credentialed tax returns preparers of changes that will take effect January 1, 2016. These rules affect all tax return preparers who are not Enrolled Agents, Certified Public Accountants or Attorneys (Credentialed Preparers). Credentialed Preparers are exempt since they already have annual mandatory Continuing Legal Education requirements from their licensing boards.

The program is designed to ensure that non-credentialed preparers have sufficient knowledge to adequately prepare tax return for others. It requires completion of Continuing Education courses. Those who have not completed the training by December 31, 2015 will lose the ability to assist their customers in the event something is challenged or goes wrong with a return they prepared. Even then, the ability of non-credentialed preparers to represent a customer with problems is limited.

To assist the public in determining whether the person who does their tax return will be able to assist in the future should something go wrong, the IRS will be publishing a listing, known as the Directory of Federal Tax Return Preparers with Credentials and Select Qualifications.

While we applaud the IRS for protecting the public through this procedure, thus ensuring at least a minimal ability to prepare returns and then protect customers, with other than routine tax situations, we recommend that taxpayers search out qualified Enrolled Agents, Certified Public Accountants or Attorneys to assist them with their taxation needs.These Credentialed Preparers can assist you without restriction.

The Time to Get Ready is Now!

5 things to do now for less taxesHere is an idea. Instead of waiting until April 13th, why not get ready for filing your next year’s tax return now. Doing this today and maybe make some changes today could make a significant difference on your ultimate tax bill due next April 15th.

Here are five things to do now:

1. Check your withholdings

If you have a big refund during the 2013 tax season, now is the time to consider lowering your income tax withholdings if your income and deductions will remain similar in 2014. Alternately, if you came owed a substantial sum when you fi led for 2013 taxes, you may want to consider increasing your tax withholdings.

2. Examine your information

Now is a good time to meet with your tax preparer —waiting until February of 2015 could add increased stress when you’re getting ready to file your 1040. Your tax preparer likely has time to meet with you now. Getting an appointment in April is nearly impossible. Get together and look at your tax situation and start planning ahead.

3. Get Your books and financial statements in order

If you’re doing anything beyond working, it’s time to start getting everything in order so that you aren’t rushing at the beginning of 2015. And if you’re a small business or have rental properties be sure to get prepared to issue 1099s or prepare other forms that you’ll need to complete your taxes.

4. Set aside receipts

Don’t wait until the end of the year to start thinking about deductions – be smart and start pulling together the records immediately so that they are close at hand come tax time. It’s amazing how many pieces of paper you will lose and how many thing you will forget between now and next April.

5. Spring Cleaning in the Fall

The Time to Get Ready is Now for Tax SavingsNow’s a great time to clear the clutter as the days fall shorter. Do some fall cleaning by gathering your old clothing and household items and donating it to a charitable organization before the end of the year. Be sure to get a receipt for your donation and when you prepare your taxes you can apply a ‘fair market value’ to that donation. Your generosity may be worth $25 to $35 in tax savings for every $100 of what you donated.

Need Help Doing It Now?

Wallace Associates Group is prepared to walk you through this process. The time to get ready is now. What you do between now and December 31st can have a much more significant impact on the amount you pay April 15th than anything you do January 1st or after.

Are Your “Independent Contractors” Really Employees to the IRS?

Believe it or not, some businesses have gone to great lengths to conduct business without employees, assuming that if you call a worker an “independent contractor” and you have the worker sign an Independent Contractor Agreement, that it’s all OK. It isn’t. As the author of Little Orphant Annie and The Raggedy Man, James Whitcomb Riley, is credited as saying, “When I see a bird that walks like a duck and swims like a duck and quacks like a duck, I call that bird a duck.”

Employee or Independent ContractorIf you tell a worker when and where to work, no matter what you call that worker, unless the situation fits specific exceptions, the Internal Revenue Service will call that worker an employee and it will want the required payroll taxes and withholding. If you happen to be one of those who has in the past called the duck something other than what it is, there is hope.

Voluntary Classification Settlement Program

The Voluntary Classification Settlement Program allows many businesses, tax-exempt organizations, and government entities that currently treat their workers, or a class or group of workers, as non-employees or independent contractors, to prospectively reclassify workers as employees under generous settlement terms. As the title clearly points out, participation in this program is voluntary, but by participating you will escape the fines and penalties that would otherwise be assessed if the Internal Revenue Service finds it on their own and forces you to do it.

Who Can Participate?

In order to participate, the taxpayer must meet the following requirements:

  1. They must have consistently treated the workers in the past as non-employees;
  2. They must have filed all required 1099 forms for the workers for the previous three years;
  3. They must not be currently under audit for employment taxes by IRS; and
  4. They must not be currently under audit by the federal Department of Labor or a state agency with respect to the classification of these workers.

What is Required?

Interested taxpayers apply for participation in the program by filing Form 8952, Application for Voluntary Classification Settlement Program. Taxpayers accepted into the program will pay an amount effectively equaling just over 1% of the wages paid to the reclassified workers for the past year.

Why Not Wait for the IRS to Find It?

Taxpayers who are accepted into the program are basically given what amounts to amnesty for their past deeds. Those accepted will not be audited for prior years on payroll taxes related to the workers they voluntarily reclassify.

Now is a Good Time to Take a Good Look at How You Classify your Workers

IRS examination employee classificationThe Affordable Care Act, common known as “Obama Care”, adds additional provisions on employers starting next year. The Internal Revenue Service will be looking for taxpayers trying to get out of these provisions, so classification of workers as independent contractors will be under the microscope like never before. If you’ve got anything to hide, now is the time to voluntarily give yourself up. It will cost you a lot less than it will if the IRS discovers it on their own.

We Can Help

Wallace Associates Group is here to help you ensure your worker classifications are correct and we can help you fix any past problems you might have.

Much Ado About Nothing

It Must Be Election Time Again

Money and FlagOn Tuesday, Democrats in the United States Congress introduced legislation that would deny government contracts to corporations that move their tax domiciles abroad. Last week, President Obama called into question the loyalty and patriotism of corporations that have or are considering what is known as an “inversion”. Reading the headlines and listening to the sound bites would lead one to believe there is an immediate danger that requires drastic action. As with most election rhetoric, it has much ado about nothing.

What is an Inversion?

Simply put, an inversion is where a new corporation is established somewhere and then an existing corporation merges into or becomes a subsidiary of the new corporation. The new corporation takes on all the business and assets of the existing corporation but with a new, legal domicile. There is nothing illegal about such a transaction and it is commonly done for a variety of legitimate business reasons.

So… What is the Problem?

The United States has one of the world’s most aggressive tax regimes. United States based companies pay income tax on earnings from all over the world, while other countries only tax earning from within their own country. If a company inverts to a foreign domicile it will only pay United States taxes on its United States derived income, not on its world-wide income.

How Big a Problem is it?

Over the past 32 years, 52 United States corporations have completed inversions.


If the Democrats really believe inversions are a problem, they should look at fixing the cause, not the symptom. Making legislation to punish companies for doing something that is completely legal is not the answer. The answer is to overhaul the United States Tax Code, especially when it comes to taxing foreign income of domestic corporations. If the Tax Code didn’t motivate corporations to move out of the United States, they wouldn’t go.