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Yearly Archives: 2019

Treasury Issues Final Regulations on Foreign Tax Credits

The Internal Revenue Service issued final regulations in on the Foreign Tax Credit, a long-standing tax benefit that generally allows individuals and businesses to claim a credit for income taxes paid or accrued to foreign governments in IR-2019-193.

The Tax Cuts and Jobs Act (TCJA) made major changes to the tax law, including revamping the U.S. international tax system. Specifically, several Foreign Tax Credit provisions were changed, including repeal of section 902, which allowed deemed-paid credits in connection with dividend distributions based on foreign subsidiaries’ cumulative pools of earnings and foreign taxes. TCJA also added two separate limitation categories for foreign branch income and amounts includible under the Global Intangible Low-Taxed Income (GILTI) provisions.

Additionally, the TCJA changed how taxable income is calculated for purposes of the Foreign Tax Credit limitation by disregarding certain expenses and repealing the use of the fair market value method for allocating interest expense. 

Finally, the TCJA made systemic changes to U.S. taxation of international income that impact the Foreign Tax Credit calculation. These systemic changes include the introduction of a participation exemption through a dividends received deduction for certain dividends in section 245A and the introduction of GILTI, which subjects to current U.S. taxation foreign earnings that would have been deferred under previous law, albeit at a lower tax rate and subject to extra Foreign Tax Credit restrictions. 

The IRS also issued Proposed Regulations relating to the allocation and apportionment of deductions and creditable foreign taxes, foreign tax redeterminations, availability of Foreign Tax Credits under the Transition Tax, and the application of the Foreign Tax Credit limitation to consolidated groups.

  1. These Treasury issued rules confirming that research and development expenses do not have to be allocated against foreign income. 
  2. Treasury also finalized proposed regulations, issued last year, that allow companies to claim some increased foreign tax credits against their GILTI liability. But the final rules don't include the broader exclusions advocated by companies that said the interaction between the foreign tax credit limitations and GILTI was an unexpected consequence not intended by Congress.
  3. Foreign tax credit limitations were of little concern to companies before the 2017 passage of the TCJA, as the U.S. corporate tax rate of 35% was well over that of most foreign countries. But with a new, lower rate of 21%, as well as an expected global minimum rate of 13.5%, the foreign tax credit limitations can have a significant impact on a company's overall tax payments. 
  4. They alsoconfirm that research and development expenses do not have to be allocated against foreign income, resolving an open question that companies had been considering since the regulations were issued last year. 
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    Trends in IRS audits – Part II

    As we discussed in Trends in IRS audits – Part I, the IRS’s auditing power has been greatly diminished in the past decade and according to accountinTODAY, while most taxpayers envision Internal Revenue Service audits as intrusive investigations resulting in criminal sentences. Today, nothing could be farther than the truth.

    1. Most audits are done by mail.
    2. The main issue in audits: The EITC. and
    3. An alarming amount of people do not respond to an audit 
    4. The most common IRS challenge to a return is not an audit  - The dreaded CP2000 Automated Underreporter notice is current three times more prevalent than an IRS audit. The CP2000 program utilizes IRS information returns (W-2s and 1099s) to match them against the filed return to discover discrepancies. A discrepancy may result in a CP2000 notice proposing additional tax (and possibly penalties) to the return. Most taxpayers do not realize (or care for that matter) that a CP2000 is not an audit. The CP2000 is less intrusive than an audit because the IRS is not allowed to examine the taxpayer’s books and records. However, for most taxpayers, the difference does not matter. The average amount owed for a CP2000 notice in 2018: $1,773.
    However, there is good news for taxpayers: Even the mostly automated underreporter process has been cut back due to lack of IRS resources.  
    AT-112119-Buttonow- CP2000 cases.png
    5. The IRS knows who to audit -The audit change rate was 89 percent for all taxpayer types in 2018. In fact, the audit change rate has been between 81 percent and 89 percent since 2005. When the IRS selects a return for audit, they pretty much know it will likely result in an adjustment.
    AT-112119-Buttonow- Audit Change Rates.png
    6. Field audits are rare, but expensive - In 2018, the IRS hit an all time low for the number of field audits conducted. Field audits are the most comprehensive, and are saved for complex taxpayers and situations — like businesses and tax avoidance schemes. The IRS has said that their audits have a great return on investment and reduction of audit results in large amounts lost to the U.S. Treasury.
    The numbers support the IRS. In 2018, the average amount owed in a field audit was $85,400. Luckily for taxpayers, the IRS only conducted just under a quarter of a million field audits in 2018.
    AT-112119-Buttonow- Extra tax owed on audit.png
    7. Want your business to escape audit? Be an S corp or partnership - The IRS continues to struggle to audit S corp and partnership returns. This situation is likely to get worse as the more experienced IRS business auditors continue to retire. Audit rates for S corps and partnerships are both 0.22 percent or, put another way, 1 in every 455 passthrough entities were examined in 2018. It is no wonder that the number of S corporations have increased by 38 percent from 2005 to 2018 (3.5 million in 2005 versus 4.85 million in 2018).
    AT-112119-Buttonow-Audit rates for S corps and partnerships.png
     Have a Tax Audit Problem?

    You Should Immediately Consult With
    An Experienced Tax Attorney

    Contact the Tax Lawyers at

    Marini & Associates, P.A. 

     for a FREE Tax Consultation Contact us at: or
    or Toll Free at 888-8TaxAid (888 882-9243). 

    Read more at: Tax Times blog

    G20 Celebrates End of Offshore Banking Secrecy!

    According to the OECD, on 26-27 November, the 10th Anniversary Meeting of the Global Forum on Transparency and Exchange of Information for Tax Purposes (the Global Forum) in Paris will bring together more than 500 delegates from 131 member jurisdictions for renewed discussions on efforts to advance the tax transparency agenda.
    It Has Been Ten Years Since The G20 Declared The End Of Banking Secrecy, The International Community Has Achieved Unprecedented Success In Using New Transparency Standards To Fight Offshore Tax Evasion. 
    Working through the Global Forum, 158 member jurisdictions have implemented robust standards that have prompted a tidal shift in exchange of information for tax purposes.

    At the heart of this shift are thousands of bilateral exchange relationships now in place, which have enabled more than 250 000 information exchange requests over the past decade.
    According to data in The Global Forum’s 10th anniversary report, in 2018 nearly 100 member jurisdictions automatically exchanged information on 47 million financial accounts, covering total assets of USD 4.9 trillion. In total, more than EUR 100 billion in additional tax revenue has been identified since 2009.

    A recent OECD study shows that wider exchange of information driven by the Global Forum is associated with a global reduction in foreign-owned bank deposits in international financial centres (IFC) by 24% (USD 410 billion) between 2008 and 2019. The commencement of AEOI in 2017 and 2018 is associated with an average reduction in IFC bank deposits owned by non-IFC residents of 22%.

    “The Global Forum has been a game-changer,” said OECD Secretary-General Angel Gurría. “Thanks to international co‑operation, tax authorities now have access to a huge trove of information that was previously beyond reach. Tax authorities are talking to each other and taxpayers are starting to understand that there’s nowhere left to hide. The benefits to the tax system’s fairness are enormous,” Mr Gurría said.

    Almost all Global Forum members have eliminated bank secrecy for tax purposes, with nearly 70 jurisdictions changing their laws since 2009. Almost all members either forbid bearer shares– previously a longstanding impediment to tax compliance efforts – or ensure that the owners can be identified. Since 2017, members must also ensure transparency of the beneficial owners of legal entities, so these cannot be used to conceal ownership and evade tax.
    Tax transparency is particularly important for developing countries. With support from the Global Forum, 85 developing country members have used exchange of information to strengthen their tax collection capacity. The Africa Initiative has helped African members identify over EUR 90 million in additional tax revenues in 2018, thanks to information exchanges and voluntary disclosures. To improve developing countries’ uptake of automatic exchange of financial information, the OECD-UNDP Tax Inspectors Without Borders Initiative today launched a pilot project aimed at supporting the effective use of the data.
    “There is still a lot of work ahead of us,” said Zayda Manatta, head of the Global Forum Secretariat. “Members must continue efforts to ensure full implementation of existing standards and address the tax transparency challenges of an increasingly integrated and digitalised global economy.”
    Have Unreported Income From Offshore Accounts?

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    Marini & Associates, P.A. 
     for a FREE Tax Consultation Contact us at: or
    or Toll Free at 888-8TaxAid (888 882-9243). 


    Read more at: Tax Times blog