The budget impasse has suspended audits conducted by the Internal Revenue Service (“IRS”) and cases currently being litigated before the United States Tax Court. This will undoubtedly be a huge opportunity for a number of taxpayers being audited by the IRS. Taxpayers must keep in mind that the Internal Revenue Code provides that the IRS must generally assess any internal revenue tax within a three-year period beginning with the date a tax return is filed. If the IRS fails to timely make an assessment against a taxpayer being audited, the Internal Revenue Code will forever foreclose the IRS’ ability to assess an additional tax liability against the taxpayer being audited.
Given this relatively short statute of limitations that the IRS has to assess tax liabilities against taxpayers, in certain cases, the current government shutdown can likely be used effectively as a defense in an IRS audit. For example, suppose the IRS was auditing a taxpayer’s 2010 individual income tax return just prior to the government shutdown. The due date of the 2010 tax return was April 15, 2011. This means that the IRS will likely only have until April 15, 2014 to make an additional assessment against this taxpayer. If the government shutdown were to drag on for a number of weeks or even months, it is not difficult to imagine a scenario in which the IRS would be barred from making an additional assessment against the taxpayer in our example.
Any taxpayer currently being audited by the IRS should carefully consider the statute of limitations regarding additional assessments. In certain cases, the statute of limitations may be used as a valuable bargaining tool to successfully resolving an audit.
The government shutdown may also be good news for taxpayers currently involved with litigation with the IRS. The United States Tax Court has suspending adjudicating cases during the government shutdown. Eventually, once the government shutdown ends, the Tax Court will once again begin hearing cases. However, while the government is shutdown, new cases will likely continue to be lodged with the Tax Court. Depending on the length of the shutdown, IRS counsel and the IRS Appeals division may find themselves buried in an unprecedented level of inventory. The volume of cases on the Tax Court docket may result in counsel and the appeals division offering “once in a lifetime” offers to settle cases. Offering such deals may be necessary to reduce a potentially crowded Tax Court trial calendar.
In short, any taxpayer in an audit or controversy with the IRS should carefully consider the effects of the government shutdown in their case and how the shutdown can be utilized to resolve their case favorably.
Moskowitz LLP is a tax law firm. We save financial lives by relentlessly pursuing all avenues to successfully resolve client tax matters. From controversy work and tax returns to tax opinions and criminal defense, we help individuals and small businesses understand their entire tax picture and act accordingly. We defend your personal liberty and dignity through skill, experience and an aggressive approach. Whether it’s spending time in court or working with the government, we passionately treat your case as if it were our own. We do whatever it takes, within the bounds of the law, to deliver top quality, non-judgmental representation to help you save your life’s work, resolve tax matters pending, and to thrive.
Our short article describing the tax plan that Apple (and many other smaller companies) can utilize to legally minimize their tax rate is attached below.
When Apple Inc. disclosed that it has not paid any corporate income tax over the past 4 years, it got the governments attention. Hailed before the Senate, Apple is confident in their tax position because it is legal.
Essentially, Apple games the system by aggressively manipulating the Internal Revenue Code and tax treaties to save billions of dollars in taxes. 9 Billion and counting to date. The Apple plan may work for any company whose assets can be sold anywhere in the world because nature of the business allows for forming the necessary subsidiaries in tax havens (countries that have no income tax) while still maintaining the ability to conduct computer-generated sales. For example if Apple sells an iTunes or iPad app in the United States, the sale produces federally taxable gross revenue. However if the same iTunes app is sold through an offshore haven, no federal revenue is generated for US tax purposes. Therefore, Apple is not taxed on the income generated from the sale of the iTunes or apps until it is repatriated to the US, if ever.
Apple takes advantage of the laws of Ireland. Ireland has recently enacted numerous laws to attract foreign investors. Apple uses a technique known as the "Irish-Dutch Sandwich" for tax planning reasons it is known as a sandwich because it involves more than one different countries much like Hungary, Lichtenstein, and Switzerland are used to practically eliminate capital gains taxes that foreign investors would normally be paid on capital gains to the US for gains in real property or securities.
Here, Apple successfully utilizes the "Irish-Dutch Sandwich":
Intellectual property is transferred from the U.S. corporation to a subsidiary established in Ireland. The subsidiary is managed by individuals residing in a Caribbean tax haven country such as the Cayman Islands, Nevis, Bermuda, or the British Virgin Islands. A sale is generated in Ireland, however the gross proceeds of the sale are quickly transferred to an offshore tax haven in order to avoid taxation in Ireland. Under Irish law, the company established in that jurisdiction is not taxed due to the fact that the manger resides outside of that jurisdiction (Typically a corporation is a tax resident of the country where it is incorporated. This is not the case under Irish law. Under Irish law a corporation is a tax resident where its manager resides ) Therefore an entity can incorporate and conduct business in Ireland. However if its management is located in a tax haven jurisdiction such as the ones discussed above, the corporation is considered incorporated in the tax haven jurisdiction, not Ireland.
However by virtue of the corporation maintaining its domicile in Ireland, it can utilize tax friendly agreements amongst European members. For instance, Apple next takes the sales revenues which were generated in Ireland, transferred to a non-Irish country, and finally diverted to the Netherlands. The Netherlands charges only a small tax on royalty income from the sale of iTunes or apps and since it is within the European Union, there is no tax withholding or tax between Ireland and it. It should be noted that rock groups such as the Rolling Stones and U2 have transferred sales from worldwide record sales to the Netherlands to avoid paying taxes in their home countries.
Please click here to find the supporting article regarding the effect of tax treaties and foreign investment.