The Supreme Court declined to review the Union Carbide Corporation R&D credit case, thereby allowing the earlier Tax Court ruling against Union Carbide to stand. In 2012, Union Carbide contended that the cost of supplies used during production qualified for R&D credit since the company was testing, developing and improving multiple manufacturing processes. The Tax Court disagreed, holding that raw materials purchased and used in normal production do not qualify for the credit. The Second Circuit Court of Appeals affirmed the Tax Court decision.

For companies engaged in R&D work, the case demonstrates the importance of properly classifying costs before using the respective items and costs as designated. In addition, the Tax Court opinion clarified a number of gray areas, such as affirming the use of cost accounting-based records to substantiate costs and the use of oral testimonial evidence supported by documentary evidence to support qualified expenses.

See more on Union Carbide case, Union Carbide a cautionary tale on R&D tax credits. Contact Mark Dunning at 720.227.0420 or mdunning@taxops.com.

Download our R&D white paper, What’s Your Credit Worth? 

The U.S. manufacturing industry is expected to expand this year, according to a recent survey released by manufacturing analysts MFG.com. The latest MFGWatch 2013 forecast is based on a survey of more than 8,800 North American suppliers and buyers of manufactured goods. According to the report, over half of entrepreneurs expect to increase their contract manufacturing in 2013 and almost one in three companies will be increasing exports this year. 

Tax increases in general are a major concern for manufacturers in 2013. Taking advantage of tax incentives already in place can help minimize tax obligations. One such incentive is the Domestic Production Activities Deduction (Section 199). Businesses engaged in U.S.-based manufacturing and other qualified production activities can take an “extra” tax deduction of up to 9 percent from net income. The deduction can generally be applied to manufacturing, construction of real property, engineering and architectural services (that leads to real property contruction), and film production. Only manufacturing or production activities occurring inside the United States is eligible.

Questions about Section 199 deductions? Please contact Mark Dunning at 720.227.0420 or mdunning@taxops.com.

Engaged in R&D? Download our R&D white paper, What’s Your Credit Worth? 

The top 10 issues that are most likely to trigger an audit of indirect taxes were published in Accounting Today. The list, compiled by the Tax & Accounting business of Thomson Reuters, includes the following.

1. Nexus, but no registration. 

2. In the phone book or on the Web. 

3. Issued resale certificates. 

4. Use tax auditing. 

5. Visual inspections. 

6. Whistle-blowers. 

7. Casual observation. 

8. Non-remission of use tax. 

9. High net sales. 

10. Exempt items. 

See the article at Accounting Today.

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The IRS issued its annual “Dirty Dozen” Tax Scams for 2013 highlighting the most egregious tax fraud schemes.

1. Identity theft. Topping the list is identity theft, when an individual uses personal information without permission to commit fraud or other crimes. The IRS reports that it has 3,000 people working on identify theft related cases – more than double the number in late 2011 – and has prevented the issuance of $20 billion of fraudulent refunds in 2012, including those related to identify theft. IRS enforcement led to 734 enforcement actions in January, including 298 indictments, informations, complaints and arrests. The IRS has a special section on IRS.gov dedicated to identity theft issues. See Journal of Accountancy. 

2. Phishing. The IRS notes that it does not initiate contact with taxpayers by email, text messages, or social media to request personal or financial information. If you receive a fake electronic communication from the IRS or an organization closely linked to the IRS, report it by sending the communication to phishing@irs.gov.

3. Return preparer fraud. The IRS suggests individuals check to make sure their tax preparers sign returns and enter their preparer tax identification number (PTIN). The IRS also has created a new web page to assist taxpayers. For tips about choosing a preparer, red flags, details on preparer qualifications, and information on how and when to make a complaint using Form 14157, Complaint: Tax Return Preparer, visit www.irs.gov/chooseataxpro.

4. Hiding income offshore. The IRS reports that the number of participants in the IRS’s Offshore Voluntary Disclosure Program increased to 38,000. The agency has collected $5.5 billion so far from people who participated in offshore voluntary disclosure programs since 2009. In 2012, the program was extended indefinitely. See IRS says offshore efforts top $5 billion mark; new details issued on offshore voluntary disclosure program.

5. “Free money” from the IRS and tax scams involving Social Security. Using fliers and advertisements, the IRS says “scammers prey on low income individuals and the elderly and members of church congregations with bogus promises of free money” from returns filed with little or no documentation. The IRS warns, “Intentional mistakes of this kind can result in a $5,000 penalty.”

6. Impersonation of charitable organizations. Some scam artists impersonate charities, or even claim to be working for or on behalf of the IRS, to get money or private information from taxpayers.

7. False/inflated income and expenses. Exaggerating wage or self-employment income is a common ploy by some unscrupulous preparers to inflate refundable credits, including excessive claims for the earned income tax credit claims and the fuel tax credit.

8. False Form 1099 refund claims. One scheme involves issuing a fake information return, often Form 1099-OID, Original Issue Discount, to the IRS. A refund is then claimed on a corresponding tax return.

9. Frivolous arguments. The IRS maintains a page entitled The Truth About Frivolous Tax Arguments describing some of the “unreasonable and outlandish claims” some taxpayers use to avoid paying the taxes they owe. Think Wesley Snipes, who left federal prison for house arrest at the beginning of April after serving time for being convicted of numerous tax protester arguments he proffered to avoid paying taxes.

10. Falsely claiming zero wages. In this scheme, the perpetrator files a Form 4852, Substitute Form W-2, or “corrected” Form 1099-MISC, Miscellaneous Income, to reduce or eliminate income on a legitimate information return.

11. Disguised corporate ownership: The IRS said it works with state authorities to identify third party entities by which taxpayers “underreport income, claim fictitious deductions, avoid filing tax returns, participate in listed transactions and facilitate money laundering and financial crimes.”

12. Misuse of trusts: The IRS said it has seen an increase in questionable transactions related to the use of private annuity trusts and foreign trusts to shift income and deduct personal expenses.

Read more at IRS Releases the Dirty Dozen Tax Scams for 2013.

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While the number of restatements filed by public companies fell overall in 2012, filings by some of the largest U.S. companies – such as JPMorgan Chase and others with market capitalizations exceeding $75 million – rose for a second straight year. According to the research firm Audit Analytics, the severity of the mistakes leading to restatements and the ensuing adverse consequences diminished in 2012 with respect to each of the following criteria:

·         Negative impact on earnings;

·         Average cumulative impact on earnings per restatement;

·         Percentage of restatements with no effect on income statements;

·         Average number of days restated; and

·         Average number of issues identified in restatements.

Audit Analytics report available for purchase at 2012 Financial Restatements Review.

Material weaknesses related to ASC 740, Accounting for Income Taxes, are the second leading cause of disclosure in management’s annual report on Internal Controls over Financial Reporting and restatement of financial results, according to the Wall Street Journal CFO. John Monahan is available at jmonahan@taxops.com or 720.227.0060.

Download A Closer Look at ASC 740: Accounting for Income Taxes.

Virtually every company should be aware of the Internal Revenue Services’ current capitalization policies and methods to determine compliance to current tangible property rules, commonly known as “Repair Regulations”. As the rules evolve, changes in regulatory interpretation, deadlines, and details could have implications on a company’s financial statements, accounting methods, and fixed asset accounting systems. The following is a timeline of key changes up to the latest issued in March 2013.  

August 2006. Initial proposed regulations, subsequently withdrawn.

 March 2008. Re-proposed regulations.

December 2011. The IRS issues temporary and proposed regulations affecting virtually all taxpayers that acquire, produce, or improve tangible property. Among other things, the temporary regulations clarify and expand the standards in the preexisting regulations; provide certain new bright-line tests for applying these standards; provide guidance under Code Sec. 168 regarding the accounting for, and dispositions of, property subject to that section; and amend the general asset account regulations.

March 2012. The IRS later issued guidance providing taxpayers with procedures for obtaining automatic consent to change to accounting methods provided in the temporary regulations Rev. Proc. 2012-19 and Rev. Proc. 2012-20. See our blogs, IRS examination activity suspended on repair/capitalization pending accounting method changes and Temporary Regulations for treatment of repairs and capital improvements; accounting method changes may be required.

November 2012. The IRS issued Notice 2012-73, extends the effective date for temporary and proposed rule changes, and advises taxpayers that it expects to publish final regulations in 2013 that may contain changes to the rules in the temporary regulations. The Notice stated that the final regulations would apply to tax years beginning on or after Jan. 1, 2014, but taxpayers could “opt” to apply them to tax years beginning on or after Jan. 1, 2012.

December 2012. The IRS revises the temporary regulations so that they apply to tax years beginning on or after Jan. 1, 2014, unless the taxpayer elects to apply them in tax years beginning on or after Jan. 1, 2012. Conforming changes were also made to the effective date provisions of pre-existing final regulations. See our blog, IRS repair regulations make taxpayers eligible to recover property repair and improvement expenses.

March 2013. The IRS issues examiner directives for pre-2013-audits, audits of tax years during the option period, and post-2013 audits. A week later, the IRS updates examination guidance on the repair vs. capitalization issue to extend the effective date of the tangible property temporary regulations issued in 2011 (Code Sec. 162(a) and Code Sec. 263(a)); modify examination instructions for tax years beginning on or after Jan. 1, 2012, and before Jan. 1, 2014; and restate prior examination instructions for tax years beginning before Jan. 1, 2012, and on or after Jan. 1, 2014.

We will issue an update when the final rules for repair regulations are issued later this year.

For more information about federal and state renewable energy credits, please contact Mike Abramovitz at mabramovitz@taxops.com or 720.227.0423.

The Foreign Account Tax Compliance Act (FATCA) requires all foreign financial institutions with $50,000 of any American taxpayer’s assets to report the holdings to the Internal Revenue Service, with few exceptions. Certain retirement funds, life insurance and other “low-risk” financial products held abroad are exempt from reporting account holders information to the IRS under the FATCA rules.

Companies affected by the new rules may spend more than $100 million each to comply with the law. Some firms are asking Treasury for additional time to prepare but so far, the IRS hasn’t budged. Financial institutions that refuse to report account holder’s names, addresses, account balances, dividends and interest could be effectively shut out of U.S. securities markets. The first reports are due in 2015.

Form 8938 and Foreign Financial Institution registration available at IRS FATCA Compliance. Please contact John Monahan at jmonahan@taxops.com or 720.227.0060 with questions regarding FATCA.

The Internal Revenue Service has released statistics on taxpayers filing uncertain tax positions (UTP) for the 2011 tax year. Certain corporate taxpayers are required to file Schedule UTP (Uncertain Tax Position Statement) and provide the IRS with information about tax positions that affect their U.S. federal income tax liabilities if they have assets equal to or exceeding $100 million (for 2011) and they issue or are included in audited financial statements.

Public or privately held corporations that issue or are included in audited financial statements and that file a Form 1120, Form 1120-F, Form 1120-L, or Form 1120-PC, must report their uncertain tax positions on Schedule UTP if they satisfy the total asset threshold. Under a five-year phase-in that started with the 2010 tax year, corporations that had total assets equal to or exceeding $100 million were required to file Schedule UTP. The total asset threshold was reduced to $50 million starting with 2012 tax years and will be reduced again to $10 million starting with 2014 tax years.

According to IRS UTP Filing Statistics for the 2010 tax year, the top code sections reported by UTP filers were research tax credit (Sec. 41), allocation of income and deductions among taxpayers (Sec. 482), and business expense deduction (Sec. 162). Further IRS analysis revealed that the third highest disclosure was actually capitalization (Sec. 263). On the 2010 tax returns, transfer pricing and research credits comprised 43% of all disclosed uncertain tax positions.

Please contact John Monahan at jmonahan@taxops.com or 720.227.0060 with questions regarding Schedule UTP.

• The recipient affirmatively consents to receive the Schedule K-1 in an electronic format and not withdraw that consent before the statement is furnished;
• The partnership provides a conspicuous disclosure statement that says that the partnership will furnish a paper Schedule K-1 if the recipient does not consent to receive the electronic version;
• The partnership informs the recipient of the scope and duration of the consent to receive the electronic version;
• The partnership explains how to get a paper version of the Schedule K-1 after recipient consent to an electronic version;
• The partnership explains what a recipient must do to withdraw the consent;
• The partnership must inform the recipient of the conditions under which the partnership will cease furnishing electronic statements;
• The partnership must inform the recipient of the procedures for updating contact information the partnership will need to furnish the electronic statement to the recipient; and
• The partnership must describe the hardware and software requirements needed to print and retain the Schedule K-1.

Please contact Gary Purpura at gpurpura@taxops.com or 203.307.2820 with any questions regarding partnership tax filing issues.