Title: Corporate Tax Penalties AGA INGA Taxation Committee Meeting Williamsburg, Virginia
1Corporate Tax PenaltiesAGA INGA
Taxation Committee MeetingWilliamsburg, Virginia
- David Jacobson
- June 29, 2005
2Introduction
- Legal Issues
- Criminal penalties
- Civil penalties
- Interest is not considered a penalty
3Introduction
- Non Legal Issues
- Acceptable level of risk tolerance
- Cost to defend
- Monetary cost
- Staffing cost
- Embarrassment factor
4Criminal Penalties
- Under penalties of perjury, I declare that I
have examined this return, including accompanying
schedules and statements, - and to the best of my knowledge and belief,
it is true, correct, - and complete.
5Criminal Penalties
- Any person who willfully makes and
subscribes any returnwhich contains or is
verified by a written declaration that it is made
under the penalties of perjury, and which he
does not believe to be true - and correct as to every material
matter...shall be guilty of a felony - and, upon conviction thereof, shall be fined
not more than 100,000 (500,000 in the case of a
corporation), or imprisoned not more - than 3 years, or both, together with the
costs of prosecution. - IRC 7206
6Criminal Penalties
- Where applied
- Embezzlement
- Money laundering
- Closely held businesses with owner running
personal - expenses through businesses.
7Civil Penalties
- Consequences
- Cash
- Non-deductible
- Regulatory consequences
- SEC disclosure
- Strategic implications for tax audit
- Relations with IRS team
- Disallowance of interest deduction
8Civil Penalties
- Types of Civil Penalties
- Failure to disclose
- You dont have to be wrong
- Understatement of taxable income
- You have to be wrong but not necessarily owe tax
- Underpayment of tax
- You have to be wrong and owe tax
9Civil Penalties
- Range of Amounts
- Flat rate of 50,000 - 200,000 per undisclosed
item - 20 to 30 of hypothetical tax on understatement
of taxable income - 20 to 40 of underpayment
10Listed Transactions
- What Are They?
- They are transactions identified by the IRS as
transactions not having the tax effects desired
by its backers and explicitly classified by the
IRS as a Listed Transaction. - Announced by the IRS through the issuance of a
Notice or a Revenue Ruling.
11Listed Transactions
- Why are Listed Transactions Important?
- They are transactions you know you are going to
have to fight - with the IRS in order to sustain and may very
well have to litigate. - Many of the reporting and disclosure requirements
for listed transactions are more stringent and
the civil penalties higher. - Some penalties increase if they relate to a
Listed Transaction.
12Listed Transactions
- Substantially Similar Transactions
- Listed Transactions include not only the
transactions explicitly identified by the IRS
but also substantially similar transactions. - Can be very difficult to evaluate particularly
when distinctions directly relate to concerns
raised by the IRS.
13Disclosure PenaltySection 6707A
- Items That Need To Be Disclosed
- Listed Transactions
- Other Reportable Transactions
- Book/tax differences over 10 million
- Loss transactions
- Confidential transactions
- Contractually protected transactions
- Short holding period transactions
14Disclosure PenaltySection 6707A
- What If You Dont?
- 50,000 per item
- 200,000 per listed transaction
- Must be disclosed in SEC filings
- Failure to disclose is subject to 200,000
penalty - Will routinely request all tax accrual work papers
15Disclosure PenaltySection 6707A
- Commissioners authority to rescind penalty
- Does not apply to listed transactions
- Rescission must promote compliance and tax
administration - Considerations
- Person must have a history of compliance
- Violation is due to an unintentional mistake of
fact - Imposing the penalty would be against equity and
good conscience - Commissioners decision may not be reviewed in
any judicial proceeding
16Income Understatement PenaltySection 6662A
- Items To Which Penalty Applies
- Listed Transactions
- Other Reportable Transactions - if a
significant purpose of the transaction was tax
avoidance - Book/tax differences over 10 million
- Loss transactions
- Confidential transactions
- Contractually protected transactions
- Short holding period transactions
17Income Understatement PenaltySection 6662A
- Amount of penalties
- If disclosed
- Amount of item X 35 X 20
- If not disclosed
- Amount of item X 35 X 30
- SEC disclosure of penalty
- Interest due is non-deductible
18Underpayment PenaltiesSection 6662
- Substantial Understatement
- Applies to understatements of income tax that
exceed the greater of 10 of correct tax or
10,000. - Penalty can be avoided if --
- There is substantial authority for position taken
on return or - The position on the return is adequately disclosed
19Underpayment PenaltiesSection 6662
- Negligence or Disregard of Rules or Regulations
- A return position that is reasonable is not
negligent - Reasonable standard is a higher standard than
merely an arguable position - Adequate disclosure does not avoid a negligence
penalty - A disregard of the rules need not be intentional
if it is careless
20Underpayment PenaltiesSection 6662
- Substantial Valuation Misstatement (SVM)
- An SVM occurs when property is overvalued by 200
or more - Gross Valuation Misstatement (GVM)
- An GVM occurs when property is overvalued by 400
or more
21Underpayment PenaltiesSection 6662
- Amount of Penalty
- Generally 20 of underpayment related to
penalized event - In the case of a Gross Valuation Misstatement the
penalty is 40 - Exception for Reasonable Cause
- Taxpayer acted in good faith
22Tax Opinions
- Where can they help?
- Can help to establish application of the
reasonable cause exception - Taxpayers reliance on opinion must itself be
reasonable
23QUESTIONS?
Dave Jacobson
djacobson_at_thelenreid.com