IRS Weighs in on Virtual Currency

Online cryptocurrencies like bitcoin have been around a few years now and every few months they end up in the news, often when the value of one virtual currency spikes or drops.

Two days ago, the IRS issued Noticed 2014-21 which addresses how the IRS will treat virtual currency for tax purposes.  The long and short of it is that the Department of Treasury and the IRS do not treat virtual currencies like bitcoin as currency.  Instead for purposes of tax they are treated as property.  This means virtual currency is not applicable for the various sorts of tax situations that could arise, for example, from the changing relative values of Euros and US Dollars.  As property, however, the changing value of virtual currency counts as gains or losses.  Virtual currency received as compensation for employment is considered wages.  For both purposes, the fair market value in US dollars has to be calculated.  The IRS further explained that payments  made in virtual currency incur the same reporting requirements as payments made through other means. Failure to treat virtual currency transactions in accordance with the notice may leave taxpayers subject to penalties, the same failing to comply with any other tax laws.

Horowitz Law Offices represents individual and corporate taxpayers before the Internal Revenue Service, Illinois Department of Revenue, and the Chicago Board of Finance.  You are welcome to contact us at (312) 787-5533 or info@hwchicagolaw.com

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Supreme Court Rules: Severence Pay Taxable

Yesterday, the Supreme Court ruled on the case of United States v. Quality Stores.  Reversing the decision of the lower courts, the Supreme Court found that severance pay are taxable wages for FICA purposes.  The justices ruled 8-0, with Justice Kagan recusing herself from the case.

The case arose during the bankruptcy proceedings of Quality Stores, Inc. and its affiliates.  As part of the Chapter 11 proceedings, Quality Stores made severance payments to employees who were involuntarily terminated.  Quality Stores withheld taxes as required under the Federal Insurance Contributions Act (FICA).  These taxes are collected to fund Medicare and Social Security.  Later, Quality Stores sought a refund of those taxes, believing FICA did not actually apply to severance payments.  The IRS did not allow or deny the refund, so Quality Stores brought action in the Bankruptcy Court, which ruled in Quality Stores’s favor.  The District Court and the Sixth Circuit Court of Appeals upheld that decision.  The Supreme Court reversed it.

The decision is uncomplicated.  FICA defines wages as “all remuneration for employment” and the Supreme Court holds that severance payments plainly fit that standard.  They are paid in consideration for employment, thus they are subject to the tax.  The opinion further points out that within the Act’s lengthy list of exceptions, severance payments made because of retirement for disability are specifically exempted.  There would be no need for such a provision unless severance payments were generally subject to tax.

Horowitz Law Offices represents individuals and businesses before the IRS, the Illinois Department of Revenue, and the Chicago Board of Finance.  You are welcome to contact us at (312) 787-5533 or info@hwchicagolaw.com

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Madigan Proposes “Millionaire Tax” In Illinois

Yesterday, Speaker of the Illinois House of Representatives Michael Madigan proposed an amendment to the Illinois Constitution that would create a new 3% tax on incomes over $1,000,000, the revenue from which would be applied to education.  The amendment would add Section 11 to Article IX of the Constitution, the article dealing with revenue.

There was discussion last year about the possibility of trying to move Illinois to a progressive or graduated income tax structure.  Doing so would require an amendment as Section 3(a) of Article IX currently requires a flat tax for both individuals and corporations in Illinois.  The amendment currently proposed does not try to alter the existing tax rates, nor to permit a graduated tax structure, simply to add an additional tax on incomes over the $1 million threshold.  The amendment provides that “all revenue collected pursuant to this Section shall be distributed to school districts solely on a per pupil basis.”  If passed, the amendment would affect tax years beginning on or after January 1, 2014.  Proponents of the amendment say it will raise as much as $1 billion for education funding.

The unmentioned elephant in the room in all of this are the scheduled rate decreases to Illinois’s individual and corporate income tax rates.  If no further legislative action is taken, those rates will decline January 1, 2015, from 5% to 3.75% for individuals.

Horowitz Law Offices represents taxpayers before the Illinois Department of Revenue, Internal Revenue Service and the Chicago Board of Finance for a variety of tax matters.  You are welcome to contact us at (312) 787-5533 or info@hwchicagolaw.com

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The Tax Tribunal Is Here – But We’re Still Not Sure Exactly What It Looks Like

In 2012, the Illinois General Assembly passed the Illinois Independent Tax Tribunal Act of 2012 (35 ILCA 1010), the effect of which was to create a body separate from the Illinois Department of Revenue to arbitrate tax disputes between taxpayers and the Department.  Prior to the creation of the Tribunal, IDOR itself handled all such matters.

Although the act was passed in 2012, the Tribunal wasn’t slated to begin taking cases until the Summer of 2013.  From that point till the first of this year, the Tribunal was in something of a no man’s land.  Taxpayers had the choice of taking their cases out of IDOR’s Department of Administrative Hearings and transferring to the Tribunal, or remaining with IDOR.

As of January 1, 2014, the Tribunal’s rules are in full effect.  It has jurisdiction over all cases involving more than $15,000 in tax (not including interest and/or penalties).  The Tribunal also has jurisdiction in cases where there is no tax deficiency but total interest and penalties is above $15,000.

Thus far, however, the Tribunal has not heard very many cases.  It has published its rules and procedures on its website, but still it isn’t yet exactly clear how the Tribunal is going to work and, more to the point, how a case resolved with a Tribunal will differ from working through Administrative Hearings.

The chief difference is of course structural.  The old model was administration, dealing with collections and appeals agents of IDOR, while the Tribunal will function much like any other court.  This might provide opportunities to taxpayers they wouldn’t have under the old system, though nothing’s certain until we’ve got a clearer picture of just how the Tribunal is going to do business.

Horowitz Law Offices represents individual and corporate taxpayers in connection with sales and use tax audits, collection matters, and other tax concerns at the federal, state and local levels.  You are welcome to contact us at (312) 787-5533 or info@hwchicagolaw.com

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It’s Not That Easy To Avoid Sales Tax

Here in Illinois, we often hear or see advertisements from neighboring states highlighting their lower taxes.  Many of these ads talk about moving to another state for lower income tax, but there’s also ads focusing on sales tax.  The idea is pretty simple.  Take a trip across state lines and enjoy lower sales tax on your shopping.

Using a similar line of thought, you can shop online or buy from a catalog.  Many such retailers don’t have to charge sales tax because they don’t have a physical, brick and mortar presence in the state.

None of these methods, however, actually remove an Illinois taxpayer from any tax exposure.  This is because in addition to sale tax — more technically, the Retailer Occupation Tax (ROT) and the Service Occupation Tax (SOT) — Illinois also has laws for use tax.

It works like this.  If you purchase something and you use it in Illinois (and you’re an Illinois resident), as long as you paid sales tax equal to or greater than Illinois’s rate (6.25% for general merchandise, 1% on qualifying food and drugs) you don’t owe anything else to the Illinois Department of Revenue.  Importantly, it doesn’t matter if you paid that sales tax to Illinois or not.  If, however, you paid less than the Illinois rate, and you use the product in Illinois, then you owe use tax equal to the difference between the tax you paid and Illinois’s rate.

An example.  Let’s say you were on vacation in a state with a sales tax rate of 3%.  You buy something and pay the sales tax on that transaction and you bring that product back to Illinois.  By using that item in Illinois, you now owe 3.25% use tax to IDOR (6.25%, the Illinois rate, less the 3% you already paid).

For several years now the Illinois annual income tax return has included a line item regarding use tax and that line cannot be left blank, which might open a taxpayer to a charge of filing a false return.

Horowitz Law Offices represents taxpayers before the IRS and the Illinois Department of Revenue on a variety of tax matters including sales and use tax audits, criminal tax cases and motor vehicle tax audits.  You are welcome to contact us at (312) 787-5533 or info@hwchicagolaw.com.

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IRS Releases FATCA Amendments

Last week, the IRS and the Department of the Treasury, released a set of amendments to the final regulations to implement the Foreign Account Tax Compliance Act (FATCA).  The final regulations had been released the beginning of last year and the law is slated to go into effect beginning in July.  These recent amendments address concerns raised since the release of the final regs.

Passed in 2010 as part of the HIRE Act, FATCA aims to combat tax evasion by allowing the IRS to create agreements to work with foreign governments or financial institutions to obtain information on US depositors.  To date 22 countries have signed FATCA agreements with the US, with many others at various stages of completing agreements.  There are two models for these agreements, one in which the IRS deals with foreign governments who in turn communicate with the financial institutions in their countries, and a second where the IRS talks directly to the foreign financial institutions.  In either model the end goal is the same, gathering information on US depositors to identify tax evasion.

FATCA has received criticism and resistance since it was first passed.  Some have blamed it for the spike in US citizens renouncing their citizenship since 2010.  Some foreign financial institutions have also pushed back against the law, while others have decided no longer to accept US depositors.

Treasury officials have said they expect FATCA to be a model for future laws in other countries, for there eventually to be an established framework of information sharing among countries and financial institutions to combat tax evasion.  Earlier this month, the Organization for Economic Cooperation and Development announced new standards for the automatic, FATCA-like exchange of financial information across borders.

Augmented in their efforts by FATCA, the IRS continues an aggressive stance toward US citizens who keep money offshore to evade paying tax or who fail to report those assets.  The penalties for failing to declare foreign financial assets or evading taxes through offshore accounts are severe and can include time in prison.  Since 2009, the IRS has continued its Offshore Voluntary Disclosure Program, which allows taxpayers to “come clean” regarding previously undisclosed offshore bank accounts and other assets and to receive a reduction in penalties and to avoid criminal prosecution.

Horowitz Law Offices represents taxpayers before the IRS in connection with offshore disclosure, reporting requires (including FBARs), and for other tax concerns.  You are welcome to contact us as (312) 787-5533 or info@hwchicagolaw.com

Who Says The IRS Lacks Humor?

We have been treated over the years to memorable quotes by Yogi Berra.  Among some of the  more well known  are:  “if you come to a fork in the road, then take it” and “déjà vu all over again.”  One of his lesser known quotes is “nobody goes to that restaurant anymore because it’s too crowded.”  The IRS inadvertently treaded on that quote this week when it announced to the public: “We do not want anyone calling the IRS next week because too many people will be calling.”

The rationale is a combination of budget cuts affecting staffing IRS phones and the Federal Holiday on Monday crunching calls into four days instead of five.

Notwithstanding, the rationale, one has to admit the IRS does have a sense of humor.

Disclaimer.

IDOR Publsihes Sales Tax Rate Changes for 2014

The Illinois Department of Revenue has published a complete list of changes to sales tax rates in Illinois.  These rates went into effect January 1, 2014.  The list can be found on the Department’s website here.

These are changes to local sales tax rates, not to the sales tax rate for the entire state.  The Illinois Retailer Occupation Tax (ROT) rate remains at 6.25%.  The actual sales tax paid for a given transaction can of course be modified by the additional rates imposed by other jurisdictions, by counties or cities for example.

For more on sales tax or other tax law matters, you are welcome to contact Horowitz Law Offices at (312) 787-5533 or info@hwchicagolaw.com

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New York Amazon Tax Law Stands

Earlier this month, the Supreme Court declined to hear a case arising from a New York law passed in 2009 intended to allow that state to collect sales tax on online purchases by New York residents.  Although the current debate focuses mostly on online sales tax, the issue stretches back to the early 1990s.  Back then the focus was on catalog purchases but the same questions were in play.

The key legal issue in these cases is nexus, a term which means all the links between a particular entity (a company, for example) and a jurisdiction (say, the state of New York).  If nexus passes a certain threshold, that company is deemed to be doing business in that state and must charge sales tax on purchases made by that state’s residents.

The nexus gold standard, set in a 1992 Supreme Court decision, is a physical, brick and mortar presence in the state.  When it comes to retailers without a physical presence in a state, however, things get fuzzier.

The New York law proposed to broaden the definition of nexus to include affiliate agreements a company had with New York residents.  So if Amazon, for example, had affiliate agreements with bloggers in New York, that would create sufficient nexus for Amazon to have to collect sales tax from purchases made by New York residents.

The Supreme Court decision this month means the earlier decision of the New York Appellate Court, which upheld the law, will stand.  Interestingly, a similar law passed in Illinois was overturned by its Supreme Court.   Several other states have passed similar laws or made or other attempts to increase their ability to tax online retailers.  Some in Congress, such as Illinois senator Dick Durbin, have proposed national efforts to allow all states to collect sales tax from out of state retailers (online or otherwise).

For more on sales tax, use tax, or other tax law concerns, you are welcome to contact Horowitz Law Offices at 312-787-5533 or info@hwchicagolaw.com

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Swiss Banks Offer Up Their U.S. Depositors and Employees To Save Themselves

A critical deadline is coming up for Swiss banks on December 31st.  Under agreements put in place last summer, the IRS has implemented a bank version of its offshore voluntary disclosure programs (OVDP /OVDI) that have been in place for individuals since 2009.

The programs offered to these Swiss banks may have serious ramifications for their depositors.  These programs provide for the banks to obtain non-prosecution agreements from the IRS.  Banks may also seek non-target letters.  What’s perhaps most important is what these agreements do not include.  They provide protection only for the banks, not for any of their depositors.

Part of the requirements for a Swiss bank to obtain one or more of these agreements is a for the Swiss bank to offer up (“hand over”) information regarding its U.S. depositors and its employees and agents.  In some if not many cases, this information  will provide the IRS with a road map of how Swiss bank employees and agents may have advised U.S. depositors to commit criminal violations of the Internal Revenue Code.  It also provides a quite literal road map to the front door of U.S. depositors who may have not disclosed their foreign offshore accounts and or failed to report income from those accounts.

In our practice we are aware of stepped up pressure by certain Swiss banks to encourage their U.S. account holders to enter into the IRS Offshore Voluntary Disclosure Program.  Examining the details of the IRS Non-Prosecution Agreements may provide the motivation for this.   One of the requirements s of the program is for the Swiss bank to pay penalties for its potentially criminal actions.  One way for the Swiss banks to reduce the amount of the penalties is to show substantial efforts to encourage U.S. depositors to enter into the IRS disclosure (OVDP) initiative.  Moreover the first deadline for submitting an application for a Non-Prosecution Agreement is December 31, 2013 thereby providing a possible reason for Swiss banks to ramp up pressure on its U.S. Offshore Account Holders.

Horowitz Law Offices represents U. S. taxpayers who maintain foreign offshore bank accounts.  You are welcome to contact us at:  312 787 5533 or info@hwchicagolaw.com .

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