Service center compliance and tax return reporting: recent developments and issues
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Service center compliance and tax return reporting: recent developments and issues Service center compliance and tax return reporting: recent developments and issues Presentation Transcript

  • Compliance and reporting:recent developmentsand issues1 May 2013
  • Eighth annual domestic tax conferencePage 1Disclaimer► Ernst & Young refers to the global organization of member firms ofErnst & Young Global Limited, each of which is a separate legal entity.Ernst & Young LLP is a client-serving member firm of Ernst & Young GlobalLimited located in the US.► This presentation is ©2013 Ernst & Young LLP. All rights reserved. No part ofthis document may be reproduced, transmitted or otherwise distributed in anyform or by any means, electronic or mechanical, including by photocopying,facsimile transmission, recording, rekeying or using any information storageand retrieval system, without written permission from Ernst & Young LLP.Any reproduction, transmission or distribution of this form or any of thematerial herein is prohibited and is in violation of US and international law.Ernst & Young and its member firms expressly disclaim any liability inconnection with use of this presentation or its contents by any third party.► The views expressed by panelists in this webcast are not necessarily thoseof Ernst & Young LLP.
  • Eighth annual domestic tax conferencePage 2Circular 230 disclaimer► Any US tax advice contained herein was not intended or written to be used,and cannot be used, for the purpose of avoiding penalties that may beimposed under the Internal Revenue Code or applicable state orlocal tax law provisions.► These slides are for educational purposes only and are not intended, andshould not be relied upon, as accounting advice. View slide
  • Eighth annual domestic tax conferencePage 3Today’s presentersCarolyn BaileyEllen BergerJeff EllsworthElvin HedgpethMinde KingMike Medley View slide
  • Eighth annual domestic tax conferencePage 4Agenda► TY 2012 tax return reporting developments:► Federal► US reporting of foreign operations► IRS service center compliance issues► State► Taxing authority audits — impact on compliance and reporting► Future tax return reporting developments► Current developments in “how work gets done”► Wrap-up► Additional Q&A
  • TY 2012 tax return reportingdevelopments — federal
  • Eighth annual domestic tax conferencePage 6Form 8949► Sales and other dispositions of capital assets:► New for corporations and partnerships to report sales and exchanges ofcapital assets► Report transactions that would have been reported by corporations andpartnerships on Schedule D or Schedule D-1 in prior years► Allows IRS and taxpayer to reconcile amounts that were reported on Form 1099-Bor 1099-S (or substitute statement) with the amounts reported on the return► File with Schedule D for return including Forms 1040, 1065, 1065-B, 8865, 1120,1120S, 1120-C, 1120-F, 1120-FSC, 1120-H, 1120-IC-DISC, 1120-L, 1120-ND,1120-PC, 1120-POL, 1120-REIT, 1120-RIC, 1120-SF, and certain Forms 990-T,but not Form 1041
  • Eighth annual domestic tax conferencePage 7Other business return reporting issues► Schedule M-3 — no substantive changes this year for Form 1120 andForm 1065► No separate payment card reporting requirements for gross receipts receivedvia payment card (credit and debit cards) and third-party network paymentsfor Forms 1120, 1120-S and 1065► Principal Business Activity Codes — Forms 1120, 1065, and 1120-F —revised and updated► Form 1120, Schedule K — new questions► Form 1065, Schedule B, Schedule K-1 — new questions
  • Eighth annual domestic tax conferencePage 8Schedule UTP► Reporting threshold:► Decrease in asset threshold for reporting uncertain tax positions from assets thatequal or exceed $100m to assets that equal or exceed $50m► Reporting — no changes:► Part I — tax positions taken on 2012 return► Part II — tax positions taken in a prior tax year (2010–2011) that have not beenreported on Schedule UTP on a prior year return
  • Eighth annual domestic tax conferencePage 9Form 8886► New Q&A released by IRS providing guidance on requirements for filing acomplete Form 8886► Penalties may be imposed for failure to submit complete disclosure► Complete disclosure includes the following:► Completed according to the instructions and regulations► Describes the expected tax treatment and all potential tax benefits expectedfrom the transaction► Describes any tax return protection► Describes the transaction in sufficient detail for the IRS to be able to understandthe tax structure of the transaction and identify all parties involved
  • TY 2012 tax return reporting developments —US reporting of foreign operations
  • Eighth annual domestic tax conferencePage 11International overview► Legislative change► Impact on attributes such as E&P, foreign tax credit (FTC), relevance of allattributes not just some► Readiness and how comfortable you are with “as filed” numbers► Courts► Extraterritorial income (ETI) and the CBS case► IRS updates to international forms and changes/updates to regulations► Amendment to Reg. Section 1.861-9T and 1.861-11T► Final Regs around use of controlled corporations to avoid Section 304► Forms 5471 and 8858
  • Eighth annual domestic tax conferencePage 12Revised IRS instructions to Form 5471 —2012 tax year► Revised instructions and revised Form 5471► Extension of the constructive ownership exception to filing Form 5471 forCategory 3 and 4 filers under Treas. Reg. Section 1.6046-1(e)(4)(iii) and1.6038-2(j)(2)(i), respectively, to Category 5 filers► Code Section 6038(a)(4) gives the Secretary authority through issuing instructionsto Form 5471 to require reporting by a US person treated as a US shareholder.► The extension of the exception can only be applied to Form 5471s filed for yearsending 31 December 2012 or later since the exception is added through the Forminstructions, which apply starting with the Form 5471 revised December 2012.
  • Eighth annual domestic tax conferencePage 13Form 5471 other changes► Expansion of Schedule G► Reportable transactions:► Applies to CFCs► Need to also file Form 8886► Foreign taxes disqualified under Section 901(m) application► Section 909 — suspended taxes► Keep in mind Section 6501(c)(8) — must make sure these questions arecorrectly answered or risk the statute staying open
  • Eighth annual domestic tax conferencePage 14Form 8858 — expanded Schedule G,dual consolidated loss► Schedule G — question 4► Asks if the foreign disregarded entity (DE) is a separate unit or part of a combinedseparate unit where the separate unit or combined separate unit have a dualconsolidated loss (DCL)► If yes, enter the amount of the DCL► Schedule G — questions 5a, 5b and 5c► Question 5a — asks whether the DCL was taken into account in computingconsolidated taxable income► Question 5b — asks whether this was a permitted domestic useof the DCL► Question 5c — if it was not a permitted domestic use, asks whether the DCL wasused to compute consolidated taxable income as provided under Reg. Section1.1503(d)-4; identify the amount contributed to cumulative register(beginning of the year)► Make sure DCL certifications are matching what is disclosed on theForm 8858
  • TY 2012 tax return reporting developments —IRS service center compliance issues
  • Eighth annual domestic tax conferencePage 16Service center compliance issues► Automated late filed 5471 penalty program► Form 1042► Rejection of 1042-S not properly completed► Audits of payors and payees by both service centers and international examiners► Form 1120-F► Requests for EIN using SS-4, but tax return not subsequently filed► 8804► Challenging 1065’s where there is some indicia of a foreign partner andno 8804 filed► FAQ 18► Remains available for delinquent filings► FBARs
  • TY 2012 tax return reporting developments —State
  • Eighth annual domestic tax conferencePage 18State overview► State tax revenues have continued to rebound from the financial crisis► Combination of spending cuts, some tax increases and increased enforcement hasresulted in a more stable fiscal picture► Some states have enacted tax cuts, and many governors and legislatureshave proposed tax reductions► Largest state budget challenge is rising Medicaid costs► Medicaid enrollment and cost levels are a major issue for 2013, as state spendingrelated to federal health care reforms comes online► State expansions required by federal health reform will create stress inFY 2013 budgets► Challenges for corporate tax functions
  • Eighth annual domestic tax conferencePage 19Rate changes for TY 2012► Connecticut► Corporate tax surcharge of 20% for 2012 and 2013► Idaho► Corporate income tax rate reduced from 7.6% to 7.4% for 2012► Indiana► Corporate income tax rate reduced from 8.5% to 8.0% after 30 June 2012 andbefore 1 July 2013► Massachusetts► Corporate excise tax rate reduced from 8.25% to 8.0%► Pennsylvania► Franchise tax rate reduced from 0.289% to 0.189%► West Virginia► Corporate income tax rate reduced from 8.5% to 7.75%► Franchise tax rate reduced from 0.34% to 0.27%
  • Eighth annual domestic tax conferencePage 20Allocation and apportionment changes forTY 2012► California — annual election for single sales factor (SSF) still availablefor 2012► Minnesota — continued phase-in of SSF (3.5/3.5/93% for 2012)► New Jersey — begins phase-in of SSF (15/15/70% for 2012)► New York City — continued phase-in of SSF (20/20/60% for 2012)► Utah — continued phase-in of SSF (2012 = 10 x sales)► Virginia — begins phase-in of SSF for retailers for tax years beginningon or after 1 July 2012► Virginia — continues phase-in of elective SSF for manufacturers
  • Eighth annual domestic tax conferencePage 21Other state developments affecting2012 returns► Combined reporting► North Carolina► Department of Revenue adopted regulations regarding the Secretary of Revenue’sauthority to adjust net income or to require a combined return► Rhode Island pro forma combined reporting for 2012► Schedule CRS — Required Data for Combined Reporting Study (part of RI-1120C)► Michigan CIT► Michigan CIT replaces the existing Michigan Business Tax (MBT) effective 1January 2012► 2011 fiscal year filers required to file two short-period returns, one foreach tax — taxpayers can choose actual or annual method of filing► Unitary and combined reporting► Elimination of MBT NOLs► Elimination of MBT credits (“certificated” credits continue if taxpayer elects tocontinue to file MBT return until credits are exhausted)
  • Eighth annual domestic tax conferencePage 22Other state developments affecting2012 returns► NOLs► Colorado — limits amount to $250K for 2012–2013► Illinois — amended the deduction suspension to allow a deduction not to exceed$100,000, for a tax year ending on or after 31 December 2012 and prior to31 December 2014► Wisconsin — allows combined groups to share pre-2009 net business losscarryforwards incurred by group members, effective for tax years beginning after31 December 2011, with certain limitations► Tennessee — related party add-backs► Prior to 2012 taxpayers only had to disclose the existence of related partyintangible expenses in order to claim a deduction on the excise tax return► For tax years ending on or after 1 July 2012, taxpayers are required to file anapplication requesting permission to deduct intangible and relatedinterest expenses► Unless permission is granted, taxpayers will not be allowed to deductthese expenses
  • Eighth annual domestic tax conferencePage 23TY 2012: new state business returnelectronic filing mandates► Taxpayer mandates► Colorado — corporations and partnerships (any tax return that includes anEnterprise Zone credit)► Tennessee — corporations► Virginia — corporations (e-file and e-pay)► Preparer mandates► Rhode Island — corporations and partnerships
  • Taxing authority audits — impact oncompliance and reporting
  • Eighth annual domestic tax conferencePage 25IRS areas of emphasis — impact oncompliance and reporting► Current IRS areas of emphasis impacting compliance and reporting:► Uncertain Tax Position (UTP)► Information Reporting and Withholding► International► Disclosures on Forms 8886 and 8275► Issue management strategies► Audit coverage expansion:► Mid-market taxpayers► Partnerships and Subchapter S► The tax preparation process should include consideration of issues potentiallyof interest to the IRS for two reasons:1. More efficient — it will cost significantly less in resources to assemble theinformation now rather than attempting to locate and analyze the neededinformation three or more years later after filing2. The IRS has tightened its Information Document Request process promising to bemore aggressive when information is not provided on time including threats toissue a summons
  • Eighth annual domestic tax conferencePage 26IRS areas of emphasis — impact oncompliance and reporting► Identity issues that may be of interest to the IRS during compliance process:► Issues you have that are areas of IRS focus► Issues that were raised or considered in a prior examinations► Any new material or significant issues, e.g., a major merger and acquisition► Consider a pre-filing agreement or other process that will provide certaintyand eliminate the need for a UTP disclosure► For the issues remaining► Associate the risk of a potential IRS issue in light of your current year fact pattern► Consider materiality and uncertainty that are known to be a high risk► Get a sense for the information the IRS will seek for the issues you believe at risk► Look at the issue from the perspective of the IRS
  • Eighth annual domestic tax conferencePage 27Audit documentation examples► R&D credit► Review the information requested in published IDR’s used in R&D examinations► Foreign tax audits► Keep documentation showing actions taken in challenging the foreign examination► Foreign payments — withholding at source► If an IRS review of this area is likely, keep a run of all payments to foreign persons► Transfer pricing► Update transfer pricing documentation study► Standard opening IDR
  • Future tax return reporting developments
  • Eighth annual domestic tax conferencePage 29What to expect for TY 2013 and future► Impact of American Taxpayer Relief Act of 2012► Extension through 2013 of credit for increasing research activities with technicalchanges to controlled group rules and when a trade or business changes hands► Extension of 50% bonus depreciation through 2013 (2014 for certain longproduction period property and transportation property)► Election to accelerate AMT credits in lieu of bonus also extended► State► Proposed alternatives to corporate income tax► Continued suspension or limitation of NOL usage► Combined reporting to increase or stall► Economic nexus► Phase-in of SSF► Repeal of Multistate Tax Compact
  • Eighth annual domestic tax conferencePage 30Tangible property regulations► Final regulations expected early summer► Government focused on portions of the regulations:► De minimis rule, dispositions, routine maintenance safe harbor, andclarifying examples► Compliance in 2014 will be mandatory with optional staging of compliance availablein 2012 and 2013► Consider Section 263A compliance► Most taxpayers considering adequacy of their Section 263A compliance forself-constructed assets and inventory► Possibility of automatic method changes — government considering for purposesof implementing the regulations► Potential benefit as taxpayers review 263A► Window periods for filing accounting method changes while under IRS exam
  • Eighth annual domestic tax conferencePage 31New proposed Gain Recognition Agreement(GRA) compliance regulations► On 31 January 2013, IRS issued new proposed regulations that would amendthe existing rules under §§ 367(a) and 6038B governing the consequences toUS persons for failing to file GRAs and related documents► New proposed regulations provide:► Changing the requirement for taxpayers to establish reasonable cause when seekingrelief from gain recognition after failing to properly file a GRA to a standard based onwillful failure.► Now require limited Form 926 (“Return by a US Transferor of Property to a ForeignCorporation”) reporting with all GRAs.► § 6038B penalty would now apply to GRAs and associated documents.► Current reasonable cause standard would continue to apply to US transferors seeking relief fromthe § 6038B penalty.
  • Eighth annual domestic tax conferencePage 32State — TY 2013 changes► California and Pennsylvania have mandatory SSF for most businesses► Indiana corporate income tax rate reduced from 8.0% to 7.5% after 30 June2013 and before 1 July 2014► Minnesota, New Jersey, New York City, Utah, and Virginia continue phase-inof SSF► Oregon corporate excise tax rate change — 6.6% of the first $10 million oftaxable income and 7.6% of taxable income greater than $10 million for 2013► Pennsylvania franchise tax rate reduced from 0.189% to 0.089%(set to expire after 2013)► West Virginia corporate income tax rate reduced from 7.75% to 7.0%► West Virginia franchise tax rate reduced from 0.27% to 0.20%(tax fully phased out after 2014)
  • Current developments: how work gets done
  • Eighth annual domestic tax conferencePage 34100 years of the modern tax returnGather dataput on formGather dataput on formIRC is 16,000pages,5.6m wordsPost WW II — firstcomputerizedaccounting system1913 2013IRC was400 pages16thAmendmentpasses1939 code 1954 code 1986 code1960 —22Mcorporatereturns filed2002 — SOXenacted:impact on taxaccounting1973 — firstlarge scale(ERP) systemintroduced1981 — personalcomputer forbusinessintroduced277mcorporatereturns filed1969 —computerizedtax returns1991introductionof World WideWeb
  • Eighth annual domestic tax conferencePage 35Key focus areas — how work gets done„ Monitoring of tax and legislative developments„ Proactive identification of tax planning opportunities and risk areas„ Ongoing connection to subject-matter professionals in technical areasConnection to specialized taxtechnical expertise„ Secure portal for information exchange and access to deliverables„ Visibility and accessibility into the process„ Centralized compliance and reporting calendar„ Workflow enabled processes with sign-offDocument sharing and collaboration„ Meaningful and impactful Integration of processes„ Automation of “baseline” activities„ Facilitate technical review„ Leverage technology to enableProcess and technology development„ Monitoring of compliance status and key performanceindicators (KPIs)„ Regular reporting to key stakeholders (value focused)„ Monitor technology changes in marketplace — leverage„ Continuous improvement — part of DNAMonitor and continuous improvement
  • Eighth annual domestic tax conferencePage 36Resourcing tax functionsCompanies are challenging and realigning their resourcesKeyconsiderations:► Core versus non-core► Flexibility and scalability► Budget and planning► Fixed and variable cost► Quality and riskOutside tax resourcesInternal non-tax resourcesShared service resourcesInternal corporatetax resourcesFinding theright balance
  • Eighth annual domestic tax conferencePage 37Wrap-up► Compliance is the end and the beginning of an effective tax reporting andcontrol framework► End of the end-to-end, record-to-report process► An integral part of the tax life cycle (planning, accounting, complianceand controversy)► Robust, well-managed compliance is the foundation for adding value tothe business► Today’s — and tomorrow’s — technology tools provide opportunities to createa well-managed compliance function using limited resources
  • Questions and answers
  • Thanks for participating