Tax Tip IRS
distinct aspect of the U.S. tax system is the ability for a taxpayer to extend
the due date of a tax return. This allows the taxpayer additional time to
complete and file an income tax return without being assessed a late filing
penalty. Late filing penalties are
assessed at the rate of 5% per month up to a maximum of 25%.
cases a tax return due date can be automatically extended by up to six
months. All that is required is the
filing of the proper extension form. No
explanation from the taxpayer is required and the IRS cannot deny a properly
filed extension. However, the timely filing of the form is crucial in order for the
extension to be valid.
important to realize that extending the filing due date of a tax return does
not extend the tax payment due date. Taxpayers
who do not pay at least 90% of the ultimate taxes due by the original due date
will be assessed a late payment penalty.
The penalty is imposed at a rate of 1/2% per month until paid. Interest will accrue, on both the taxes due
and any penalties, from the original payment due date until payment is
made. The rate of interest is equal to
the short-term applicable federal rate (AFR) plus 3%.
If the due
date falls on a weekend or a statutory holiday, the due date is extended until
the next business day.
Individual Tax Returns
individual taxpayer can obtain an automatic six-month extension of time to file
by filing Form 4868, “Application
for Automatic Extension of Time to File U.S. Individual Income Tax Return,”
on or before the original due date of the return. No signature is required and the form can be
filed electronically or mailed to the appropriate IRS office. A proper estimate of the tax due for the year
must be made, but full payment is not required.
citizen or resident who is “out of the country” on the regular due date of a
return is allowed an automatic two month extension to file without filing Form
4868. However, if additional time is
required beyond this extended due date, the taxpayer can file Form 4868 and
will be allowed an additional four months to file the return.
or residents who do not reside in the U.S. may also request an additional 2
month extension. This extension,
however, is not automatic and can be denied by the IRS.
corporation generally may obtain an automatic six-month extension of time for
filing its income tax return by filing Form 7004, “Application for Automatic Extension of Time To File Certain Business
Income Tax, Information, and Other Returns,” provided that the
application is timely filed, properly signed, and a remittance is made of the
amount of the tax properly estimated to be due.
A seven-month extension is available for returns of C corporations with
tax years ending June 30.
Corporations, and Trusts
automatic extension of time for a partnership, S corporation or trust to file
an income tax return can be obtained by filing Form 7004, “Application for Automatic Extension of Time
To File Certain Business Income Tax, Information and Other Returns.”
The length of the automatic extension depends upon the type of return. For partnerships and S corporations, an
automatic six month extension is available. For certain estate and trust
returns, an automatic 5½ month extension is available.
A summary of U.S. tax return regular due dates and extended due dates is
Type of Filer||Form||RegularDue Date||ExtendedDue Date|
|U.S. citizens and residents||Form 4868||April 15||October 15|
|U.S. non-resident aliens with U.S. employment income||Form 4868||April 15||October 15|
|U.S. non-resident aliens without U.S. employment income||Form 4868||June 15||December 15|
U.S. citizens and residents who reside outside of the United States receive an automatic two-month extension of time to file to June 15. No filing is required for this automatic extension.
|Type of Filer ||Form || Regular Due Date ||Extended Due Date |
|C Corporations ||Form 7004 ||15th day of the 4th month after the end of the tax year ||15th day of the 10th month after the end of the tax year |
|Partnerships ||Form 7004 ||15th day of the 3rd month after the end of the tax year ||15th day of the 6th month after the end of the tax year |
|Limited Liability Corporations ||Form 7004 ||15th day of the 3rd month after the end of the tax year ||15th day of the 6th month after the end of the tax year |
|S Corporations ||Form 7004 ||15th day of the 3rd month after the end of the tax year ||15th day of the 6th month after the end of the tax year |
|Type of Filer ||Form ||Regular Due Date || Extended Due Date |
|U.S. Resident Trust ||Form 7004 ||15th day of the 4th month after the end of the tax year ||First day of the 10th month after the end of the tax year |
|U.S. Nonresident Trust ||Form 4868 ||15th day of the 6th month after the end of the tax year ||15th day of the 12th month after the end of the tax year |
|Foreign Trust with a U.S. Owner ||Form 7004 ||15th day of the 3rd month after the end of the tax year ||15th day of the 6th month after the end of the tax year |
State Income Tax
Those U.S. states
that impose an income tax also have a provision to extend a tax return’s due
date. However, keep in mind that the regular due date and extended due date
for a state tax return may be different than the federal dates. Also, each state has a different filing
requirement for an extension — some states will recognize a federal extension form
while other states have their own forms.
It is important to review an individual state’s extension filing
On March 13, 2018 the Internal Revenue Service announced (IR-2018-52) that it will close the 2014 Offshore Voluntary Disclosure Program (OVDP) on Sept. 28, 2018. Acting IRS Commissioner David Kauffer states
“Taxpayers have had several years to come into compliance with US Tax Laws under this program. All along, we have been clear that we would close the program at the appropriate time, and we have reached that point. Those who still wish to come forward have time to do so.”
Beginning in 2009, the IRS initiated a series of offshore voluntary disclosure (OVD) programs to settle with taxpayers who had failed to report offshore income and file any related information return such as the FBAR. According to the IRS more than 56,000 taxpayers have used one of the programs to comply voluntarily. All told, those taxpayers have paid a total of US $11.1 billion in back taxes, interest and penalties.
The planned end of the current OVDP also reflects advances in third-party reporting and increased awareness of U.S. taxpayers of their offshore tax and reporting obligations. With respect to U.S. persons living in Canada, the enactment of the U.S. Foreign Account Tax Compliance Act (FATCA) and the signing of the Intergovernmental Agreement (the “IGA”), between the Government of Canada and the Government of the United States of America, required Canadian financial institutions to report information about their U.S. customers to the IRS (indirectly via the Canada Revenue Agency).
The number of taxpayer disclosures has decreased substantially over the years with only 600 disclosures in 2017. Unlike Canada, the IRS does not have an on-going voluntary disclosure program. All programs have a specific beginning and end date.
The IRS notes that it will continue to use tools besides voluntary disclosure to combat offshore tax avoidance, including taxpayer education, Whistleblower leads, civil examination and criminal prosecution. Since 2009, IRS Criminal Investigation has indicted 1,545 taxpayers on criminal violations related to international activities, of which 671 taxpayers were indicted on international criminal tax violations.
“The IRS remains actively engaged in ferreting out the identities of those with undisclosed foreign accounts with the use of information resources and increased data analytics,” said Don Fort, Chief, IRS Criminal Investigation. “Stopping offshore tax noncompliance remains a top priority of the IRS.”
Streamlined Procedures and Other Options
Effective September 1, 2012, the IRS introduced the Streamlined Filing Compliance Procedures. These procedures were introduced for taxpayers who might not have been aware of their filing obligations.
The Streamlined Filing Compliance Procedures will remain in place and available to eligible taxpayers. Similar to OVDP, the IRS has said it may end the Streamlined Filing Compliance Procedures at some point.
Because the circumstances of taxpayers with foreign financial assets vary widely, the IRS will continue offering the following options for addressing previous failures to comply with U.S. tax and information return obligations with respect to those assets:
- IRS-Criminal Investigation Voluntary Disclosure Program;
- Streamlined Filing Compliance Procedures;
- Delinquent FBAR submission procedures; and
- Delinquent international information return submission procedures.
What you need to do
If you are a US person and you have not brought your past filings into compliance time is running out. If you do not file under one of the IRS programs you may be subject to significant penalties for non-compliance. Cadesky US Tax has a long history of assisting clients with bringing their past filings up to date. We can also assist with renunciation should that be an option you wish to examine.
Please do not hesitate to reach out to any member of the Cadesky US Tax team if you have any questions.
If you are a U.S. citizen and you have a “seriously delinquent tax debt” with the IRS, you may lose your U.S. passport.
On December 4, 2015, President Obama signed into law the Fixing America’s Surface Transportation Act (The FAST Act, P.L. 114-94). As part of this legislation the IRS is required to notify the State Department of those U.S. persons who have a “seriously delinquent tax debt.” The State Department must then deny any passport application or renewal request from these persons, and has the power to revoke an existing passport. If the U.S. person happens to be outside of the United States, the State Department may issue a limited validity passport good only for a direct return to the United States.
Though the legislation was passed, the IRS was not certifying tax debt to the State Department. On January 16th, 2018 the IRS issued IR-2018-7, and Notice 2018-01 (Part III being relevant), where the IRS announced that they will begin implementation of new procedures in January 2018. As such, impacted taxpayers will now have to deal with this issue.
Revoking or denying a passport is not the first step in collecting overdue taxes, but is more of a last resort after other methods have failed. The IRS will certify a taxpayer to have a “seriously delinquent tax debt” only if:
- The debt is over $51,000 USD (for 2018, will adjust for inflation); and
- A notice of federal tax lien has been filed and all administrative remedies have lapsed or been exhausted; or
- A levy has been issued.
A “seriously delinquent tax debt” does not include amounts that are currently being paid under an approved installment agreement with the IRS or are being paid under an offer in compromise. It also does not include amounts for which a collection due process hearing has been requested or for which collection has been suspended because a request for innocent spouse relief has been made.
If the above factors have been met, the IRS will certify the taxpayer as having a “seriously delinquent tax debt” and will notify the State Department. The IRS will send a notice of this action at the taxpayer’s last known address. The first notices went out in January 2018.
Once a “seriously delinquent tax debt” has been certified, the only way to reverse the certification is:
- Pay the tax debt in full;
- Enter into an installment agreement with the IRS to pay the debt over time;
- Propose an offer in compromise to the IRS and have it accepted;
- Enter into a settlement agreement with the Justice Department to satisfy the debt;
It’s important to note that cases being resolved through the Taxpayer Advocate Service are not excluded from these provisions. Nina Olson, the National Taxpayer Advocate, has expressed her concern about this lack of exemption and has taken steps to protect those cases already registered with her office. She has also expressed her concern to Congress regarding the lack of a notice period allowing the taxpayer to take action before information is provided to the State Department.
If you have an outstanding debt with the IRS, it is important to seek professional advice and assistance to resolve the issue. The Cadesky U.S. Tax Team can assist you in resolving debt collection and other matters with the IRS.
TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.
The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.
This article also appears in the May issue of Insights, the Tax Journal of Ruchelman PLLC
In finding for the taxpayer in a recent transfer pricing decision, the U.S. Tax Court followed its own determination in Veritas in valuing a buy-in payment made as compensation for the right to use pre-existing intangible property in a related-party cost-sharing arrangement (“CSA”). This decision, like other major transfer pricing decisions, serves as a reminder of the fact-intensive nature of transfer pricing matters and of the importance of uncovering and properly analyzing transactional evidence from the controlled transaction in question and from uncontrolled transactions or dealings of the business.
Amazon.com, Inc. (“Amazon”) entered into a CSA with Luxembourg subsidiary AEHT in 2005. The CSA covered: (i) the software and other technology underlying the Amazon European domain-name websites, fulfillment centers, and related business activities; (ii) marketing intangibles, including trademarks, tradenames, and domain names used in Amazon’s European business; and (iii) customer lists, customer data, and the Amazon tradename and mark. The right to use the pre-existing intangible assets in these three categories was priced at $254.5 million, payable over a seven-year period corresponding with the useful life of the intangible assets.
Using the income method and the same discounted cash flow approach rejected by the court in Veritas, the IRS estimated the arm’s length value of the buy-in payment to be $3.468 billion, effectively disregarding the CSA and valuing the transfer of rights as a business that would exploit infinitely-lived intangibles in perpetuity. The IRS also disputed the Amazon failure to classify certain technology and content expenses of Amazon.com as intangible development costs, thereby biasing downward the income from annual cost sharing payments received from AEHT over the term of the CSA.
The economic substance of the AEHT Luxembourg operations hub was not critical on its own. Local language requirements, local vendor relations, and European logistics considerations and customer tastes were all factors contributing to the need to carry on a business in Luxembourg, and the change in economic position for AEHT expected to result from the CSA In rejecting the IRS transfer pricing method, the court made clear that “AEHT was not an empty cash box.” This determination contrasts sharply with the O.E.C.D. outcomes under the BEPS Action Plan that attack hypothetical “cash boxes” that are legal owners of rights but lack the decision-making and risk management capacity needed to allocate capital to investments with uncertain returns. The dispute in Amazon therefore centered on (i) the transfer pricing method, (ii) the assumptions made and analyses used to value the buy-in payment, and (iii) the correct treatment of the intangible development costs within the term of the CSA
In deciding for the taxpayer, the court relied on the testimony and reports of 30 experts in computer science, marketing, economics, and transfer pricing economics. The opinions of the computer science experts on the state and viability of the Amazon software and websites served as a stable foundation upon which the transfer pricing economics experts for the taxpayer could anchor their assumptions. These assumptions were critical – as the technical constraints of the software system provided a reliable estimate of the lifespan of the software used to power the core operations of the Amazon websites and fulfillment business. The marketing experts helped the court decide on a proper method to estimate key variable values used in the marketing intangibles value calculation. They also assisted the court in determining how the intangibles allowed a team of engineers – for whom no technical challenge seemed too large – to overhaul the websites without causing them to crash during popular shopping seasons.
However, the star of the trial was a Treas. Reg. §1.482-7 transfer pricing method – the Comparable Uncontrolled Transaction method (“CUT”). Amazon used an unspecified transfer pricing method resembling in some respects the profit-split method to calculate the original buy-in payment, while the IRS used an application of the income method. The IRS income method calculated the present value of cash flows forecasted to result from AEHT’s European business, using cash flow and balance sheet forecasts as its only company data input. Both approaches neglected or devalued Amazon’s outsourced web store programs, and thousands of Associates or Syndicated Stores programs that provided customer referrals to Amazon.
The website platform and referrals transactional data alone did not win the case for Amazon. Considerable expert testimony was required to establish reliable assumptions of discount rates, value decay rates, useful asset life, and trademark ownership. The company’s own information, however, was a crucial element in winning the case. CUT’s that involve transactions between the taxpayer and independent businesses (sometimes called internal CUT’s), are highly persuasive given these fit well within the framework of the comparability requirements of Treas. Reg. §1.482(c)(1), which is critical to selecting a best method. CUT’s are not abstract agreements between third parties. They must bear some resemblance to one of the controlled parties and its business.
One small levity allowed in the 207-page decision was that “one does not need a Ph.D. in economics to appreciate the essential similarity between the DCF methodology that Dr. Hatch employed in Veritas and the DCF methodology that Dr. Frisch employed here.” Similarly, a Ph.D. is not required to present a well-selected and adjusted CUT to the IRS or a Tax Court judge. It seems unlikely in the case of Amazon’s CSA that the IRS would have paid any attention to a CUT at the examination level, given the strong motivation within the IRS to re-litigate Veritas. Nonetheless, CUT’s remain a valuable commodity to be mined and stockpiled for use in appropriate circumstances.
Not only was Amazon’s transactional data important in building its case in favor of the buy-in payment value, its Code §41 credit cost detail proved useful in substantiating the company’s claim that a significant class of expenses should not be classified as intangible development costs and shared with other CSA participants. This is another good example of seeking the data required within the company’s records before reinventing the wheel.
An open question in the case is the treatment of employee stock option costs in a CSA. This question will have to wait for the outcome of the IRS appeal in Altera.
Pending a successful outcome in Altera, two theories used by the IRS to attack a technology company CSA could be blunted. To the extent that IRS estimates regarding the size of the tax gap rely on large income windfalls from litigating CSA positions of high-tech companies, Amazon could prove to be an early indication that these estimates require a downward adjustment.
 Amazon.com, Inc. & Subsidiaries v. Commr., T.C., 148 T.C. No. 8 Docket No. 31197-12.
 Veritas Software Corp. v. Commr., T.C., 133 T.C. 297 (2009).
 Altera Corp. v. Commr., T.C. 145 T.C. No. 3 (2015).
TRANSFER PRICING NEWSLETTER is provided as a free service to clients and friends of Cadesky Tax. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing a tax planning arrangement or taking an uncertain tax filing position. Cadesky Tax cannot accept any liability for the tax consequences that may result from acting based on the contents hereof.