News from AVZ

March 2011

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Sales and Use Tax: Imposition of Fraud Penalty Affirmed

Dear Friend:

The appellate division of the Supreme Court of New York affirmed a sales and use tax assessment that included a fraud penalty after finding that a liquor store operator willfully and intentionally filed false or fraudulent tax returns. No one disputed that serious errors were made in the taxpayer's tax returns and that they did not accurately reflect the business's sales tax liability for the period at issue. Also, the taxpayer did not deny that he derived a significant financial benefit from the errors made in these tax returns, but disavowed any responsibility for them. Instead, the taxpayer placed full blame for any errors or mistakes made in these tax returns on the accountant he retained to prepare them. Ultimately, the taxpayer's failure to provide reliable records, the significant difference that existed between what the taxpayer spent for merchandise and what he claimed in his tax returns to have sold in the business for the identical time period at issue, the financial benefit he derived from these false returns, and his failure to remedy these errors after he became aware of them, when considered as a whole, provided substantial basis for the conclusion that the taxpayer willfully and intentionally filed false sales tax returns for the purpose of deliberately underreporting the sales tax owed by his business for the audit period. Thus, the imposition of a fraud penalty was affirmed.

The court also found that the taxpayer failed to meet his burden to show that the methods used by the Department of Taxation and Finance in its audit and its calculation of the tax assessment were unreasonable.

Very truly yours,

AVZ

2011 Offshore Voluntary Disclosure InitiativeArticle Headline

IRS Commissioner Douglas Shulman announced that the IRS is implementing a second offshore voluntary disclosure program. The 2011 Offshore Voluntary Disclosure Initiative (OVDI) offers reduced penalties for taxpayers who failed to report non-U.S. financial accounts and assets on an FBAR (IRS Form TD F 90-22.1-Report of Foreign Bank and Financial Accounts) and who failed to report income from those accounts and assets on their U.S. income tax returns but who come forward now.

In 2009, the IRS offered a similar voluntary disclosure program for such taxpayers that ended on October 15, 2009. The IRS received thousands of additional voluntary disclosures after the end of the 2009 program. The 2011 OVDI is in response to the success of the 2009 program and the thousands of additional voluntary disclosures that the IRS received after the end of the 2009 program.

The look-back period for the 2011 OVDI is eight years (2003 through 2010). The penalty scheme under the 2011 OVDI is as follows: (1) a one-time 25 percent penalty on the highest aggregate annual balance in the unreported accounts in the look-back period (an increase from the 20 percent penalty under the 2009 program) and (2) a 20 percent accuracy-related penalty or delinquency penalties on the amount of U.S. income tax that should have been paid on any unreported income from the non-U.S. accounts in the look-back period. However, a taxpayer with offshore accounts or assets that, in the aggregate, did not surpass $75,000 in any calendar year covered by the 2011 OVDI will qualify for a new 12.5 percent rate. No such reduction was provided in the 2009 program, but the IRS has indicated that taxpayers who came forward under the 2009 program can apply for retroactive application of the 12.5 percent rate, if eligible. A 5 percent rate may also apply in certain limited circumstances. Notably, it appears that the IRS will allow the reduced 5 percent penalty for certain foreign residents who were unaware that they were U.S. citizens. The 2011 OVDI also offers a modified mark-to-market election for taxpayers with interests in passive foreign investment companies (e.g., foreign mutual funds) to determine the income from such investments.

Issue: 7

Sales and Use Tax: Imposition of Fraud Penalty Affirmed

2011 Offshore Voluntary Disclosure Initiative