DHG Tax Advisory presentation

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Information ReportingWayne Boody, Senior ManagerDHG Tax Advisory

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Key Elements of Information Reporting

• Reviewing and maintaining knowledge of

the rules and requirements surrounding

1099/1098/1042S/5498 reporting.

• Central oversight to ensure that filing

deadlines to the IRS, state agencies and

customers are met timely.

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Tax Year 2016 Changes to the Information Reporting

Requirements

• Mortgage Interest, Form 1098 - effective for returns filed after 12/31/2016 (2016 filing year), in addition to interest paid by the borrower, you must now capture and report:

A. The address or description of property

securing the mortgage;

B. The outstanding mortgage principle as

January 1, 2016 and;

C. The mortgage origination date.

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2016 Tax Year Changes

• Form 1099-Miscellaneous – for tax year

2016 returns, the due date to the IRS has

changed when reporting non-employee

compensation in Box 7. The due date to

the IRS for calendar year 2016 when

reporting amounts in Box 7 is January 31,

2017.

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2016 Changes – 1099-Miscellaneous

• Otherwise, follow the normal due dates

to the IRS:

A. February 28 if filing paper copies

B. March 31 if filing electronically

• Due dates for sending statements to the

recipients remain the same which is

January 31, 2017.

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Mergers and Acquisitions

• Information reporting and how forms will

be reported for a merger year should be

clearly addressed in the M&A agreement.

• Revenue Procedure 99-50 provides

guidance on reporting considerations for

the successor and predecessor in a

merger year. The predecessor may

choose to report amounts through merger

date, or the successor may combine

reporting for both parties.

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• Combined reporting is allowed when all the following conditions are met:

A. The successor acquires substantially

all the property used in the trade or

business of the predecessor.

B. The predecessor is required to report

amounts, including withholding on

information returns for the year of merger.

C. The predecessor is not required to report

amounts for the year following merger.

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• Under the combined reporting procedure:

A. Both parties must agree on the specific forms

to combine and the successor assumes the

predecessor’s entire reporting obligation.

B. Combined reporting may be used on all

forms, or limited to (a) specific forms, or

(b) specific reporting entities, i.e., business

units or branches.

C. The successor must combine reportable

amounts, including withholding.

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• The successor must also notify the IRS in writing

that forms are being reported on a combined

basis. This will allow the IRS to reconcile

withholding amounts for both parties.

• Considerations:

A. Involve back-office and technology

early to ensure reportable fields can be

mapped and combined.

B. Consider customer impact and

communication.

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Information Reporting Penalties

• Substantial penalties may apply for failure to file returns correctly or by the due date. This includes:

A. Failure to file timely;

B. Failure to include all information

required to be shown on the return;

C. Including incorrect information on the

return, for example, incorrect Taxpayer

identification number;

D. Filing on paper when you were

required to file electronically.


Penalties

• The amount of penalty is based on when you file

file the corrected return:

A. $50/return if you file correctly within 30

days of the due date – maximum

$500,000/year.

B. $100/return if you file corrected returns more

than 30 days after the due date but

before August 1 – maximum

$1,500,000/year.

C. $250/per return after August 1 – maximum

$3,000,000/year.


Penalties

• You may also be assessed a penalty for failure to

file correct information returns to the recipient.

The penalties apply for:

A. Failure to furnish the statement to the

recipient by the due date.

B. Failure to include correct information,

or all information required on the return.

• Intentional disregard – if any failure is due to the

intentional disregard of the filing requirements, the

penalty is at least $500/return with no maximum.


Penalties

• Penalties may be waived or abated if “reasonable

cause” can be demonstrated by the filer.

Examples of reasonable cause are:

A. An event beyond the filer’s control, i.e.,

the recipient provided incorrect

information;

B. The failure was due to significant

mitigating factors, i.e., system issues,

etc. However, you must show that you

acted in a responsible manner and took

steps to avoid the failure(s).


Foreign Account Tax Compliance Act (FATCA)

• FATCA was added as part of the Hiring Incentives to

Restore Employment Act (HIRE) in 2010.

• Final regulations on FATCA were issued in Feb. 2014.

• Key objectives and requirements:

A. Reduce tax evasion by U.S. persons holding assets

in foreign financial institutions (FFIs).

B. Requires FFIs to identify and report on U.S.

accounts held in their institution.

C. Imposes a 30% withholding tax on FDAP income

paid by U.S. institutions to FFIs that fail to comply

with FATCA.


FATCA

• In order to enhance compliance by FFIs, an FFI is required to register on an IRS database or enter into an inter-governmental agreement (IGA) with the IRS.

• Burden on U.S. financial institutions:

A. Requires reviewing the IRS FFI database before making payments of FDAP income to FFIs.

B. Requires certification of an FFI’s status.

C. Must withhold 30% withholding on income payments to non-compliant FFIs.


FATCA

• FATCA also imposes additional burden on

identifying non-financial foreign entities

(NFFEs).

• An NFFE is a foreign entity that is not an FFI, i.e.,

foreign companies, etc.

• NFFEs are required to disclose whether or not

they have substantial U.S. owners. A substantial

U.S. owner means a U.S. person that has a 10%

direct or indirect stake in the foreign entity.


FATCA

• As a result of FATCA, the IRS has added

new form W-8BEN-E to the W-8 family of

forms.

• Form W-8BEN-E must be completed by

FFIs and NFFEs to certify their FATCA

status.

• Form W-8BEN-E is 8 pages in length and

has 32 FATCA categories.


FATCA

• Due to FATCA, the IRS has modified Form W-8-BEN.

• Form W-8BEN is now used solely by individuals to certify their foreign status.

• Specific changes require the foreign person to provide his/her foreign taxpayer number, or date of birth if the individual’s country of residence does not provide foreign tax I.D. numbers.

• Latest form updates may be found under the

forms and publications tab at www.irs.gov.

http://www.irs.gov/


Other Key Changes to Reporting Requirements

Another key change to note involves reporting

deposit interest on accounts owned by foreign

persons.

• Prior to 2012, reporting deposit interest was only required to residents/citizens of Canada.

• Several subsequent Revenue Procedures have expanded the reporting requirement. The latest Rev. Proc., 2016-18 lists 37 countries in which reporting is required on Form 1042-S using income code 29 and exemption code 02.


Contact

Wayne Boody | Senior Manager

Dixon Hughes Goodman LLP

[email protected]

202.212.5322


Sales & Use Tax Considerations for Financial InstitutionsTony Buffkin, DirectorDHG Tax Advisory


Why Should I Be Concerned

with Sales & Use Tax?


Responsible Parties

• Who are responsible persons?

• Typically, tax law imposes personal responsibility for payment of sales or use tax on certain owners, officers, directors, employees, partners or members (together, responsible persons) of a business that has an outstanding sales or use tax liability.

– Being personally liable means that your personal assets could be taken by the tax department to satisfy the sales tax liability of your business.

• You may be held personally responsible even if you have an employee or an accountant handle your sales tax matters.

• In addition, you may be held personally responsible even though your business is a corporation or a limited liability company.


NCGS § 105-242.2 Personal Liability

• Responsible person is defined to include any of the following: president, treasurer, chief financial officer or other officer of a corporation

• Responsible person liability for:– all sales and use taxes collected by the business entity upon its

taxable transactions;

– all sales and use taxes due upon taxable transactions of the business entity that it failed to collect but only if the person knew or in the exercise of reasonable care, should have known that the tax was not being collected;

– all taxes due from the business entity under Articles 36C and 36D, as specified, and all taxes payable under those articles by it to a supplier for remittance to North Carolina or another state; and

– all income taxes required to be withheld by the business entity.


Some Key Sales & Use Tax

Issues to Watch


What Is Changing?

• Law changes to broaden the tax base

– States are taxing more services (ex., RMI

services in NC)

– SaaS and related software services

• Increased M&A activity

• More state audit activity


Some Services Could Trigger Sales Tax

• Banks may have legal entities that provide “back office” services to related affiliates or external customers

– Automated Valuations, Income Tax Verifications, Pre-Foreclosure Title Reports and Flood Certificates are taxable in a number of states as information services or data processing services.

– Various credit related services and products may be taxed as credit reporting services, information services or investigative services depending on the taxing jurisdiction.

– A mortgage company may offer software hosted by a third party application provider to simulate debt implications to a consumer. This software could be taxable as Software as a Service.

• Even though related entities may be disregarded for income tax purposes, that is generally not the case for sales & use tax

– States could consider charges for those services, even if they are only accounting entries, to constitute a sale of services.


Common Use Tax Issues

• Purchases of software – canned software, SaaS, software maintenance agreements– Seller may not have nexus

• Promotional and marketing materials

• Signage– Is it considered to be real property or tangible

personal property?

• Equipment maintenance and service contracts


M&A Issues


Due Diligence

• In any acquisitive transaction, tax due diligence should be performed covering sales and use tax

• From a sales and use tax perspective, what should be reviewed in the context of due diligence?

– Historical sales & use tax filings

– Outcomes of past audits

– Sales & use tax policies, including those related to AP review for use tax


Successor Liability

• In a stock acquisitions the acquirer inherits all the

liabilities of the acquired entity – including sales and use

tax liabilities

• In an asset sale, sales or use tax can transfer to the

purchaser

– Not just for the tax on assets purchased but:

» For tax the was collected and not remitted; or

» For other taxable transactions where for instance

the wrong rate was used; or

» Other error


Certificate or Letter of Clearance

• When negating an acquisition transaction, the

purchase documents should require the escrowing

of a portion of the purchase price until a sales & use

tax clearance letter is obtained by the seller in each

state in which they operate

– The withheld amount should be sufficient to

incent the seller to expedite the process

» Some states require that a certain amount be

withheld by the buyer

– Note: states can be slow in issuing letters of

clearance; it is a cumbersome process


Asset Purchases – What is Subject to Sales Tax?

• Typically, when making an asset purchase in a dealership context some of the assets may be subject to sales or use tax

– Intangibles, such as goodwill is typically not subject to tax;

– Inventory can be purchased tax free by extending properly executed resale certificate

– Fixed assets are typically subject to sales or use tax

– Real property may be subject to real property transfer taxes or recordation taxes

– Vehicles, including motor vehicles and airplanes, typically, are excluded from the occasional sale exemption


How to Protect the Purchaser

• It is not uncommon for purchasers to opt out of the notification requirements and rely on the seller's representation that it has complied with all of its sales & use tax obligations.

• In such cases the purchaser should require that the seller perform a sales & use tax review prior to the acquisition to identify any areas of exposure.

• The most common issues to address:

– Failure to collect and remit sales tax

– Failure to accrue and pay use tax on purchases

– Taxability determinations

– Nexus in states where they have not filed


Protection in the Purchase Agreement

• Once issues are identified, the seller can take corrective

measures to minimize any potential liability for the buyer.

• Voluntary disclosure agreements (VDA) can be obtained

from states where it has nexus but did not collect or

remit sales or use tax.

• If purchasers waive the notification requirement, they

should also require indemnification provisions in the

sales contract. Such as:

– Indemnification by the seller for any unpaid sales and

use tax incurred while the business was operated by

the seller; or

– Escrowing funds.


Contact

Tony Buffkin | Director

Dixon Hughes Goodman LLP

[email protected]

704.367.7057

DHG Tax Advisory presentation

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Transcript of DHG Tax Advisory presentation