To stem the potential influx of US charities losing their tax-exempt status this year, the Internal Revenue Service (IRS) has announced an extension to the tax filing deadline for not-for-profit organization. Under the one-time relief program, announced on July 26th, charities will now have until October 15th 2010 to complete necessary returns and declarations. The exemption is being offered after repeated calls from tax preparers with claims that more time is needed to adequately fulfill all necessary documentation requirements. The filing date for tax-exempt organizations is based on the entity’s own accounting period, with the deadline for most charities falling between May 17th and early October. The filing extension has not been offered to large charities, with annual gross receipts in excess of USD 500 000 and assets of more than USD 1.25 million.

Under the Pension Protection Act of 2006, charities are liable to lose their tax-exempt status if necessary returns are not filed for three years. The 2010 year will be the first in which the new rules will be enforced, and non-compliance will lead to organizations losing their status in early 2011. Current IRS records indicate that 321 091 non-profit entities are at risk of forgoing their tax exemption.

Tax-exempt charities provide an invaluable set of services to US communities, which would typically fall outside the scope of Federal or local Government spending. Explaining the need to for charities, Doug Shulman, IRS Commissioner, said that they “are vital to the vibrancy of our nation.” He went on to say, “The last thing we at the IRS want to do is to have these groups lose their tax-exempt status because they haven’t filed a short, simple form.”

Photo by usag.yongsan

In a television interview on January 10th Doug Shulman stated that he has used a tax consultant to prepare his tax returns for the last ten years. The Commissioner continued on to say that both he and President Obama are large proponents of simplifying the US tax code. Although when pressed further regarding how he would hope to achieve this, Doug Shulman simply said that this was not his job and that the US Congress designs the country’s tax laws.

In an initial step to clarify tax communication and simplify the tax system, on January 11th the IRS unveiled nine new correspondence letter templates that it will be using to communicate with taxpayers. The redesigned templates are aimed at improving tax compliance by providing more understandable information to recipients. Commenting on the revised letters, Doug Shulman said “…one of my priorities is to ensure that we have clear and simple communication with taxpayers. In the past, our notices often looked more like legal documents and not an effort to communicate clearly. The differences between the old and new notices are like night and day. They show the potential of our on-going effort in this area.”

Photo by Christopher S. Penn

It was revealed on November 17th by Doug Shulman, IRS Commissioner, that the US tax disclosure leniency program has been met with “unprecedented success”. Describing the achievement he said, “To put it simply, this is a historic milestone for the nation’s hardworking taxpayers”.

In the wake of the US Department of Justice’s (DOJ) legal action against Swiss bank UBS, the leniency program has received an unparalleled number of submissions. Far surpassing the annual average of 100 voluntary submissions, the final number has even doubled the IRS’s initial estimate of 7,500 disclosures.

Those who apply for the voluntary disclosure program and agree to pay all appropriate taxes, interest charges and fines will lessen their chance of prosecution for any tax evasion committed. The penalty liability charged on their hidden wealth will also be reduced. While exact figures are not yet available, Doug Shulman has revealed that the revenue from the disclosure program could be in the range of billions.

No indication has been given by the IRS that another voluntary disclosure program will be run. Encouraging those evading their tax laibility to disclose them anyway, Doug Shulman said, “It will be much worse for them if we find them first”.

Speaking at a conference for the American Institute of Certified Public Accountants (AICPA) on the 26th of October, in Washington DC, Doug Shulman announced the creation of the Global High Wealth Industry Group (GHWIG). According to the IRS Commissioner, the unit will conduct “a small number” of audits on individuals with assets “in the neighborhood of $30 million”, with the primary aim of weeding out tax cheats who hide behind complex financial structures.

While claimed to be operational for a number of months, the new unit is expected to begin its initial audits in November. According to Doug Shulman, international tax specialists and flow-through experts have already been recruited by the IRS to aid in the detangling of the complicated web of partnerships, offshore trusts, royalty and licensing agreements, private foundations and flow-through entities that can be used for tax evasion.

The IRS Commissioner commented on the IRS’s new direction by saying that a “holistic” approach was needed to understand contemporary international tax evaders. He went on to say, “Our goal is to better understand the entire economic picture of the enterprise controlled by the wealthy individual and to assess the tax compliances of that overall enterprise,” and “We cannot do this by continuing to approach each tax return in the enterprise as a single and separate entity. We must understand and analyze the complete picture”.

In an effort to curb tax evasion and retrieve tax liabilities avoided through offshore accounts, the IRS is offering a tax amnesty program which sees lower penalties and prosecution avoidance for those harboring money overseas. The program which requires submissions to be made by 5pm on October 15th, has now received over 7,500 applications. According to IRS statements, admittances of offshore accounts have ranged from US$10,000 to over US$100 million in value. While spurned by the IRS’s court action against Swiss bank UBS, amnesty applications have been now been received from over 70 jurisdictions, and every continent except Antarctica.

Originally scheduled to expire September 23rd, the tax amnesty program was extended to October 15th. According to Doug Shulman, IRS Commissioner, no further extensions will be granted, and those discovered to be hiding wealth in the future will be prosecuted to the IRS’s typical extent. Further, Doug Shulman declared that the IRS will be “scouring the 7,500 disclosures to identify financial institutions, advisers and others” in an effort to root out tax evaders who did not take advantage of the tax amnesty program.

According to an outline provided with the announcement of the tax amnesty program, the IRS will levy a fee of 20% of the account’s peak value over the last six years and require that all taxes and appropriate interest be repaid. Although, following preset conditions on the account’s activity levels and original purpose, the fee could be reduced to 5%. Conversely, typical procedure could see 150% of an account’s peak value confiscated. The amnesty program also provides protection from further prosecution, on the condition that the original funds were earned legally.