For years, everyone involved with audits of partnership tax returns (tax professionals, the IRS and the taxpayers themselves) have complained about the often complicated and unclear Tax Equity and Fiscal Responsibility Act (TEFRA) rules. Disputes between the IRS and partnerships, as well as between the various partners, often dragged on for years.
That is if the IRS even bothered to start an audit – audit rates for partnerships were historically low compared to similar size corporate entities. Once an audit finally was completed, the IRS would face the onerous task of tracking down and collecting the assessments from each partner, often having to dive through dozens of tiers to find these ultimate taxpayers. Naturally, this resulted in difficulty collecting the additional tax, making the whole exercise seem futile to some. A better way was needed. TEFRA had to die.
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By now, most CPAs have heard of FATCA (Foreign Account Tax Compliance Act), which requires foreign financial entities to report information on their U.S. account holders to the IRS. In return, the U.S. (in some cases) is sharing information on accounts held in this country by foreign nationals with the individual’s home country. The goal of this information sharing is to ensure that individuals are reporting all their income properly and paying the appropriate amount of tax.
Now the focus is shifting to tax avoidance by multi-national businesses. In early October, the Organization for Economic Co-operation and Development (OECD) released the final reports from their two-year project targeting Base Erosion and Profit Shifting (BEPS) activities. BEPS occurs when businesses take advantage of differences in countries’ tax laws, tax treaty provisions and (occasionally) special arrangements with a local tax authority to minimize their total worldwide tax liability. Some of the ways businesses do this include:
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