03.02.2010

When important people speak at important events, it‘s a good idea to listen. That even includes the US Internal Revenue Service commissioner and the director of the Israel Tax Authority.

IRS Commissioner Douglas Shulman addressed the New York State Bar Association last Tuesday. He spoke about the work program and proposals under consideration at the IRS for US tax purposes.

In particular, Shulman announced a sweeping proposal for spelling out issues that underlie the tax returns of large corporations subject to the accounting standard known as FIN 48, relating to uncertain tax positions.

The IRS is developing a schedule to the annual tax return that will require certain taxpayers to provide information about uncertain tax positions having a bearing on federal income-tax liability. Those affected include business taxpayers with total assets in excess of $10 million and one or more uncertain tax positions.

The schedule will also require a taxpayer to quantify the amount of US federal income tax that would be due if an uncertain tax position were disallowed in its entirety in a tax audit.

This is basically a proposal for those corporations to hang out their dirty tax linen where the IRS can see it – and to say why it is dirty.

In addition, late last year, the IRS launched the Global High Wealth Industry Group to centralize and focus IRS compliance expertise involving high-wealth individuals and their related entities. Initially, the IRS is focusing on individuals with tens of millions of dollars of assets or income.

The IRS is looking for ‘‘nodes‘‘ of activity: where ‘‘multiple people‘‘ not paying taxes can be detected. Financial institutions are one such potential node of activity; promoters of tax-evasion schemes are another.

Working smarter in the international tax arena also requires heightened cooperation and interaction with other countries‘ tax authorities, Shulman said. The IRS is developing a ‘‘protocol‘‘ to conduct joint audits with some tax-treaty partners of the US (it remains to be seen if this will include Israel).

The IRS is also establishing a Transfer Pricing Practice within its large- and mid-size business operating division to enable it to strategically and systematically administer transfer-pricing issues. Transfer pricing refers to the pricing of transactions between related parties.

Yehuda Nasardishi, the ITA‘s director, last Sunday spoke at an Israel Institute of Certified Public Accountants conference about proposals he is considering for Israeli tax purposes.

In particular, he said, the ITA is inclined to initiate a one-time partial amnesty during 2010, but not a general amnesty (not defined). The aim is to encourage tax offenders to repatriate currency back to Israel.

Consideration is being given to granting amnesty applicants immunity from criminal prosecution. They will still have to pay the tax due, but interest and indexation of unpaid tax may be reduced.

Recent amnesties in Italy, the US, the UK and Germany succeeded in encouraging the disclosure and repatriation of substantial amounts to those countries.

It remains to be seen if and when such an amnesty will be introduced in Israel. No further details of the proposals have been announced.

In 2009, there was a different kind of amnesty in Israel for irrevocable trusts regarding the tax years 2003-05. The catch was that in many cases, no Israeli tax was actually due in those years. But the amnesty tax may help reduce capital-gains tax in 2006 onward in some cases!

The amnesty currently proposed is a step forward in ITA thinking. Until now, many within the ITA thought it was wrong to give any tax reduction or ‘‘prize‘‘ to tax evaders; this would only encourage others to do the same and wait for their ‘‘prize.‘‘

But merely reducing the penalties may be a compromise solution that may, hopefully, bring money back into the economy and taxpayers back into the tax net, without sacrificing principles.

As always, consult experienced tax advisors in each country at an early stage in specific cases.

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Leon Harris is an international tax specialist at Harris Consulting & Tax Ltd.