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FILING AND PROCESSING RETURNS PowerPoint PPT Presentation


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FILING AND PROCESSING RETURNS. Presenter LESLIE ZIMMERMAN Assistant Commissioner Payment Operations, NYC Finance Facilitator HOWARD REISS Chief of Staff Payment Operations, NYC Finance. FILING AND PROCESSING RETURNS. Panelists VIRGINIA CHING Unit Manager, Account Examination Unit

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FILING AND PROCESSING RETURNS

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  • FILING AND PROCESSING RETURNS

Presenter

LESLIE ZIMMERMAN

Assistant Commissioner

Payment Operations, NYC Finance

Facilitator

HOWARD REISS

Chief of Staff

Payment Operations, NYC Finance


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  • FILING AND PROCESSING RETURNS

Panelists

VIRGINIA CHING

Unit Manager, Account Examination Unit

JOHN CONRY

Senior Director, Payment Center Operations

ROBERT CONTARD

Unit Manager, Revenue Accounting Unit

CASEY D. CRAWFORD

Senior Director, Commercial Exemptions

LINDA LEVINE

Unit Manager, Discrepancy and Billing Unit


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lll. CITY AND STATE AUDIT UPDATE

Facilitators

RICHARD W. GENETELLI

President, Genetelli Consulting Group

BRIAN SCANLON

Partner, Ernst & Young LLP

Panelists

PATRICIA F. CONEYS

Director of Income Franchise, Field Audit Bureau

NYS Department of State Taxation and Finance

PAULINE HYLES

Assistant Commissioner, Audit Division, NYC Finance


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lll. CITY AND STATE AUDIT UPDATE

Panelists

NONIE MANION

Director of Tax Audits

NYS Department of Taxation and Finance

PETER RABINOWITZ

Senior Director, Business Taxes

NYC Finance


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IV. DISPUTE RESOLUTION:

ELIMINATING FUTURE CONTROVERSIES

Facilitators

ALVAN L. BOBROW

MARK S. KLEIN

Partners, Hodgson Russ LLP

Panelists

DARA JAFFEE

Assistant Commissioner. Legal Affairs, NYC Finance

MICHAEL NEWMARK

Director, Tax Advocacy & Resolution

LegalAffairs, NYC Finance

KENNETH T. ZEMSKY

Partner, Ernst & Young LLP


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VI. BUSINESS TAX REFORM ROUNDTABLE

Facilitator

MICHAEL HYMAN

Assistant Commissioner, Tax Policy

NYC Finance

Panelists

PETER FABER

Partner, McDermott Will and Emery LLP

BARRY H. HOROWITZ

Partner, Eisner & Lubin, LLP


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VII. BUSINESS TAX REFORM

PresenterMICHAEL HYMANAssistant Commissioner, Tax PolicyNYC Finance


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Overview


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Single-Sales Factor Apportionment of Business Income


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Estimates based on 2001 sample data.


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Flow-Through Entities


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Issues Regarding Flow-Through Entities

General Corporation Tax Income-plus-Compensation Alternative Tax Base

·Reformed in the 1990s

·Officers’ compensation add back eliminated

·Income exclusion increased from $15,000 to $40,000

·Compensation paid to greater-than-5 percent shareholders is still subject to alternative tax

·In TY 2003, two-thirds of the alternative tax was paid by S-corporations

Unincorporated Business Tax

·Also reformed in the 1990s

Tax relief:

·“Small business” credit increased from $600 to $1,800

·Partial NYC personal income tax credit adopted for UBT paid

Additional Reforms under Discussion

·Adoption of PIT credit for S-corporation owners similar to credit for UBT paid

·Increase in UBT fixed deduction for reasonable compensation for services performed


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Tax Filing Simplification


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GCT Tax Filing Simplification Proposal

·For non-allocators with no investment or subsidiary capital and gross receipts less than $250,000

·Eliminate the income-plus-compensation and capital bases

·Allow filers to use NYS ENI in lieu of NYC ENI (with limited modifications – e.g., add back of GCT deducted on Federal return)

·Allow filers to use a much simplified return

·What to do about S-corporations?

NYS has eliminated the differential tax on ENI for

S-corporations.


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Utility Taxation


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VIII. NATIONAL TRENDS

AND DEVELOPMENTS

Facilitator

IRWIN M. SLOMKA

Partner, Morrison & Foerster LLP

Presenters

MICHAEL DUFFEL

Director, California Franchise Tax Board

HARLEY T. DUNCAN

Executive Director, Federation of Tax Administrators

DEBRA PETERSEN

Attorney Tax Counsel IV

California Franchise Tax Board


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Tax Activity Across the Nation

HARLEY DUNCAN

Presenter


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Purpose

  • Overview of tax activity across the country

  • Drivers of that activity

  • Attempt to separate some fact from fiction

  • Identify issues to consider


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Business Tax Activity

General Themes/Drivers

  • Broaden tax base and range of taxpayers

  • Decrease volatility of corporate tax

    Average change of 11 percent;

    maximum of -30 percent


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Business Tax Activity

  • Improve competitiveness/business climate

  • Arrest/reverse long-term decline in effective tax rate

    Decline of about 40 percent in effective rate


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Corporate Tax Volatility(Year over Year Change)

Source: Rockefeller Institute and FTA


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Effective Corporate Rate1980-2006


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General Approaches

  • Alternative tax/tax base

    Ohio, Texas, Kentucky

  • Add-back statutes

    15 states

  • Single sales factor

    Several states

  • Combined reporting

    Vermont and Pennsylvania


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Alternative Taxes

Ohio Commercial Activities Tax

  • Gross receipts tax replaces net income and franchise tax

  • 0.23 percent tax rate

  • Applied to all but financials


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Alternative Taxes

Issues

  • MTC factor-presence nexus standard

  • Sourcing receipts – services

  • Apportionment??

  • Filing unit


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Alternative Taxes

Texas Gross Margins Tax

  • Gross receipts less cost of goods, compensation ($300,000) or 30%

  • 1 percent rate; 0.5 percent retail/wholesale

  • Issues

    • Income tax issue

    • Long-term viability


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Alternative Taxes

Kentucky

  • Entity-level tax on flow-throughs

  • Withholding

  • Tax based on gross receipts


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Add-Back Statutes

  • Effort is to offset effect of intangible holding companies

  • Multiple states with varying approaches

  • Issues

    - Constitutional challenge in Alabama

    -Potential double taxation?

    -Disrupting ‘legitimate’ business transactions


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Single Sales Factor

Current Situation

  • Ten have equally-weighted three factor, and four allows it as an option for certain taxpayers.

  • Eighteen have double-weighted sales, with nine having it as option for certain taxpayers.

  • Nine have a single-sales factor, with seven others having it as an option for certain taxpayers.


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Single Sales Factor

Rationale

  • Promote facility/employee location in the state

  • Shift burden to those primarily marketing into the state


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Single Sales Factor

Results

  • Mixed, not consistent

  • Some Single Sales Factor states lose more than average manufacturing jobs

  • Major locations not concentrated in SSF states

  • Effect is not direct and other factors intervene

  • Need also to account for benefits of expenditures


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Single Sales Factor

Issues

  • Revenue loss/impact

  • Constitutionality

  • Throw-back rule

  • Marginal impact of being the “next state”

  • Incentive effect depends on where you are now

  • Interplay with P.L. 86-272 and potential physical presence nexus standard


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Combined Reporting

  • Adopted in Vermont in 2005

  • Proposed in Pennsylvania

  • Coupled with rate reductions and movement toward greater weighting of sales factor

  • Issues

    • Change in audit process/issues

    • Institutional overhead requirement


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Conclusion

  • Corporate tax likely to be area of continued attention

  • Focus on development

  • Focus on stability and horizontal inequity

  • Question of whether low-rate, broadly applied taxes are pro-growth and investment


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Questions?

Harley Duncan

Federation of Tax Administrators

<[email protected]>


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NATIONAL ISSUES AFFECTING STATE & LOCAL TAX ADMINISTRATION

California Franchise Tax Board

Presented by Mike Duffel

Director, CPA

Multistate Audit Field Operations - Out-of-State Offices


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WHAT’S THE HOT TOPIC IN NATIONAL, STATE, & LOCAL TAX ADMINISTRATION?


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REDUCING

THE TAX GAP!!!


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This is NOT the Tax Gap!

  • TOTAL TAX REVENUE20,000,000,000

  • LESS EXPENSES - 30,000,000,000

    NET DEFICIT: (10,000,000,000)


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A Tax Gap is defined as:

“The difference between

what taxpayers owe and

what they pay voluntarily.”


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Why is there a national and a local tax gap?

  • Tax Codes are increasingly complex

  • Proliferation of Tax Shelter Activities resulting in understated income

  • Erosion of taxpayer attitudes regarding the acceptability of cheating

  • Increase in activities lending themselves to cash and capital transactions


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Federal Tax Gap

  • IRS Report issued on 2/14/06 said,

  • “The total noncompliance rate in the US is 16.3%.”


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What’s the Problem?

  • About one in five taxpayers think it’s OK to cheat on their taxes.

  • Over the last four years, those saying it’s OK to cheat rose from 11% to 17%.

  • 60% of Americans believe that people are likely to cheat and take a chance on being audited.


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HOW LARGE IS THE FEDERAL TAX GAP???

$345,000,000,000


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Three Components of the Federal Tax Gap

  • NONFILING - 27 BILLION

  • UNDER-REPORTING - 285 BILLION

  • UNDERPAYMENT - 33 BILLION


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If the Federal Tax Gap is$345 Billion …..

…How much of the Tax Gap flows down to the states?


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Nonfiling, Under-reporting & Underpayment

The Tax Gap

involves

individual, corporate, employment,

estate, and excise taxes.


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Analysis of

Federal Under-Reporting

INDIVIDUAL INCOME TAX:

Under-Reported Non-Business Income 56 BILLION

Under-Reported Business Income 109 BILLION

Overstated Adjustments, Deductions,

Exemptions and Credits 32 BILLION

TOTAL INDIVIDUAL INCOME TAX

UNDERREPORTED 197 BILLION


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Analysis of

Federal Under-Reporting

CORPORATION INCOME TAX:

Large Corporations 25 BILLION

Small Corporations 5 BILLION

TOTAL CORPORATION INCOME TAX

UNDERREPORTED30 BILLION


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Income Tax Gap Segments


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Under-reporting / Overdeducting

($ Billions)

  • Wage earners report 99% of their wages.

  • Self-employed individuals who operate formally report 68% of their income.

  • Self-employed individuals operating informally on a cash basis report 19% of their income!


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Sole Proprietors – Highest Rates of PIT Under-reporting

  • Antique dealers60 – 70%

  • Restaurants 55 – 65%

  • Used car dealers45 – 55%

  • Auto repair businesses40 – 50%

  • Landscaping 35 – 45%

    Source: 1995 FTB presentation at UC Davis Tax Symposium


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Corporate Under-reporting by Industry Segment

  • Services (includes doctors,

    lawyers, hotels, etc.) 32%

  • Retail trades 25%

  • Finance (includes insurance and

    real estate) 23%

  • Mining20%

  • Transportation (includes20%

    communications and utilities)

  • Construction 20%


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What Can We Do?

  • Change public awareness and behavior,

  • Deter others who are considering noncompliance, and

  • Reassure compliant taxpayers that paying their fair share is the right thing to do.


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What Can States and Localities Do?

  • Offer incentives/programs for those who do not comply,

  • Work for legislation to promote enforcement,

  • Identify tax preparers filing fraudulent returns and assess additional penalties on preparers found to understate liabilities,

  • Increase audit involvement,

  • Create informant reward programs, and

  • Target specific industries.


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Voluntary Compliance Initiatives and Amnesty Programs

ALLOW TAXPAYERS TO…

  • File amended returns,

  • Pay the tax liability associated with abusive tax shelters, and

  • Avoid increased penalties during a set window period.


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Voluntary Compliance Initiatives and Amnesty Programs

  • CALIFORNIA Jan ‘04 - April ‘04

  • CONNECTICUT June ‘04 - July ‘04

  • ILLINOIS Oct ‘04 - Jan ‘05

  • ARIZONA Feb ‘05 - April ‘05

  • MINNESOTA Aug ‘05 – Jan ‘06

  • NEW YORK Oct ‘05 - Mar ‘06


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Multistate Tax Commission

NEW PROJECT IN DEVELOPMENT

  • A joint effort of approximately 30 states

  • A new voluntary compliance initiative

    THE GOAL: To encourage taxpayers who are engaged in potentially abusive tax avoidance transactions to file amended returns.


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Other Proposals Used by Many States & Localities

  • Independent contractor withholding study

  • Legislative possibilities:

    • Expanded / improved information reporting and matching

    • More audit resources

    • More focus on underground economy by industry segment

    • Discovery programs

    • More information sources to identify nonfilers


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Addressing the Tax Gap

Our ability to reduce the tax gap depends on partnering with the individual taxpayers, corporate community, and tax practitioners!


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TAX SHELTER UPDATE

California Franchise Tax Board

Presented by Debbie Petersen

Tax Counsel


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Federal Activities

  • Cases

    • Black and Decker

    • Coltec

    • Castle Harbor (GE)

    • Dow Chemical

  • SPSI Hearing – Offshore Tax Shelters

  • Federal Indictments

    • Tyco VP of Tax

    • KPMG Partners

    • Mid-Atlantic Telecom Founder


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Ethical Questions

  • Is it okay to take a position because the code doesn’t specifically say you can’t?

  • To what extent should Congressional intent be taken into consideration?


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Ethical Questions

  • Does “ethical” mean “legal” or that something “passes a risk/reward analysis?”

  • When does good taxpayer representation become tax evasion, conspiracy, or obstruction of justice?


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STEP 2

STEP 3

Exclusive lease to taxpayer for remaining life in exchange for $1 pursuant to binding commitment

Sale to Nevada Corp for $1,000 pursuant to binding commitment

Charitable Contribution Tax Shelter Example

STEP 1

Charity

Taxpayer

“Legitimate Tax Shelter”

Nevada Anonymous Corporation formed by

TP Attorney


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The Real Facts

  • Tax Return Penalty of Perjury Statement: True, correct and complete – evasion or conspiracy?

  • Disclosure: How much is enough?

  • Don’t ask, don’t tell? Is there an obligation to provide all the facts?

  • Controversy Stage: Valid privilege

    or obstruction of justice?


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QUESTIONS?


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