RCP Tax Risk Consulting Practice
Penalties exist to encourage voluntary compliance to the standards of behavior expected by the Internal Revenue Code. The IRS can provide penalty relief where taxpayers can demonstrate that they acted with care under the guidelines set forth in the IRM Chapter 20.1.1.
About Tax Risk: A Critical Business & Personal Exposure
With an ever-increasing focus on governance and regulation, tax risk management has never been as important as it is in today’s environment. Tax compliance failures represent not only a financial risk of high dollar penalties that drain operating capital, but could ultimately result in a possible increase in the underlying tax charge. Additionally, compliance related issues that may be unintentional, can have at times catastrophic consequences that may put an individual or a business in jeopardy by damaging its reputation with tax authorities, the public and their clients
Consequently, there is a vital need to be able to manage multi-level tax compliance requirements/issues and keep abreast of changes in legislation and their corresponding regulations. Business pressures such as a lack of internal resources and the need to control costs can exacerbate your ability to meet compliance responsibilities.
RCP’s Tax Risk Consulting Practice, lead by a former IRS Director of Penalties & Interest, can help provide you with the assurance and protection of a knowledgeable independent review.
RCP Tax Risk Consulting Services
RCP Tax Risk Consulting offers a unique and comprehensive set of solutions. We are a nationwide firm that specializes exclusively in matters related to tax risk management and mitigation with an emphasis on problem resolution and penalty prevention. Our firm can successfully bring businesses a permanent solution to penalty related tax matters; achieving the best possible results for our clients across a wide range of tax penalty issues. From individuals to large corporations, we are dedicated to providing the best service with prompt results for our clients.
Our practice focuses on three primary areas of specialization:
Tax Risk Audits>Tax Risk IdentificationTax Risk Compliance>Tax Resolution and Penalty PreventionTax Risk Mitigation>Tax Risk Mitigation via Tax Insurance
Tax Risk Audits - Before a penalty notice is received
We believe that “an ounce of prevention is worth its weight in gold”…..for that reason tax risks audits focus on inspecting your current tax practices, procedures and systems to identify where you may be vulnerable to incurring a penalty assessment. A review of past, current and anticipated transactions is central in determining whether or not a client is at risk. Our deep understanding of the IRS Code and of the types of transactions that have run afoul will help elevate your tax risk mitigation. We can provide recommendations for changes in practice as well as solutions that will mitigate current penalty exposure and prevent future penalty exposure. In many cases, an improved practice will cause the IRS to choose not to impose a penalty for past practices.
Tax Risk Compliance - Once a penalty notice is received
If you have received a penalty notice, or if the IRS or a U.S. Possession is proposing a penalty, you owe it to yourself or your company to take action and contact us - NOW. We will conduct an in-depth review of the facts that surround the situation, in order to develop a plan to ensure compliance and challenge/ reduce any current penalties that may be pending. As part of our service we will review and analyze your IRS tax transcripts of your federal tax accounts to determine if previously paid penalties and interest charges can currently be challenged and previously paid monies can be recovered.
Scope of the Problem: Penalties and Interest represent a large portion of the majority of IRS notices. In FY 2004 the Internal Revenue Service proposed over $20 billion in penalties and interest. Of that amount, $7.1 billion were against businesses with $5.2 billion relating to employment tax returns. Additionally, there were roughly $200 million in penalty assessments on information return filings. Of the balance due accounts that the IRS has in their inventory penalties & interest represent 67 percent of the total amount due.
Tax Risk Mitigation – Tax insurance to help mitigate past/present or future liabilities
In many instances, complex tax issues lead a corporation or individual to procure an "opinion letter" from their tax advisor on the ability of a tax strategy to withstand review by the IRS or foreign revenue authority. These opinions generally offer comfort - but do not offer certainty.
RCP tax solutions reinforce the professional opinion obtained and remove all financial uncertainty by insuring any contingent tax exposure which is subject to future challenge by the IRS and/or state or foreign tax authorities. RCP tax solutions can also be utilized as an alternative to, or in conjunction with, a private letter ruling request to the IRS.
RCP tax solutions reimburse the insured for: Federal, state, local or foreign taxes; related fines, penalties and interest; denied tax benefits; legal and accounting costs related to resolving future disputes with the IRS and/or other taxing authorities. Generally, they are available on an after-tax gross-up basis. Policies provide coverage for the entire tax exposure period as defined by applicable tax statute and are backed by highly rated insurance providers.
RCP Tax Risk Consulting Services in Action:
Penalty Averaging – on employment tax returns if the IRS is missing or cannot read schedule B it will assess what is called an “averaging penalty”. We can reduce or eliminate these penalties in 95 percent of the cases.
Reporting on incorrect Forms – Filing and/or paying taxes on incorrect Tax Forms.
Filing or paying taxes to the wrong tax authority – Paid withheld income tax to IRS and it should have been paid to a US Possession.
Non-Payment or Late Payment of FTDs - We can maximize your timely payment so that your penalty is reduced significantly. This must be done within 90 days of the penalty assessment. After which we will review to determine if further penalty reduction can be addressed through the penalty relief provisions of Chapter 20.1.1 of the IRM.
Mergers and Acquisition – The fall-outs resulting from Mergers and Acquisitions activities create risk in the information reporting and employment tax areas. We will resolve any penalty and interest assessments that may have already been assessed as a result of the M&A activities. Then we will review the impacted departments and prepare a report of problems areas and develop a first year implementation guide to mitigate any future issues. If the tax consequences of a past transaction are holding up a potential M&A deal, we may be able to mitigate the risk by procuring a tax insurance policy, thereby transferring potential liability to a third party (rated Property Casualty firm).
Information Reporting – Information reporting is the cornerstone of tax compliance in America. Congress is placing more and more income items as reportable on information reporting documents, so the IRS is placing more and more emphasis on the business community to report accurately and timely. These penalties generally run $50 per document and are capped at $100,000 for Small Businesses, and $250,000 for Large businesses. Many businesses have previously paid these penalties as a cost of doing business. They decided that it was cheaper to pay than to dispute with IRS on the penalty. We will address these issues with IRS for less than the cost of the penalty and in many cases we will be able to recapture all or some of these previously paid amounts.
Insuring tax risks – In cases where there is insufficient time to obtain a ruling from the tax authorities; or where the IRS as a matter of policy will not issue private letter rulings; and or when there are concerns that the IRS will decline to rule on the matter.
RCP Tax Insurance
Adding immediate financial certainty to tax opinions issued by reputable legal and accounting firms, for both current and past transactions.
In many instances, complex tax issues lead a corporation or individual to procure an "opinion letter" from their tax advisor on the ability of a tax strategy to withstand review by the IRS or foreign revenue authority. These opinions generally offer comfort - but do not offer certainty.
RCP tax solutions reinforce the professional opinion obtained and remove all financial uncertainty by insuring any contingent tax exposure which is subject to future challenge by the IRS and/or state or foreign tax authorities. RCP tax solutions can also be utilized as an alternative to, or in conjunction with, a private letter ruling request to the IRS.
RCP tax solutions reimburse the insured for: Federal, state, local or foreign taxes; related fines, penalties and interest; denied tax benefits; legal and accounting costs related to resolving future disputes with the IRS and/or other taxing authorities. Policies provide coverage for the entire tax exposure period as defined by applicable tax statute and are backed by highly rated insurance providers.
The RCP tax insurance team consists of highly qualified experts who have practical experience in structuring unique tax solutions for Fortune 100 firms. Team members have a unique blend of both investment banking and insurance skills having held senior positions at: Merrill Lynch, ABN Amro, Deloitte and Touche, Bank of America and AIG. The team is additionally supported by tax counsel from the most prestigious law firms in the country.
Accounting for Tax Insurance
Collection of tax insurance should be recorded in other income, not a credit to the income tax provision. The insurance proceeds would be recorded at the time the insurance company acknowledges that they have an obligation and when an insured can estimate how much the receivable will amount to. The loss of the tax benefit for which the insurance was purchased would be shown as a debit to the tax provision in the year an insured loses the issue to the IRS. Because insurance was purchased, there would be no basis to not recognize the tax benefit on the original transaction.
Sample Opportunities
Past Tax Strategies:
When there are concerns about previous tax positions taken, both on an individual and corporate level.
Current Tax Strategies:
When there is insufficient time to obtain a ruling from the tax authorities.
In cases where the IRS as a matter of policy will not issue private letter rulings.
When there are concerns that the IRS will decline to rule on the matter.
Individuals:
To protect against tax liability arising from estate planning or wealth management techniques.
Corporations:
When in need of financial certainty - tax insurance locks in the originally envisioned financial benefits of a past or contemplated transaction.
Offers an alternative to tax reserves - eliminates the need to reserve or reduces the amount of tax reserves maintained for corporate transactions and can be used as an effective tax management tool.
Offers bottom line leverage - tax insurance positively impacts the bottom line (and the effective tax rate). By eliminating/reducing tax reserves, corporations can recognize profits from key transactions sooner rather than later.
An Audit Committee & Corporate Governance Tool - provides a vehicle through which companies can mitigate contingent tax liabilities for transactions that may now be under greater scrutiny due to prevailing market conditions.
When there are concerns about availability of corporate net operating loss carry-forwards as a result of a change in ownership of a corporation.
When a current transaction may jeopardize the tax treatment of a prior tax-free spin-off.
When there are concerns that a lease transaction will be treated as a sale for tax purposes.
When there are concerns that debt will be treated as equity.
To protect against tax liability arising from potential loss of S corporation qualification.
When there are concerns about whether basis should be stepped up or carried over as a result of a potential transaction.
To protect against tax liability arising from potential loss of Real Estate Investment Trust (REIT) qualification.
Other Areas of Concern:
IRC Section 263(c): Intangible Drilling Costs.
IRC Section 355/355(e): Tax-Free Spin-Offs.
IRC Section 358: Tax-Free Mergers.
IRC Section 1031: Like-Kind Exchanges.
IRC Section 29: Synthetic Fuel Credits.
IRC Section 368 (a)(1)(A): Tax-Free Corporate Re-organizations.
IRC Section 368 (a)(1)(G), 197,269: Structuring transactions as taxable to realize a step up in basis.
IRC Section 382: Using net operating losses to avoid tax on capital gain.
