Daily Tax Update - June 23, 2010

TREASURY INSPECTOR GENERAL’S REPORT REVEALS MILLIONS LOST FROM FRAUDULENT FIRST-TIME HOMEBUYER CREDIT CLAIMS: Today, a report released by the Treasury Inspector General for Tax Administration (TIGTA) recommends that the IRS take greater precautions to ensure that claims for the First-Time Homebuyer Credit are administered more efficiently. Homebuyers who purchased a home in 2008, 2009, or 2010 may be able to take advantage of the First-Time Homebuyer Credit. The Credit may be an interest-free loan or a fully refundable Credit depending on when the taxpayer purchased his or her home.

  • According to the report, “Fraudulent and erroneous Credits totaling millions of dollars in refunds were issued, which increases an already burgeoning Federal deficit. Control weaknesses allowed fraudulent claims filed by prison inmates totaling an estimated $9.1 million to be processed. Multiple claims for the same home were allowed. In addition, claims totaling an estimated $17.6 million were allowed for homes purchased prior to the dates allowed by the law. Many questionable claims for the Credit made on amended tax returns were not appropriately sent to the IRS’ Examination function for scrutiny. Further, TIGTA found additional IRS employees that had made questionable claims for the Credit.”
  • The TIGTA recommended that the “IRS ensure that steps are taken to reconcile Prisoner Files from year to year. The IRS should also ensure that erroneous Credits received by prisoners and by taxpayers claiming homes that do not qualify for the Credit (including those filed on amended returns) are identified and recovered through post-refund examination activities. IRS management agreed with all of the recommendations. Management plans to continue to explore ways to enhance the accuracy and completeness of the Prisoner File and plans to take steps to ensure that the claims made by prisoners are given high priority and are subject to post-refund examinations. In addition, the IRS plans to provide additional compliance scrutiny to all other inappropriate claims.”
  • In response to the report’s findings, Ways and Means Oversight Subcommittee Chairman John Lewis said, “Last year, we learned that children and persons who did not purchase homes were fraudulently claiming the first-time homebuyer credit. In response, we provided additional authority to the IRS to administer the program. Although I am pleased that the fraud identified earlier does not continue, I am concerned about prisoners claiming the credit. I am also disturbed by 67 people claiming the credit for a single address and millions of dollars claimed by people who purchased homes before the program started. The report highlights the need to remain vigilant in this area. We are committed to working with the IRS and TIGTA to address and eliminate fraud with respect to all Federal tax provisions.”

UK RELEASES EMERGENCY BUDGET: On June 22, the United Kingdom released its 2010 emergency budget. The budget contains the following provisions of interest:

  • The New Bank Levy: One of the most significant changes announced in the Emergency Budget is the introduction of an annual levy on Banks. The levy is to apply to total liabilities calculated by reference to (i) the consolidated balance sheets of the UK banking groups and building societies, (ii) the aggregated subsidiary and branch balance sheets of foreign banks and banking groups operating in the United Kingdom and (iii) the balance sheets of UK banks in non-banking groups. These institutions and groups will only be liable for the levy where their relevant aggregate liabilities amount to £20 billion or more. The levy will be based on total liabilities excluding (a) Tier 1 capital, (b) insured retail deposits, (c) repos secured on sovereign debt and (d) policyholder liabilities of retail insurance businesses within banking groups. The levy is to be set at 0.04 per cent for 2011 raising to 0.07 per cent in the following year and is expected to raise over £2 billion annually. The levy will not be deductible for corporation tax purposes. Consultation is to take place in the summer with the final details to follow later on in the year - the levy is to come into effect from 1 January 2011.
  • Change to the Standard Rate of VAT: Another of the significant changes announced in the Emergency Budget is that the standard rate of VAT will increase to 20 per cent on 4 January 2011. The new rate will now match the rates of the UK’s leading trading partners - the German and the French VAT rates are 19% and 19.6% respectively. Anti-forestalling legislation will be included in the enabling legislation to prevent the 17.5 per cent rate applying to supplies of goods or services that are provided on or after 4 January 2011. Zero rated supplies (such as basic foodstuffs, children’s clothing and books), exempt supplies (such as education and health) and supplies subject to VAT at the reduced 5 per cent rate (such as domestic fuel and power) are not affected by this change.
  • Corporation Tax – Rates: Companies with profits below £300,000 will pay corporate tax at a rate of 20% on and after 1 April 2011, a reduction of 1% from the current 21%. Companies with profits above £1.5million will pay corporation tax at a rate of 27% on and after 1 April 2011 (currently the rate is 28%) with further annual reductions of 1% every year until the rate reaches 24%. The decreased rate is intended to make the UK internationally more competitive than it is at present. Companies with profits between £300,000 and £1.5million will pay corporate tax at an effective rate which is between the two rates applying at the material time.
  • Controlled Foreign Company Regime and Foreign Branch Reform: The Emergency Budget announcements include confirmation of the Government’s intention to continue with the reform the UK’s Controlled Foreign Company regime. Consultation will take place over the summer on interim improvements to be legislated in spring 2011 to make the current rules easier to operate and where possible increase competitiveness. Wider reform will be legislated in spring 2012 allowing time to consider carefully how to make the rules more competitive, to enhance long-term stability and provide adequate protection of the UK tax base. The Government has also stated that it will move to a more territorial basis for taxing the profits of foreign branches, and will consult in summer 2010 on options for retaining foreign branch loss relief as part of this, reforming the rules in 2011.
  • Non-domiciliaries: The Government is to review the taxation of non-domiciled individuals with consideration to be given, once again, to a General Anti-Avoidance Rule.
  • For additional information, contact Kassim Meghjee - kmeghjee@steptoe.com or Philip R. West - pwest@steptoe.com.
  • A detailed summary can be accessed here.

INTERNAL REVENUE SERVICE - CIRCULAR 230 DISCLOSURE:
As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

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