Tax Research Tips to Solve Tax Problems

The main purpose of tax research is to help clients find solutions to their tax problems. Tax law is continuously changing, so tax researchers must find the most authoritative, useful and updated resources to solve their clients’ tax problems.

While tax law is complex, tax researchers demand simplicity, which is why many look to tax research software for immediate and total access to tax resources. As tax law and technology evolve, so do tax research solutions. Tax research solutions offer the ability to quickly search thousands of sources and databases to provide the most up-to-date and useful results.

This issue, we tapped several resources to gain their expertise on tax research. BNA Software offers five situations when researchers need to gauge nexus exposure. Editor T. Steel Rose, CPA, explains how taxalmanac.org’s tax forums offer practical tax advice and how Tax Analysts e-book provides unique tax explanations for practitioners. CCH, a Wolters Kluwer business discusses the importance of interpretive regulations in tax research. For efficient tax law research and analysis, LexisNexis offers tips from integrating live citations to looking for trusted law literature.

Read on to discover more helpful tax research advice, as the top tax research vendors share their tips to solve tax problems.

5 Situations When You Need to Gauge Your Exposure

For state tax purposes, ‘‘nexus’’ means the threshold of contact that must exist between a taxpayer and a state before the state has the power to tax an out-of-state business. The U.S. Constitution requires that there be some minimum connection between a state and the person, property, or transaction it seeks to tax before taxable or substantial nexus can be found to exist.

Despite this constitutional pro-tection, states vary in determining what particular activities performed within their borders might trigger nexus, and then income or sales tax obligations for an out-of-state business.

From a company’s standpoint, the need to gauge nexus exposure generally arises in these five scenarios:

Startups. A company begins operating in only one state, but grows quickly and begins to regularly transact business activities in other jurisdictions.

Mergers, Acquisitions, and Re-organizations. Due diligence reveals nexus exposure in a jurisdiction either before or after the purchase of a target entity.

Change of Tax Personnel. A business replaces its tax manager. The new tax department head concludes that the former manager either incorrectly concluded that the company was not subject to tax in a particular jurisdiction or pursued an overly aggressive nexus policy.

Financial Reporting. A company must comply with FIN 48 or other financial reporting rules by listing nexus exposure as an “uncertain tax position.”

Expanding Nexus Standards. New legislation or case law, results in increased nexus exposure for out-of-state companies.

Different standards have emerged for income tax nexus and sales and use tax nexus.

For income tax, nearly all the states adhere to an “economic nexus” policy, under which a business that is not physically present in a state could be subject to tax if it engages in activities such as issuing credit cards to residents.

For sales tax, however, a company must be physically present within the jurisdiction to trigger nexus.

Despite these standards, gauging a company’s exposure can be challenging because nexus is a notoriously gray area of tax law. There is a general lack of state guidance regarding many types of nexus-creating activities. Even where guidance exists, state tax department nexus determinations tend to be fact specific and subject to interpretation.

Performing regular nexus reviews and keeping apprised of changes to state nexus laws will help guard against unwelcome surprises in this area.

— BNA Software

Tax Forums Offer Advice to Practitioners

At first glance taxalmanac.org looks dated. The opening main page feature article is Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 enacted 12/27 of 2010.

The first item under the General information button is 2005 Tax Rate Schedule. A note at the bottom of the page states, “This page was last modified on 2 November 2008, at 21:53.”

You can’t tell a book by its cover in this instance, because the strength of this Web site is in the forums where tax practitioners try to help each other and post very specific problems, sometimes in dealing with the IRS. While you can’t rely on the advice, you can obtain an experienced perspective. One such contributor is Dave Fogel. Responding to a question on how to deal with the IRS question during an audit: “Do you know of any errors on the return?” Fogel responded:

“Regarding your first question, under section 10.21 of Circular 230, you have an obligation to inform the client of the additional errors and the consequences of not correcting them. You have no duty to disclose these errors to the IRS agent.

However, the second question is the problem because you cannot lie to the IRS agent. TKelly recommends that you reply, “I cannot answer that question,” and that you inform the agent about the law of privilege. I presume that the “law of privilege” that TKelly is referring to is Sec. 7525. This section protects communications between a taxpayer and the tax practitioner, and your knowledge of the errors might not be entitled to the confidential protection provided in this section because they aren’t “communications” — you discovered them on your own after going through the return and the client’s records.

In addition, by informing the agent about the “law of privilege,” the agent will become suspicious and will probably expand the audit to other areas of the return. Instead, I would recommend that you reply, “Let me get back to you on this after I’ve had a discussion with my client.” Then convince the client to disclose the errors to the agent. If the client is unconvinced, then withdraw from the engagement. On further investigation it turns out Fogel, is a CPA, EA, who is also admitted to practice before U.S. Tax Court and has 35 years experience representing clients.

There are other useful resources on the site including the Research Resources section on the left side of the main page.

The Importance of Interpretive Regulations

Although there have been extensive changes in the techniques for doing tax research in recent years with the growing sophistication of online tax research tools, there is a perception that the analysis of the results of that tax research has not changed much over the years. There are still the primary sources of tax research from the Congress (the Internal Revenue Code, tax treaties and legislative history), from the Administration (Regulations, Rulings, Notices and whatever other documents can be obtained from Treasury and the IRS), and from the Judiciary (court decisions). Then there are the secondary sources of expert analysis and commentary.

Knowing the weight to be placed on the results of that tax research has, however, become increasingly important with increased penalties on taxpayers and return preparers with respect to the support for the positions taken on those returns. The weight given to particular results of tax research determines the amount of authority for a certain tax position. The Internal Revenue Code is always given the most weight in tax research. After that, would generally come regulations, since Congress has given the Treasury general authority to interpret the Internal Revenue Code. Of course, even a regulation could be trumped by a Supreme Court decision stating that the regulation was an improper interpretation of Congressional intent in the statute.

There has been a recent change in the weight to be given to types of tax regulations. Under the traditional view of tax research, there are two types of regulations. Interpretive regulations, enacted under the general statutory authority to interpret the Internal Revenue Code, were to be given less weight than legislative regulations, where Congress in the specific Code provision being interpreted states that the Treasury is to issue regulations fleshing out the meaning of the provision. Legislative regulations were to be given the force and effect of law unless they were arbitrary, capricious, or manifestly contrary to the statute (the Chevron standard). Interpretive regulations were to be given deference if they implemented that statute in a reasonable manner, giving consideration to the plain language, origin and purpose of the statute and the proximity of the timing of the regulations to the enactment of the statute (the National Muffler standard).

In the Supreme Court’s recent decision in Mayo, however, the Court adopts the Chevron standard for both legislative and interpretive regulations. In weighing the results of tax research, interpretive regulations move up a notch. This is already making it more difficult to challenge regulations in court and could also affect the weight to be given to a tax position taken on a return.

— CCH, a Wolters Kluwer business

Speed, Accuracy Aid in Tax Law Research

Speed and accuracy are two key elements to efficient tax law research and analysis. When they are both possible, tax law professionals work faster, smoother and with more confidence for better service to their clients. When one element is not present, however, things bog down and more time is spent either finding or verifying tax law and related issues.

With this in mind, here are a few tips on what to look for in tax law technology that combine the elements of speed and accuracy to aid in tax law work:

Integrate live citations, IRS Code and Treasury Regulations with other sources of related information. Look for and use technology solutions that not only offer codes and regulations, but also provide easy and seamless access to related analytical content, law reviews, case annotations, legislative history and other resources. This improves research efficiency and thoroughness by giving the user instant access to multiple tax sources related to a Code or Regulation section, thereby reducing the number of searches.

Choose resources that offer shortcuts to find and verify law. Finding the right law, code or regulation is one thing, while verifying it as accurate, valid and up-to-date is another. Tax law technologies that offer ways to do this quickly can be of great assistance — not only in terms of speed, but in a user’s confidence that he or she has indeed found valid law. For example, some leading tax law solutions feature drop down menus that enable the user to pull up the authority needed and check to make sure that it’s still good Federal or state law with a “wizard” tool. Look for these and use them if your solution offers them, as they do offer a way to find what you need and enable you to move on quickly to your next step.

Look for trusted tax law literature. An effective tax law technology solution will also offer up integrated access to a library of treatises and other written information about tax law to help professionals stay up to date and assist in the thoroughness and accuracy of analysis.

—LexisNexis

When it comes to tax research, Tax Analysts should not be overlooked. They recently announced a new e-book of the entire Internal Revenue Code and Regulations. The interactive e-book with the entire Internal Revenue Code and Regulations will update quarterly.  Tax Analysts offers a unique perspective to help explain taxes to tax clients.

For example, according to their State Tax Notes, “Wireless subscribers in 47 states pay taxes, fees and government-mandated charges that exceed the general retail sales tax rate.” Specifically, “the average American pays a whopping 16.26% on their wireless phone and broadband bills, with Nebraska residents paying as much as 23.69%.”

Joseph Thorndike, director of the tax history project at Tax Analysts, explains that when it comes to tax holidays, “The balance of evidence at this point suggests not particularly successful at creating jobs, if that’s the goal. You could make a marginally better case that as far as stimulus goes, they stimulate the economy, but they’re not the most effective form of stimulus.’”

When clients complain that taxes are rising, David Cay Johnston, a columnist for Tax Notes points out that, “The effective rate for the top 400 taxpayers has gone from 30 cents on the dollar in 1993 to 22 cents at the end of the Clinton years to 16.6 cents under Bush, so their effective rate has gone down more than 40 percent.”

Taking the historical view Thorndike states that the federal income tax, “Enacted as a wartime measure in 1862, roughly 10 percent of Americans, mostly the more affluent Northern citizens, were paying income tax in the late 1860s, compared with 50 percent today.”

Martin Sullivan, an economist at Tax Analysts believes there are dangers in de-fanging the IRS. According to Sullivan, “Taxpayers will lose their fear of the IRS and stop paying taxes, expecting that they could make good the next time the U.S. government offers a reprieve. ‘It actually reduces compliance with the rules,’ he said as reported by The New York Times, ‘In the long run, it’s a revenue loser.’”

Sullivan also reported that booking such a large percentage of its profits in low-tax countries has, “allowed G.E. to bring its U.S. effective tax rate to rock-bottom levels (3.6%).”

In response to the elusive how much salary to pay a Sub-S corporation owner Sullivan reported in The Wall Street Journal that, “The average pay for a Sub-S owner was recently $38,400.” His inference was that was too low.

Sullivan makes the point that, “Short-term incentives for accelerated depreciation, which Congress enacted in 2008, 2009, and 2010 cause companies to report lower current tax expenses.”

Bringing in the practical implications of tax legislation Christopher Bergin, president and publisher of Tax Analysts clarifies, “One of my least favorite tax credits is the ethanol production credit,’ notes ‘In addition to taking care of the farmers and ethanol producers, the credit drives up the price of feed, which drives up the price of pigs, which drives up the price of bacon.”

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