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If you want to set up a business in the state of Pennsylvania, you may qualify to operate virtually tax-free for over a decade. Parcel-based exemptions are available at a dozen locations across the state through the Keystone Opportunity Zone (KOZ) Program.

The Program is a partnership between state and local governments designed to revitalize and develop vacant and underused land and buildings. Businesses that qualify to operate in KOZ locales receive a litany of both state and local tax breaks:

koz-program-1

The Program’s legislation was first passed in 1998 by former Pennsylvania Governor Tom Ridge. Since then, according to the Pennsylvania Department of Community and Economic Development (DCED), KOZ-participant firms have created close to 20,000 jobs and generated about $8.01 billion in real estate capital investments.

These successes have encouraged Congress to incrementally expand the KOZ Program. Passed in 2012, the most recent amendments to the legislation

  • permit the DCED to create 15 new zones, each no larger than 15 acres;
  • repeal the pre-existing December 2019 close date for all abatements provided by the KOZ Program;
  • enable the DCED to extend the close date of KOZs that expired at the end of 2013 and later by as much as 10 years, and;
  • authorize future extensions of the KOZ Program on an “as applied/as needed basis.”

Pennsylvania’s 12 KOZ locales break down further into 350-acre subzones. Local governments decide which parcels and firms get the exemptions inside each of those subzones.

The specifics of the breaks firms receive vary by local political whim. But economic development agency CAN DO, based in Hazleton Pennsylvania, provides the following example analysis of a mid-sized firm that successfully applies for KOZ exemptions in Hazle Township:

KOZ program details

Importantly, you don’t have to be from out of town to participate. Suppose you wish to relocate your business to a KOZ within limits of the township, borough or municipality in which you currently operate.

The stipulation is that firms which relocate to a KOZ from within a given locale must either

  • increase the number of full-time positions at their firm within the first year of operation in a KOZ, or;
  • make an investment in that locale equal to or greater than 10% of the area’s gross revenues from the previous year.

Page nine of the DCED’s March 2014 KOZ brochure provides potential applicants up-to-date contact information for officials at each of the Program’s 12 subzones.

uncle-sam-not-collecting-all-taxesAccording to a new report by the Treasury Inspector General for Tax Adminstration (TIGTA), the IRS may have failed to collect billions of dollars from delinquent taxpayers because not enough research was done before moving the client to a Currently Not Collectible Status–Unable to Contact/Unable to Locate (CNC-UTC/UTL). TIGTA performed the audit because for Fiscal Year 2012 the IRS closed 482,611 tax modules with an estimated $6.7 billion as CNC-UTC/UTL.

IRS employees may move taxpayers to a CNC status if it is determined there are no income or assets available or if they are unable to contact (UTC) or unable to locate (UTL) the delinquent taxpayers. However, IRS employees must do the necessary research or follow a checklist before moving these clients to CNC-UTC/UTL.

TIGTA reviewed a stratified sample of 250 cases in the CNC-UTC/UTL status and found that there was no evidence that all research steps were taken in 57% of the cases. To make matters worse, 7% of the cases with tax debt over $10,000 never had a a Notice of Federal Tax Lien (NFTL) filed for all applicable tax periods as required.

80% of Field Cases & 21% of ACS Cases Showed a Lack of Proper Research

In 165 of 204 Field Cases (Collection Field function of IRS), there was a  lack of research completed. Unlike the ACS (Automated Collection System), these cases have to be approved by managers. In 38 ACS cases, 8, or 21% of the cases, IRS ACS employees failed to complete the necessary research.

TIGTA had recommendations for the IRS. These are:

  • Directors, Enterprises Collection Strategy and Field Division must ensure controls are in place so that the necessary research is completed and  NFTL determinations are made where applicable
  • Ensure managers document that all case actions are done before approving any CNC-UTC/UTL case closure.
  • Make sure that all CNC-UTC/UTL cases closed in Fiscal Year 2012 had NTFL filed for all applicable tax periods
  • Get an analysis done to ensure that the additional research steps undertaken before moving a taxpayer to CNC-UTC/UTL status are justified

The IRS agreed with the recommendations but TIGTA believes the corrective actions they are making will not address all recommendations.

tigtaTIGTA, or the U.S. Treasury Inspector General for Tax Administration, recently did an audit to determine if the IRS was validating the eligibility of certain employers in the Voluntary Classification Settlement Program (VCSP).

The IRS over the last few years has stepped up its effort to enforce employment tax laws. Specifically, the IRS has been targeting employers who misclassify employees as independent contractors. As a result, the IRS rolled out VCSP in 2011 in an effort to get employers to voluntarily come forward and correctly reclassify workers as employees as opposed to independent contractors. By employers doing so, they would get relief for employment taxes and penalties that would have been owed on those workers that were misclassified as independent contractors. The benefits are worth knowing:

  • Only 10% of prior year employment taxes  for misclassified workers would need to be paid
  • Tax penalties and interest would not be owed on the liability
  • The employer will not be subjected to an employment tax audit regarding worker classification for previous years

TIGTA discovered the IRS was not specifically verifying the employees (using names and Social Security Numbers) who were being reclassified. Therefore, the IRS really had no way to validate whether a taxpayer who took advantage of VCSP benefits were in compliance or maintaining compliance.

As a result, TIGTA made five recommendations which the IRS agreed to:

  • Require that employers provide employee names and Social Security Numbers for those being reclassified with the VCSP application
  • Improve IRS internal procedures for evaluating employer eligibility and confirm the accuracy of worker compensation and the VCSP payment due
  • Devise follow-up procedures to ensure VCSP compliance
  • Create one system for tracking inventory and monitoring program performance
  • Make sure accepted agreements are sent to the IRS business units responsible for monitoring compliance

IRS-itin-updatedPart of the Affordable Care Act Legislation imposed an excise tax of 2.3% on the sales price for medical devices in 2013. This excise tax impacts manufacturers, producers, and importers, as they must collect the 2.3% excise tax and submit Form 270, Quarterly Federal Excise Tax Return. This excise tax, based on the Joint Committee on Taxation, is estimated to bring in $20 billion from 2013-2019.

The Treasury Inspector General for Tax Administration recently released a report on an audit that was completed to assess how the IRS is processing tax returns that report the new excise tax and to identify noncompliance (if any). TIGTA found out that medical device excise tax revenues are much lower than were anticipated. They also found out that the IRS cannot even identify all the medical device manufacturers that have registered with the FDA that must file Form 270.

TIGTA audited 5,107 Quarterly Federal Excise Tax Return Forms from Q1 and Q2 (quarters ending March 31st and June 30, 2013) and discovered that their were discrepancies with 276 tax returns.  Although only 5% of total tax returns audited had discrepancies, it amounts to $117.8 million in lost tax revenue when tax return figures were compared to figures reported on Form 720.

TIGTA also discovered that the IRS incorrectly assessed 219 failure to deposit penalties, amounting to about $706k for Q1 and Q2 of this year, which were technically penalty relief periods. Although the IRS had originally credited firms for 133 incorrect penalty assessments, 86 penalty assessments were still in error and the IRS immediately reversed the penalties once TIGTA alerted the IRS.

The final recommendations for TIGTA to the IRS were:

  • Refine compliance strategy to catch noncompliance
  • Create a process to make sure Forms 720 excise tax amounts are correct
  • Figure out the proper excise tax owed for the 276 returns that had discrepancies

The IRS agreed with all of TIGTA’s recommendations.

tigtaTIGTA, or the Treasury Inspector General for Tax Administration recently found that about 4% (3.8%) of tax exempt organizations were delinquent in paying Federal payroll taxes. In fact, TIGTA found that over 64,000 tax exempt organizations owed over $875 million in Federal taxes since June 16th, 2012. Moreover, many of these 64,000 tax-exempt organizations were delinquent over many tax periods.

Although tax-exempt organizations do not have to pay Federal income taxes, they are required to pay Federal payroll taxes which includes social security and medicare taxes. What makes this report daunting, is that TIGTA reviewed 25 tax-exempt organizations over a 3-year period with delinquent payroll taxes and found that these same organizations were receiving over $148 million in government assistance such as government grants, Medicaid, and Medicare.

In the wake of the IRS scandal last year with many organizations losing tax-exempt status, nothing in the Internal Revenue code allows the IRS to revoke the tax-exempt status if an organization fails to pay payroll taxes.

What TIGTA recommended that the Director, Exempt Organizations to:

  • Have the Department of the Treasury evaluate if legislation is needed to address and enforce payroll tax compliance for tax-exempt organizations
  • Complete analyses repeatedly to identify tax-exempt organizations that abuse their tax-exempt status for examination
  • Coordinate with Small Business/Self-Employed Division to obtain relevant collection information

The IRS disagreed with the last two recommendations but agreed with the first recommendation above.