Income Tax Compliance: How to File Correctly and Defend What You Filed

A multinational enterprise subject to the OECD's Pillar Two global minimum tax framework must calculate its effective tax rate in each jurisdiction where it operates and pay a top-up tax when that rate falls below the fifteen percent minimum, and international tax compliance counsel advising on Pillar Two compliance must evaluate whether the group's legal entity structure and intercompany pricing produce an effective tax rate in each jurisdiction that is correctly measured under the qualified domestic minimum top-up tax rules.

A US person who holds a financial account at a foreign financial institution is subject to FATCA's reporting requirements and may also be subject to the OECD's Common Reporting Standard in the jurisdiction where the account is maintained, and FBAR and FATCA compliance counsel advising on offshore account compliance must evaluate whether the account holder has correctly reported all foreign financial assets on Form 8938, whether the account's balance triggered an FBAR filing obligation on FinCEN Form 114, and whether any prior years of noncompliance can be corrected through the IRS's streamlined filing compliance procedures.

A business that claims deductions for expenses that tax authorities commonly challenge, including meals and entertainment, compensation paid to owner-employees, and research and development expenditures, must maintain contemporaneous documentation that establishes the business purpose and business connection of each expenditure, and business tax counsel advising on deduction substantiation must evaluate whether the company's expense approval and documentation policies satisfy the specific record-keeping requirements that apply to each category of expense.

A taxpayer that cannot produce contemporaneous transfer pricing documentation at the time of an audit faces a penalty of twenty percent of the transfer pricing adjustment if the IRS determines that the intercompany prices are not at arm's length, and transfer pricing counsel advising on transfer pricing compliance must evaluate whether the taxpayer's master file and local file documentation satisfy the requirements of the applicable tax treaty and the OECD Transfer Pricing Guidelines and whether the benchmarking study supporting the arm's length price is current and based on a reliable set of comparable transactions.

A high-net-worth individual who splits time between multiple countries must determine which country or countries treat the individual as a tax resident, because tax residency determines the scope of the individual's obligation to report worldwide income, and FBAR reporting counsel advising on tax residency must evaluate whether the individual's connections to each jurisdiction satisfy the applicable statutory residency tests and whether the tie-breaker rules in the applicable tax treaty override the domestic residency determinations.

A controlling shareholder who sells shares of a closely held corporation or receives dividends from a private company must correctly characterize and report each item of income, because the difference between capital gain and ordinary income treatment can significantly affect the individual's total tax liability, and tax audits and adjustments counsel advising on income characterization must evaluate whether the transaction is structured in a manner that produces the intended tax treatment and whether any applicable holding period, basis calculation, and installment reporting elections have been correctly applied.

A taxpayer who receives an information document request from the IRS or a state tax authority must carefully evaluate which documents are responsive to the request, whether any responsive documents are protected by the attorney-client privilege or tax practitioner privilege, and whether the scope of the request exceeds what is permitted under the applicable statute or treaty, and IRS audit defense counsel managing an audit must evaluate whether the document request can be narrowed through negotiation with the examiner.

A taxpayer who disagrees with the IRS's proposed adjustments after an examination can request a conference with the IRS Independent Office of Appeals, where approximately eighty percent of cases are resolved without litigation, and tax delinquency and penalties counsel advising on an appeals strategy must evaluate whether the legal and factual hazards of litigation favor a settlement at the Appeals level.