Tax Controversy Lawyer Blog

The North Carolina Department of Revenue has launched a fight against approximately 350 online retailers. The North Carolina Department of Revenue is seeking the identity of the purchasers with North Carolina addresses as well as a description of the purchases. The most visible case is a North Carolina sales tax audit of Amazon.com. In the Amazon.com case alone there are about 50 million purchases covered.

North Carolina charges a "use tax" on out-of-state purchases of goods for use or consumption in North Carolina. If you or your business has purchased goods from Amazon.com since 2003, the North Carolina Department of Revenue may get your identity and a description of what you purchased. If you have not paid the North Carolina use tax on these purchases, you may be the subject of a North Carolina Department of Revenue use tax audit in the future.

Lucky for you, Amazon.com is not giving up without a fight and neither is the American Civil Liberties Union.

Amazon filed a lawsuit in April in the U.S. District Court for the Western District of Washington against the North Carolina Department of Revenue in response to a state request for purchase records dating back to August 2003 of customers with a North Carolina shipping address.

In June, the American Civil Liberties Union filed a motion to intervene in the lawsuit. The ACLU contends that the Department's demand for information is unconstitutional, as the Department can assess taxes based on retail sales without knowing what customers purchased. The ACLU argues the product descriptions reveal personal and private information about consumer choices, and that the Department should narrow the scope of its request in order to protect privacy rights. The Department counters that it only asks for product descriptions in order to determine the correct tax liability.

In accordance with the Internet Freedom Tax Act, remote sellers (i.e. online retailers) are generally required to collect taxes where they maintain a physical selling presence. If they do not have such a presence, they are not required to collect sales tax. Thus, in online transactions with out-of-state retailers, the consumer typically has the obligation to calculate and pay a use tax. North Carolina seeks voluntary compliance from taxpayers, requesting inclusion of a "consumer use tax" on residents' individual tax returns for items purchased or received through the mail.

Currently, North Carolina levies a general retail sales and use tax of 5.25 percent. Most counties levy an additional 2.5 percent local sales and use tax on items taxed by the state at the general rate. Thus, the combined general state and county tax rate is 7.75 percent in all counties with the exception of Mecklenburg County (which has a combined general state and county tax rate of 8.25 percent due to inclusion of a 0.5 percent public transit tax). Further, Surry, Sampson, Pitt, Martin, Haywood, Cumberland, Catawba, and Alexander counties have an additional 0.25% sales tax. The actual use tax rate may be different depending on the date of the purchase.

Continue reading "North Carolina Department of Revenue Sales Tax Audit of Amazon.com May Result in Use Tax Audits for Online Buyers" »

The United States Tax Court, located in Washington, D.C., is comprised of traveling Judges who preside over civil tax trials in cities throughout the United States. In order to have your case heard in Tax Court, a taxpayer must file a Tax Court Petition within 90 days of receipt of his or her Statutory Notice of Deficiency. This Notice, often called "the ticket to Tax Court", tells you that the IRS has proposed adjustments to your tax return and determined that you owe additional tax (and interest...and maybe even penalties).

If you disagree with the Statutory Notice of Deficiency, you can begin tax litigation proceedings by filing a Tax Court Petition which outlines the reasons why you believe the IRS erred in assessing additional tax against you. You do not have to pay the amount that the IRS proposes to assess in order to file the Tax Court Petition and to go to Tax Court. The ability to have a judge determine who is right and who is wrong before you are legally obligated to pay the tax is one of the attractions of the United States Tax Court as a forum for resolving IRS tax disputes.

The Tax Court offers a surprisingly relaxed environment in which to attempt to resolve your tax dispute. Tax Court Judges rarely stand on convention, preferring an open dialogue with the taxpayer and the IRS attorney. The Judges prefer that the taxpayer and the IRS stipulate, or agree to, the relevant facts and resolve as many issues as possible prior to trial. IRS attorneys are granted Settlement Authority while representing the IRS in Tax Court and are extremely open to reaching a settlement, if at all possible. If the taxpayer and IRS can reach a basis of settlement, a trial can be avoided.

Continue reading "The United States Tax Court: An Overview" »

Imagine a family member passes away and leaves the family farm or business to you. Internal Revenue Code Section 2032A allows for a Special Use Value to be applied to family farming operations as well as closely held businesses. However there are several requirements that must be met to claim the reduced value on the Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return. If these requirements are not met then you may receive a Notice of Deficiency from the IRS showing a vast increase in your taxable estate, coupled with a significant increase in tax and the imposition of hefty penalties. Unfortunately, this scenario can and does happen, as the IRS may find that the taxpayer insufficiently established the method of valuation.

In general, the value of the gross estate of a decedent includes the value at the time of his or her death of all real and personal property. However, the executor or personal representative can often significantly reduce or even eliminate the estate tax when a large portion of the estate's value includes real property used for business or farming.

The executor or personal representative should elect the special use valuation if material participation by the deceased owner and/or a member of the owner's family in the operation of a farm or closely-held business can be established. Material participation must be shown to have existed for periods totaling 5 years or more during the 8 years immediately preceding the date of the decedent's death. Material participation can be shown in a variety of ways, but physical work and participation in management decisions are the principal factors the IRS considers in determining whether material participation has occurred.

Once the special-use election has been made, qualified heirs or their family members must continue to materially participate in the operation of the farm or closely-held business for the next 10 years. Further, the heirs may not dispose of the property during this 10-year period. Failure to comply with these rules results in a recapture of the special use value benefit.

If the IRS finds that the method of valuation was not sufficiently established, the estate could be burdened with hundreds of thousands of dollars of additional tax. In this scenario, the estate is entitled to an Appeals Conference with an IRS Appeals Officer and if not resolved in appeals, has the right to take the case to the United States Tax Court.

Continue reading "Estate Taxes: A Special Use Value Can Save the Farm" »