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Fallout or Consequences: The IRS makes its case for increased enforcement


The Commissioner of the Internal Revenue Service (IRS), Douglas Shulman recently stated his beliefs on the state of the economy and tax compliance.

"Call it what you will – fallout or consequences – but I believe that the events of the past year will create increased public pressure on corporate taxpayers to adhere to not only the letter of the law, but the spirit of their home country law...

It’s clear that no one – not the IRS or any tax administration system in the world – can afford to fall behind this fast pace...“

To this end, I am committed to engaging with my counterparts across the globe and pushing forward what I see as the collective and shared enterprise of fair and effective tax administration.”

One could interpret the Commissioners statements as a call to arms of tax administrators around the world.  What effect the words will ultimately have will eventually be tested by time and the actions of the world’s other tax administrators.

But, most would agree that we should expect the IRS to strengthen its enforcement mechanisms in an attempt to improve compliance with existing U.S. tax laws.

Does an eroding US economy change my tax plans?
An area of concern for many Canadian corporations is the IRS initiative to ensure foreign corporations are in compliance with their tax filing responsibilities (Form 1120F) and their interpretation of what is or is not a permanent establishment in the United States in accordance with the Canada – United States tax treaty.

Assuming hiding was ever a viable U.S. tax strategy, it is no longer viable long term. While all Canadian corporations should continually revisit their U.S. business activity to determine their risk of having a U.S. permanent establishment, those who were merely hiding (i.e. substantial risk of a permanent establishment, but did not comply with their U.S. filings) should revaluate their go forward strategy.

Should I stay or should I go NOW?
While the U.S. economy continues to deteriorate causing substantial increase in the U.S. federal deficit, Canadian corporations should revisit their historic filing (or for many non-filing) positions to ensure their prior tax planning is in line with their current facts and existing U.S. tax law.

For historical non-filers, if the risk has elevated to the point that the risk is no longer appropriate from business perspective, we can help.

At MNP, we assist companies who wish to become compliant. Our strategies are inventive and can significantly lower your historical risk. To learn more, please feel free to contact me.