Evolution Tax & Legal’s Week in Review – August 10, 2020

For this week’s in review, we are looking into the IRS outreach to those who have received all of their stimulus payments, the IRS refocus on audits and examinations on high-net worth individuals and their businesses, the US’s newest tariff aims, and the impact of a recent IRS memo on online fantasy sports gaming companies.

Specifically, we will be covering the following this week—

• IRS Reaches Out to Distribute Unclaimed Child Stimulus Checks
• The IRS Announces a Renewed Focus on High-Net Worth Individuals with an International Footprint
• The Newest Tariff Aim: Europe Distillers Supply Lines
• DraftKings, FanDuel Fees Deemed Taxable in Landmark IRS Memo

IRS Reaches Out to Distribute Unclaimed Child Stimulus Checks

The IRS has recognized some taxpayers have not yet received their $500 stimulus payment related to their children. In order to provide those taxpayers with the stimulus payments they are otherwise entitled to, the IRS is asking those who haven’t received their $500 payments to fill out an online form.

The IRS is collecting the information from individuals not required to file a federal tax return, such as some Social Security, disability and Veterans Affairs benefits recipients, from last Friday until the end of September though an online portal.

The IRS anticipates the payments will be issued by mid-October. Individuals who received their original payment by direct deposit will also have any supplemental payment deposited to the same account. Others will receive a check.

Non-filer adults who’ve yet to receive their $1,200 payment can also use the same form to submit their information to the IRS.

The agency has sent about 160 million payments since April, but there are as many as about 12 million individuals who haven’t received their full payment or in some cases any money at all.

The CARES Act passed in March included $1,200 payments for adults earning as much as $75,000 or couples earning $150,000 or less, plus an additional $500 for each child under age 17. The payments phased down for individuals earning as much as $99,000, or $198,000 for couples.

For more information about the stimulus payments you should otherwise be entitled to, check out the IRS’s site here.

https://www.irs.gov/coronavirus/get-my-payment

The IRS Announces a Renewed Focus on High-Net Worth Individuals with an International Footprint

The IRS Global High Wealth Program recently announced on a June 18^th webcast that it will be looking at hundreds of high-income individuals’ tax returns between July 15 and September 30 of this year.

Each review is expected to include both individual tax returns as well as the returns of related business entities, with a focus on “pass-through” entities and partnerships.

This newly announced focus will likely affect sports owners, athletes, entertainers, and others in these industries, who often have high incomes and other business interests conducted through pass-through entities.

Unlike the typical salaried employee, athletes, entertainers, and other performers often earn income outside of a fixed salary subject to wage withholding. For example, athletes may receive payments for endorsements of products or services, and for professional appearances. This income is generally not subject to withholding and potentially exposes individuals to IRS challenge as to how the income was reported and how much tax was due. Further, athletes may earn income through holding companies established for liability and financial security reasons.

This type of structure—high-income individuals, related business entities, and reporting positions subject to challenge—is arguably exactly what the Global High Wealth Program is targeting in its looming review.

The Global High Wealth Program is likely to review high-income individuals’ tax positions in light of these uncertainties to obtain a roadmap of how these individuals (and related entities) might be both complying with—and taking advantage of—the TCJA. Moreover, the economic ramifications of Covid-19 already have caused massive declines in tax revenue. The Global High Wealth Program necessarily will be incentivized to identify audit targets that may help ameliorate any shortfalls.

To further complicate matters, the IRS may view its guidance with respect to compensation of athletes, entertainers, and similar performers to be clearer (and perhaps even more favorable) under U.S. tax law now than in recent years due to certain recent pronouncements. In the IRS’s view, they may have no excuses left not to play the (audit) ball. For example, the IRS recently issued a revenue procedure, Rev. Proc. 2019-18, providing a safe harbor for a professional sports team to treat certain personnel contracts and rights to draft players as having a zero value for determining gain or loss to be recognized for federal income tax purposes on the trade of a defined personnel contract or a draft pick.

While it is certainly not a foregone conclusion that sports and entertainment figures will be audited due to the Global High Wealth Program’s recent announcement, the risk is real and deserves attention—especially now. Recent legislation such as the BBA and TCJA has increased uncertainty, and Covid-19 and criticism of the IRS due to perceived failures to audit high-income individuals has increased pressure to pursue targets.

In this environment, sports owners, athletes, entertainers, and other high-income taxpayers in these industries are well advised not to “drop the ball” in seeking advice for what may come.

The Newest Tariff Aim: Europe Distillers Supply Lines

Last week, America’s top trade official, Robert Lighthizer, began considering fresh tariffs that could increase prices on a range of European goods like British gin and German beer.

While the import taxes are aimed at forcing a settlement to a 15-year-old World Trade Organization dispute over illegal subsides to Airbus, they are hammering unrelated sectors like Scotch whisky, which has seen a 30% drop in U.S. demand since October.

The existing duties on European wine and spirits are also hurting U.S. importers, retailers and restaurants that argue they’ve become collateral damage in the spat between Airbus and Boeing.

Lighthizer has the backing of President Donald Trump, who has championed creative U.S. tariff strategies like the “chicken tax” — a 25% duty on imported light trucks that President Lyndon Johnson imposed in the 1960s to retaliate against West German tariffs on U.S. poultry.

Just how much payback and in precisely what form remains a matter of debate. So far, Washington has rejected at least three offers from Brussels for a settlement because the EU and U.S. “don’t have the same number,” he said. Wednesday marks the end of the latest six-month review where the U.S. can opt to change the tariffs.

Making the matter even stickier is how new American tariffs would be received in the U.K., where the government is trying to sell prospects of a free-trade deal with Washington as a Brexit win.

With no settlement in sight, Lighthizer appears keen to use tariffs to pick American winners and European losers, bolstering industries like California wine growers and Kentucky whiskey distillers by pummeling their transatlantic competition.

DraftKings, FanDuel Fees Deemed Taxable in Landmark IRS Memo

In a recently released memo, the IRS says FanDuel, DraftKings must pay federal excise taxes.

The tax consequences of this IRS decision could be “business-destroying” for the popular online fantasy sport companies.

In short, daily fantasy sports companies like FanDuel and DraftKings must pay tax on every wager—the entry fee—they accept as well as an annual occupational tax on each person accepting those wagers. Those taking wagers must also register with the IRS.

It could mean fantasy sports companies would face millions of dollars in taxes if they haven’t been paying and are challenged by the IRS.

The daily fantasy sports industry generated $3.2 billion in entry fees and about $335 million in total revenue in 2018.

What is important to note is that the memo isn’t binding in court but does signal the agency’s position in audits.

After the release of the IRS memo, DraftKings shares closed the subsequent Friday at $33.91, down nearly 6%.

Tax Consequences of the IRS’ Position

Daily fantasy sports are online games that let fans—in exchange for an entry fee—compete for cash prizes contingent on the performance of the professional athletes they select in their fantasy line-up.

The memo says the IRS considers the entry fees to meet the definition of a wager under the tax code.

The amount of federal excise tax owed differs based on whether the wagers are legal in the states in which they’re accepted, according to the IRS.

Legal sports wagers are subject to an excise tax of 0.25% on the amount wagered and an annual occupational tax of $50 for each person accepting wagers. Illegal wagers are subject to an excise tax of 2% on the amount wagered and the annual occupational tax increases to $500 per person accepting wagers.

The IRS in the memorandum notes that the companies can’t get out of paying the tax, even if a state has decided daily fantasy sports are a “game of skill,” as opposed to gambling. The agency notes that some states use this label to decriminalize the activity under state law.