Business people are often misled by their investments in their own companies. How much to invest in the company and how much to pay to themselves? These are constant questions of operating a business.

Business people who borrow money from their companies frequently face an I.R.S. challenge. To win the case they need to have a signed note with a repayment schedule and a stated interest rate. Otherwise, the tax people are likely to view the loan as a dividend, taxable to both the business and the owner. There are more and more cases where the I.R.S. has accused business owners of family-owned S corporations of underpaying themselves.  

So, how much to pay and how much is right? The amount depended on the business and on its industry. One of the creative things business people do to keep themselves from running afoul of the I.R.S. is to keep careful minutes of board meetings and record any bonuses paid, making clear that they are performance related, not paid because the owner wanted a new car or luxurious dwelling.

Another is to insure that compensation is based on service rendered, not on the percentage of stock held. The I.R.S. is likely to view payment for stock holdings as a dividend. The last one can’t be deducted as a business expense, but compensation can be, however. The third one is to convert to an S corporation, the entity which allows earnings flow through to the owners, rather than being retained at the corporate level. This type of corporation is not always preferable, because of the various restrictions on S corporations, where only one class of stock and the corporation is must have 35 or fewer shareholders, all United States residents.

In case you go on a regular C corporation, compensation should always reflect performance, not a current performance, however. Although it’s very easy for business people to identify themselves with the company and to feel the ownership, legally the company is a separate entity, and the legal standard of financial operations including owners’ compensation packages is reasonableness. 

E-commerce industry observers and business people were speculating last week on whether a US Internal Revenue Service “John Doe” summons on e-processing company PayPal might be connected with US citizens hiding their income in offshore accounts. This week on April 29 PayPal provided the information requested by the IRS. The company has said that whilst it values the privacy of its clients, it feels obliged by US law to obey the subpoena.

The news broke last week that PayPal, which still services e-commerce accounts outside North America, has been subpoenaed by the US Internal Revenue Service in the District Court for Northern California to produce financial records concerning the use of offshore credit cards. Different lobbying groups tried to check out the issue discovering that “this is to be part of a larger IRS investigation that commenced several years ago concerning tax issues involving Americans holding credit cards issued by banks located in places the Treasury Department considers to be potential “tax havens”. 

However, IRS action raises two questions. First, why IRS didn’t issue a third party summons for a named individual or group of individuals but acted under the ‘John Doe’ summons? And a second, what is the right of privacy of taxpayer in this case?

Obviously, in the first case under IRS 7609(a), it needs to notify the person within three days so that the individual could contest the summons by seeking to have it quashed. But with “John Doe” summons, the targets’ opportunities to fight the summons are very limited. In this case however, a greater burden is placed on the IRS to show in a court that it is not engaged in a “fishing expedition.”
 
Next, what is a right of privacy of e-commerce or our “digital civil rights”, so to say? Law experts say that the U. S. Constitution contains no express right to privacy. Distinct from the right of publicity protected by state common or statutory law, a broader right of privacy has been inferred in the Constitution. This right has developed into a liberty of personal autonomy protected by the 14th amendment. The 1st, 4th, and 5th Amendments also provide some protection of privacy, although in all cases the right is narrowly defined. The Constitutional right of privacy has developed alongside a statutory right of privacy which limits access to personal information. The Federal Trade Commission overwhelmingly enforces this statutory right of privacy, and the rise of privacy policies and privacy statements are evidence of its work. In all of its forms, however, the right of privacy must be balanced against the state’s compelling interests. Such compelling interests may include the IRS need to obtain such personal information of American tax evaders.

Well, here is the funny thing. Some of my Russian friends trading on e-bay and using PayPal informed me that PayPal is going to produce IRS their various account records, including data related to their PayPal account. Russians protested. They don’t get how they are related to the American tax obligations and why their personal information should be provided to IRS. Nevertheless, “PayPal understands the summons relates to the IRS’ offshore compliance program in which the IRS has sought information about offshore credit card accounts from a number of companies”. This understanding doesn’t help, I think. It so amazing how easy for IRS to get so sensitive information using “John Doe” summons. Since what time the IRS form W8-BEN Certificate of Foreign Status doesn’t satisfy the requirements for the foreign accounts owners?

I am sorry, but I see only sad future. If there is an American address but a foreign credit card on PayPal account, this is a red light for the US IRS. Even if there is no particular taxpayer details of the account owner IRS has easy access to the information to determine the taxpayer status. I think many Americans use their foreign credit cards to save some money in e-commerce. Most likely it is still expensive for IRS to dig too much to get a detailed information of every taxpayer. But once technology gets advanced and cheaper all of the people who used this kind of tax heaven will owe something to IRS.
 

 “If you want to raise revenue in difficult times, you’re almost invariably going to have to raise taxes on wealthy people because that’s where the money is”, said Mark Zandi, chief economist with Moody’s Economy.com. “In times of financial distress, the rich get hurt also,” Mr. Trump added. Is it unreasonable that the rich should contribute to the public expense?

Well, let’s see.  Tack on an extra percentage point to the income tax rate of someone like Rupert Murdoch, who earned $23.9 million in the last fiscal year from his News Corporation salary and bonus, and the state can make an extra $200,000. That is enough to pay the salaries of about a half-dozen New York Police Department rookies.

The additional tax revenue from former Gov. Eliot Spitzer’s $1.97 million in income in 2006 — earned mostly from rental property along Madison Avenue that he owns with his family — would be nearly $17,000, or about the cost of one unequipped police cruiser.

Add up all the new tax revenue — from the Trumps and Murdochs and Jeters and 26,000 other New Yorkers who earn more than $1 million a year — and the state would be able to make an extra $1.5 billion.

Read whole article here.