United States

Tax period

US corporate taxpayers are taxed on an annual basis. Corporate taxpayers may choose a tax year that is different from the calendar year. New corporations may use a short tax year for their first tax period, and corporations may also use a short tax year when changing tax years.

Tax returns

The US tax system is based on the principle of self-assessment and voluntary reporting. A corporate taxpayer is required to file an annual tax return (generally Form 1120) by the 15th day of the fourth month following the close of its tax year. A taxpayer can obtain an additional six-month extension of time to file its tax return. Failure to timely file a return may result in penalties. Additional penalties may be applicable for a late return for certain information returns that are required to be filed with a timely return. 

Important tax return due dates

Payment of tax

A taxpayer's tax liability generally is required to be prepaid throughout the year in four equal estimated payments and fully paid by the original due date of the tax return. However, because a corporation that expects its tax liability for the tax year to exceed the small sum of USD 500 is required to make estimated tax payments, almost all corporations are required to pay their full estimated tax liability for the year in four estimated tax payments. For calendar year corporations, the four estimated payments are due by the 15th day of April, June, September, and December. For fiscal year corporations, the four estimated payments are due by the 15th day of the fourth, sixth, ninth, and 12th month of the tax year. Generally, no extensions to pay are allowed. Failure to pay the tax by the due dates as indicated above can result in estimated tax and late payment penalties and interest charges.

The instalment payments must include estimates of regular CIT and, for foreign corporations, the tax on gross transportation income, although not all of these taxes are reported through the Form 1120. Although some of these other taxes are reported on tax forms other than the 1120 series, they may require similar estimated payments through regular deposits of taxes throughout the year.

To avoid a penalty, corporations must calculate the instalment payments based on at least 25% of the lesser of (i) the tax shown on the current tax return or (ii) the prior year's tax liability, provided that the tax liability was a positive amount in the prior year and that such year consisted of 12 months. However, corporations with taxable income of at least USD 1 million (before use of NOLs or capital loss carryforwards) in any of the three preceding years are not permitted to calculate the instalment payments based on the prior year's tax liability, except in determining the first instalment payment. Instead, such corporations must calculate the instalment payments based on the tax shown on the current tax return.

Penalties

Civil and criminal penalties may be imposed for failing to follow the Code when reporting and paying US taxes. The civil penalty provisions may be divided into four categories: delinquency penalties; accuracy-related penalties; information reporting penalties; and preparer, promoter, and frivolous-filing penalties. Many, but not all, have exception provisions that allow for potential abatement based on reasonable cause. In addition, many have provisions directing how the penalties interact with the other penalties.

These four main civil penalty categories may further be divided. First, the delinquency penalties may be divided into failure to file, failure to pay, and failure to make timely deposits of tax. Failure to make timely deposits of tax applies to taxpayers required to make instalment payments and WHT payments.

Second, the penalties relating to the accuracy of tax returns are divided into the negligence penalty, the substantial understatement penalty, substantial overstatement of pension liabilities, substantial estate or gift tax valuation underestimate, and the valuation penalties. These penalties are coordinated, along with the fraud penalty, to eliminate any stacking of the penalties. Again, like other provisions, the fraud penalty is not intended to be imposed as a stacked penalty.

The third category of penalties is the information reporting penalties. These penalties may be imposed upon those who only have a duty to report certain information to the IRS. Although not a penalty, another result of failing to report certain information on international operations is a potential extended limitations period for assessment of tax for properly failing to report certain information.

The fourth and final major categories of civil penalties are the preparer, promoter, and frivolous-filing penalties. Currently, the most notable of these is the return preparer penalty for which there is a penalty for a position on a return for which the preparer did not have substantial authority and there was a failure to disclose the transaction on the return. Also included in this provision is a penalty for wilful or reckless attempt to understate the tax liability of another person. Additionally, return preparer penalties may be imposed for failure to furnish a copy of a return or claim for refund to the taxpayer, sign the return or claim for refund, furnish one’s identifying number, or file a correct information return.

Other promoter and frivolous-filing penalties include a penalty for promoting abusive tax shelters, aiding and abetting the understatement of tax liability, and filing frivolous income tax returns. Additionally, a court may award sanctions and costs if a person institutes or maintains a proceeding primarily for delay, takes a position that is frivolous, or unreasonably fails to pursue available administrative remedies.

In addition to these major civil penalties, international tax-related penalties for failures other than timely and accurate filing (e.g. wilful failure to report international boycott activity, failure of an agent to furnish a notice of a false affidavit relating to the WHT on dispositions of US real property interests, failure of a US person to furnish information relating to CFCs and controlled foreign partnerships, failure of a US person to report foreign bank accounts) exist. Pension and employee benefit related tax penalties exist to protect the policy reasons for the tax incentives, including, most notably, early withdrawal of pension funds. Another group of specialised penalties apply to exempt organisations.

Criminal penalties exist for situations when the failures to stay within the tax system are more egregious and the actions are wilful. Although applicable to corporate taxpayers, they are applied more frequently to individuals.

In addition to the penalty provisions, interest at statutory rates generally applies to underpayments of tax and, in general, interest cannot be abated.

Tax audit process

Generally, the US tax system is based on a voluntary self-assessment of tax; however, many large and mid-size businesses are under annual audit by the IRS and state tax authorities. The audits may include the review of the entire list of taxes for which the business is liable. Smaller businesses and persons with lower incomes are generally subject to audit on a more selective, and random, basis and to more limited examinations focused on only some of the issues on the return.

Statute of limitations

The IRS generally has three years after an original return is filed to assess income taxes. A return will be deemed to have been filed on its original due date even if the return is actually filed on an earlier date. If a return is filed on extension, the limitations period runs from the date of filing the return and not from the extended due date.

Topics of focus for tax authorities

Currently, the IRS continues to focus on certain activities related to Form 1120-F filing requirements, foreign tax credit issues under section 901, foreign earnings repatriation, allocation of success-based fees outside of safe harbour procedures, research credit claims, transfer of intangibles/offshore cost sharing, WHTs, section 956 inclusion issues, self-employment tax issues affecting partnerships, and certain sales of partnership interests and S corporation distributions. The IRS also continues to focus enforcement efforts on the review of Section 965 (the transition tax provision added by P.L. 115-97) issues, as well as other new provisions added by P.L. 115-97 discussed above. Additionally, the IRS has significantly increased its examinations of partnerships pursuant to the new provisions in the Bi-Partisan Budget Act (BBA) of 2015, which introduced a new centralised partnership audit regime. 

Tax shelter

Treasury regulations require taxpayers to disclose transactions determined to be abusive or when the transaction is substantially similar to an abusive transaction. Current information on these transactions, known as listed and reportable transactions, is available from the IRS website (www.irs.gov).

Methods of accounting

For US federal tax purposes, the two most important characteristics of a tax method of accounting are (i) timing and (ii) consistency. If the method does not affect the timing for including items of income or claiming deductions, then it is not an accounting method and generally IRS approval is not needed to change it. In order to affect timing, the accounting method must determine the year in which an income or expense item is to be reported.

In general, to establish an accounting method, the method must be consistently applied. Once an accounting method has been adopted for federal tax purposes, any change must be requested by the taxpayer and approved by the IRS. Changes in accounting methods generally cannot be made through amending returns. The two primary overall methods of accounting are the accrual and the cash receipts and disbursements methods.