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Corporate inversion to reduce tax obligations under fire

There are a number of legal ways to reduce tax obligations. Some of these methods are common, known to anyone that has filed taxes. Basic deductions like charitable donations are a common example. Other maneuvers are more specialized.

One such method, referred to as a corporate inversion, is under scrutiny by the federal government.

What is a corporate inversion? As noted in a recent piece by The Washington Post, a corporate inversion is a business maneuver that involves a business located in the United States merging with a foreign business. This merger results in the headquarters for the business moving abroad. As a result, the business is now free of the obligation to pay the corporate tax rate that is imposed on businesses that are headquartered here in the United States.

Why would businesses want to move to a foreign country? Businesses will move forward with a corporate inversion to help their bottom line. The corporate tax rate in the United States is steep. Currently, the rate is set at 35 percent.

Why is this business move “under fire?” In most cases, the use of a corporate inversion is legal. The issue is one of money. More specifically, the government is not happy that it is losing out on the money it would make from this tax.

The Internal Revenue Service (IRS) is aware of this tax avoidance method and knows that the country is losing money due to this loophole, but the practice is currently under the spotlight due to new data. A recent report by the Congressional Budget Office (CBO) brought attention to just how much the government is losing in corporate taxes when businesses execute this maneuver. According to the report, the IRS will lose out on billions in tax payments.

What should businesses learn from this increased focus? The increased scrutiny of corporate inversions could lead to policy change. Regulations are now present that make the move less advantageous than it once was. According to the piece in The Post, the CBO is “optimistic” that the use of corporate inversions to avoid tax obligations “is slowing.” However, the report could result in increased regulations and penalties for these types of business moves.

The focus also serves as a reminder that tax practices are always under scrutiny by the IRS. This can lead the federal agency to conduct audits or otherwise request information. Businesses that receive contact from the IRS or that are looking to take advantage of tax maneuvers to reduce their tax obligations are wise to seek legal counsel. An experienced tax attorney can review your situation and suggest various options.

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