SUMMER 2017 THE PRACTICAL TAX LAWYER | 5

TED DAVID , a tax practitioner in Hackensack, New Jersey, is a former IRS Agent and IRS District Counsel attorney (1974 to 1978) (New York, NY). Holder of an LL.M degree in Taxation from New York University, he has practiced in the IRS tax dispute area in all branches of the IRS for more than 30 years. In addition to his tax practice, he is Professor of Law and Taxation at Fairleigh Dickinson University’s Graduate Tax Program. Mr. David is a frequent contributor to ALI CLE’s The Practical Tax Lawyer, and is author of the ALI-ABA book, Dealing with the IRS. In addition to his LL.M, he holds an RHL (reasonably happy lawyer) and actually loves the IRS. This column is excerpted from his bulletins to the Bar and is intended to alert lawyers to IRS matters in an informative and amusing manner. It is not intended to give advice. Ted maintains a tax blog at “Learn to Love the IRS.” He can be reached at tdavidlawyer@gmail.com.

CUBA SI, YANKEE SEE?In May, I returned from Cuba. It was all legal. In years past, one was required to go from Europe, Canada or Mexico or some other Caribbean country via a puddle jumper. These days, making the trip from the good old USA is a lot quicker and safer. I spent six nights in Havana. The purpose of my trip was professional research. If you don’t believe me, just take a look at the self-certification I filed with the State Department. When you book your air fare your computer screen your airline will give you the choice of things like vis-iting family, religious reasons, professional research, education, and the like. You select one and that’s that. I understand that you are to keep a journal of your activ-ities for at least five years. Fortunately, I keep extensive journals of all my travels and can easily comply. I do have to wonder how many people are actually keeping this kind of journal. And what agency of government is charged with reviewing this kind of documentation—the IRS? Note that getting a suntan on one of Cuba’s marvelous beaches is not included. For me, I wanted to see with my own eyes how socialism was doing in a country that is 775 miles long and no wider than 120 miles at its widest. Ever since Fidel Castro died his brother Raul has been somewhat relaxing the social-ist approach to good old-fashioned making an extra buck or two. Now Havana has got a population of 2 million and the entire country just a little less then 12 million. It has the Atlantic Ocean to the north and the Caribbean Sea to the south and as most people here are aware is a mere 90 miles from Key West. If you’re old enough to remember the Cuban missile crisis you can close your eyes and see a very stern and stressed President Kennedy trying to deal with Russian missile installations that could easily reach the United States. So here is the scoop on Cuba these days: First, let me

say unequivocally that you should visit Cuba as soon as you can. There is no need to go with a high-priced tour and traveling directly from Newark is relatively cheap and easy. The flight is under three hours. I was fortunate enough to travel to Russia in 1993 just as the Soviet Union fell apart. Within no time things changed over there dramatically. The same thing is going on in Cuba though the socialist regime does not look like it’s collapsing anytime soon. It will be the comprehensive tax law changes which became effective January 1, 2013 that may lead the way to major change. That law contains 19 different taxes that will apply to Cuban busi-ness and Cubans in general. Up to now 80% of Cubans worked for the state and had little concern for any taxes. That has already changed with workers contrib-uting to a Cuban version of Social Security. And there are plenty of other taxes on the way. They include sales tax, a comprehensive income tax, employment taxes, environmental and resource taxes. Starting to sound familiar? Only a tax lawyer would love the complica-tion. There appears to be two tax types: profits based on an accounting and a monthly fee based on occu-pation. The government sets preliminary monthly tax quotas based on occupations. Rates are set annually in their budget which by itself has to create a great deal of problems. If the preliminary tax that is paid is higher than that due at the end of the year apparently no refund is made. The taxation of retailers allows a cost of goods sold but it is limited by a figure determined by the government arbitrarily. There is also a prop-erty tax on acquisition as well as a 1% tax for property acquired in a divorce. Inheritance taxes will also apply depending on relationship to the decedent. The rates begin at 7% and go as high as 65%. Taxes on public documents and certifications are due and payable by stamp. Not to be outdone there is a tax for using toll

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roads which amounts to three dollars for each 50 km traveled and applies to cars, motorcycles, trucks, wag-ons and vans. An airport tax, which I paid, amounts to $25 arriving and departing. Most self-employeds now in Cuba pay their tax under the simplified monthly payment method. Needless to say, Cubans are feeling their way with regard to taxation. Excessively high rates will result in the creation of an underground economy. The arbitrary allowance for costs, for example, allow farmers to deduct 70% of their revenue as costs and small business 40% as their costs. Creating exemptions and favorable tax treatments in no time can turn the Cuban tax structure into the same mess we have here in the States. Several years ago, Raul Castro allowed people to apply for permits to have private businesses. In the first year, about 1 million of those permits were issued. They include everything from being able to rent your casa to using your private vehicle as a taxi or your pickup truck to load cement. During my visit, I stayed in a Casa. Renting the entire apartment through air B&B was simple. Clean and comfortable with hosts that spoke English and were able to answer my many “preguntas.” They told me that they have a permit for their private business which requires them to pay 30 CUC monthly and 10% of their profit. That sounds to me like the simplified method. That leaves a substan-tial amount left over compared to the average salary of about $25 per month for many Cubans. Cuba has a dual currency at the moment. CUC, Cuban convert-ible pesos and CUP, pesos for the ordinary Cuban citi-zen. The CUP is one 24th of the CUC. The money looks interchangeable at first glance and travelers must be careful. The CUC these days is the equivalent to one dollar. At this time, due to the congressional failure to end the fifty-year embargo, Cuba extracts a 10% tax when dollars are exchanged for CUC. Dollars are not legal in any transaction in Cuba. Note, to change U.S. dollars into Cuban currency is no problem as there are exchanges at the airport as well as banks in town. ATMs exist but do not accept U.S. credit cards as there are no U.S. banks in Cuba. Cuba is a cash economy and no one buys on credit. Citizens can have debit-type cards that can be used at the few ATM in the city. A few miles outside of Havana the world turns into farmland where people rely on horseback and oxen. Our host Raul and his wife have their air B&B apartment at 505 O’ Reilly in the historic district of Havana. Raul is retired from the military after 25 years of service and told me he receives a pension of about $467 CUP a month. That translates into about $20 U.S. Remember, for the time

being, Cubans receive subsidies for rent, free educa-tion, and free medical care, as well as a monthly allow-ance for foodstuffs via a ration book. It’s the tax system that’s currently firing up that may change all this as the government gets out of providing subsidies and moves to a more targeted welfare system.

It may be “Cuba Libre,” but perhaps not for long. I can also recommend without hesitation the Cuban Mojito. It tasted different than the one here in the states. They use an herb called Yerba Buena...which means the good herb. And so it is with the right mix of rum and sugar. Music is everywhere and the Cubans seem happy and demonstrate a real joie de vivre despite having rela-tively little. We Americans might be able to learn a thing or two from them about working less and enjoying life more. Oh yes, the streets are filled with American cars from the 1950s. If they aren’t American, they’re Russian Ladas. Remember, the Cubans turned to Russia when they were shunned by the United States. The Cubans are incredibly talented in keeping those old beasts running with jerry-rigged engines, transmissions, and everything else. I guess that’s what an embargo will do to you—make you more self-reliant. The New York Times recently reported that the Cuban gross domes-tic product shrank in 2016 for the first time in 20 years. It also said that about 634,000 Americans visited Cuba last year, which was an increase of about 34%. Overall tourism to Cuba was up 13% in 2016 with over 4 million tourists visiting the island country. A number of hotels are being renovated in the downtown area known as Park Central. The Cuban government says that it is not interested in creating a second Cancun because it val-ues its country’s cultural and historical heritage. But it will most likely be tourism chiefly from the United States which will bring this country into the 21st cen-tury. You have to wonder whether that will be the best result. Then there is the presidential politics of the moment, with Donald Trump having made promises to conservative Cuban groups during his campaign to further restrict relations with Cuba, citing human rights violations. Needless to say, China’s violation of those same rights does not seem to be a problem for the American economy or the American people. But at the time of this writing, some form of restriction on further travel by ordinary American citizens to Cuba seems imminent. The talk is that further restrictions on being able to prove the purpose of their trip will be a likely enforcement area. It will be a shame if the window to contact with the Cuban people is further

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closed by presidential mandate. Anyone desiring to go to Cuba to see for themselves ought to book their trip as soon as possible. Further announcement on restric-tions is likely soon and will be made in Miami where the stronghold of Castro exiles exists.

THE SHADOW IRS?I have written a lot of commentary about the loss of funding for the Internal Revenue Service. Congress once again has tried to solve the problem without spending any additional money by allowing private debt collectors to become an extension of the Inter-nal Revenue Service. They will be working on a cut of the action—25 percent of what they collect. This is something that IRS agents are not permitted to do. No IRS agent ever got a dime other than their salary. They have been told to make sure they pay attention to tax-payer rights as they go after tax collections that could be in the mega billions. This most likely will be a disas-ter. Historically, this has been tried twice before. In both instances, when everything was said and done, the government was losing money. No matter. Congress is intent on giving it another try. Taxpayers, especially the elderly, have been cautioned by the Commissioner of Internal Revenue that IRS does not seek payment for taxes by telephone calls. That has changed, as pri-vate debt collectors will in fact make many, many tele-phone calls to IRS tax debtors. Now we lawyers often play the part of a hen; what I mean to say is that in the appropriate tax case we may be doing little but sit-ting on it and awaiting IRS contact or response. From our viewpoint, clients are entitled to understand the application of the collection statute of limitations and it may in fact be malpractice not to understand it and communicate it clearly to clients with tax problems. We are not delaying anything, but just awaiting IRS action. Practice before the IRS guided by Circular 230 requires lawyers and others who practice before the IRS not to file or take action for the sole purpose of delay. In some cases penalties can result from frivolous actions. But IRS response time in some situations can take years. So in those cases, we have been sitting on like that hen, the introduction of these new tax collec-tion people may spoil the eggs, and clients should be so advised. The IRS is planning to send over to these collection agencies the cases that they themselves have either been unsuccessful in collecting or simply do not have the manpower to deal with. Clients should be told that this will likely bring about some contact which may in fact come by telephone. Tax scammers

and identity thieves are the number one priority at the IRS. It is more than odd to allow private debt collec-tors to get in the act given this nefarious atmosphere. How people will sort out one from the other remains to be seen. The IRS says it will be sending notices to taxpayers alerting to them to future contact by these private agencies. As a practical matter, many of these taxpayers have received numerous prior notices from the IRS about their matters. It may all result in sufficient confusion and frustration. The odds are the scammers will have a field day and when all is said and done, the issue of funding the IRS will again be in the face of Congress once more. By the way, some Democrats in Congress are already calling for the end of this ques-tionable program.

THE TINY TAX PLANOkay, at the time of this writing the president’s tax plan is about one page long. It’s basically an outline. Or maybe it is a wish list. Or a tweet. Here it goes: Three individual tax brackets 10%, 25%, and 35%. Double the existing standard deductions for individuals and elimi-nate some itemized deductions in order to broaden the tax base. What all of those deductions to be elimi-nated are remains somewhat of a mystery at this time. It looks like the home mortgage interest deduction and charitable contribution are safe. Not so the state and local tax deductions. That won’t make high-tax states happy. The president would like to eliminate the estate tax and the alternative minimum tax. A bone to the super wealthy? Needless to say, our tax system is a highly political one. It is not likely that lobbyists in Congress will permit the elimination of cherished tax deductions and credits like that state and local income tax currently allowable. With regard to business, corpo-rations and pass-through entities which would include sole proprietorships the plan provides for a 15% maxi-mum tax rate. (See below for the skinny on that idea.) It also calls for a one-time tax on corporations with overseas profits still held abroad. How to pay for all of this tax reform doesn’t seem to be part of the plan. Economists say that any stimulation of the economy will be offset by the tax revenue loss. In other words, it just isn’t going to get us anywhere. And maybe that will be the fate of this tax reform plan. There is really little chance that this will become law anytime soon. While the president wants to be a real deal-doer, the reality of how the tax system works may take a little more time, and thought, than less than a year.