Question

Find a story which discusses an entrepreneur or business which failed largely because of their lack of attention to financial obligations to tax or regulatory agencies of the federal, state, or local governments. Evaluate the type of business and the patterns of behavior which led to its ultimate demise because of their inattention to financial obligations to the government. Detail the elements you'd include in a tax compliance document that could prevent this type of issue from occurring in your venture.

Answer 1

Kingfisher Airlines – India

Establishing an airlines company is difficult, but maintaining it over the years sustainably is even more strenuous.  Kingfisher, the King of Good Time, was one of the largest passenger airlines. It was established in 2003 by a Bengaluru-based company called United Breweries Group.  They soon succeeded to be India’s fifth largest passenger airline that provided both national and international flights at flexible fares to its customers.

Over 1 million people travelled using the services of this airline during the month of May in 2009. This tremendously boosted its market share among other airlines in India. In 2011 Kingfisher also won the Skytrax award for being India’s best airline. But why would this airlines no more reach the sky? Kingfisher, also known as KFA launched with great fanfare as a premium class airline is no more in function.

Vijay Mallya, the owner of Kingfisher was an experienced businessman in the sector of breweries. He has acquired fame as a liquor baron. In spite of his skills in that sector, he lacked experience when it came to managing businesses such as airlines company. Due to this, he was unable to provide inspiring and effective leadership to the Kingfisher team.

Kingfisher Flies into Tax Turbulence:

The Income Tax department has attached all assets of cash-strapped Kingfisher Airlines for failing to remit taxes amounting to Rs.350 crore.

“We have attached all assets of Kingfisher Airlines and are in the process of recovering its dues by sale and attachment of properties of the defaulter company,” stated by an IT official.

The defunct airline of business tycoon Vijay Mallya had deducted tax at source from its employees’ salaries and other payments for assessment years 2010-11 and 2011-12, but failed to remit the amount to the government account. Kingfisher House at Western Express Highway near the Mumbai domestic airport has been attached under the second schedule of the Income Tax Act, 1961.

The Income Tax department also charged the airline with failing to honour the Karnataka High Court directive Dec 5, 2012, to pay 50 percent of the demand and furnish bank guarantee for the balance amount within six weeks. The Supreme Court in India, had recently dismissed the airline’s special leave petition (filed Jan 16, 2013) against the high court directive.

The revenue department has threatened to take Kingfisher Airlines to court over alleged service tax evasion, saying the company has not deposited taxes it collected from travellers.

The service tax department has already frozen as many as 40 bank accounts of the debt-ridden Kingfisher for non-payment of dues worth Rs. 76 crore, which also include arrears and interest. Its IATA accounts too have been frozen. The airline had informed CBEC that it would pay the dues by March 31, 2012.

Kingfisher had collected the service tax at the rate of 10 per cent from its passengers, but did not pay to the government. So it is an evasion. For evasion there is a criminal liability under which courts are empowered to take action once it is proved that they have evaded tax.

The service tax department can take Kingfisher to court under Section 76 and 78 of the Finance Act. Under the provisions of the Act, the CBEC can charge up to 200 per cent of the tax evaded as penalty. The income tax department too frozen the carrier’s bank accounts for not depositing tax deducted at source. The airline has a debt of Rs. 7,057.08 crore. The financial crunch has hit its operations with dozens of flights being cancelled. Tax authorities have added to its woes by freezing its bank accounts for non-payment of dues.

The downfall of KFA from being one of the best airlines in India is due to the lack of effective decision made by the team. Acquiring the loss of Air Deccan, the sudden launch of the service into the international arena and its change in segments which gave rise to competition are major factors which led to its shut down. External factors such as the high cost of aviation fuel would also be responsible. KFA’s expenditure on fuel kept mounting. This was experienced by all airlines including KFA’s competitors, but they came up with strategies to overcome the challenge.

Elements Included in a Tax Compliance Document:

• Deadlines:

An undercurrent to the Internal Revenue Service (IRS) approach to tax compliance is whether its deadlines were met by the business. Businesses and business owners often have many different due dates for filings, deposits, and payments.

For example, income tax withheld from employee pay checks must be deposited on a specific schedule. However, the schedule is determined by the pay period used by the business as well as the amount of tax liability reported in the previous tax year. Needless to say, a business will often need to look to IRS tax lawyers to help figure out the deadlines for depositing withheld taxes.

Similarly, most C-corporations and owners of S-corporations pay estimated taxes on a quarterly basis (every three months). Tax advisors can determine which schedule applies to a business' filings and payments to ensure that IRS deadlines are met.

• Documents:

If there is anything the IRS is known for, it is paperwork. Documents must be collected from new employees, like elections for withholding and copies of each new employee' identification and social security card. Conversely, when a contractor is hired, a completely different set of documents, namely a W-9, must be collected. When tax season rolls around, W-2s must be distributed to employees and 1099s must be distributed to contractors. And this is just the beginning. Different forms are used for partners and owners than employees. A business does not need to have highly complicated dealings to have need of a tax professional, such as IRS tax lawyers and accountants, to ensure that all the correct documents are distributed.

• Record Keeping:

Maintaining records is important in two respects. First, knowing what needs to be recorded and how to record it will help a business' tax professionals prepare filings and ensure that the correct information is provided to the IRS. Second, if there is an audit or other tax problem, having the right records can create the paper trail needed for IRS tax lawyers to overcome the issue or explain how the issue was inadvertent rather than deliberate.

• Filing and Reporting:

The big rush that occurs every April 15th is a product of tax compliance. Specifically, all tax payers (including businesses and business owners) who operate on a tax year ending on December 31 must file a tax form that reports all the tax payer's taxable activity for the prior year. Encompassed within this requirement is that the correct form is filed and that the correct activity is completely and accurately reported.

• Payments:

As noted by the IRS, compliance in filing and reporting may be necessary, but the IRS always wants to make sure the right payments are made. The price of underpaying the IRS can be high. The IRS is entitled to assess penalties plus interest when an underpayment has been made. Moreover, deliberate tax avoidance can be the subject of a criminal prosecution, which could result in fines and imprisonment.

Even when an underpayment is unintentional, the IRS has many tools at its disposal to collect, such as garnishing wages, levying bank accounts, and placing liens on property. Avoiding this situation by consulting IRS tax lawyers concerning tax strategies is much easier than being subjected to IRS collection.

In sum, the role of IRS Tax lawyers in tax compliance can take many forms, including determining deadlines for filings, deposits, and payments, guiding businesses in distributing and collecting the correct forms, creating and maintaining its records, and meeting filing, reporting, and payment requirements.