U.S.(American) Income Tax for Expatriates & US International Tax Matters

Legal & Tax Procedures For US Citizenship Surrender/or Surrender of Green Card by Long Term Resident

2012-01-26T20:37:00.000-08:00

Surrendering your US Citizenship or long term US Residency (holding a Green Card for 8 years or more) is a two step process. Step one: A Citizen must fill out the forms and meeting with the US Embassy and Consul and paying the $450 fee. A Green Card holder only needs to file the proper form with Immigration. Once that is done, you have established the effective date and completed the legal side. Of course, they will not allow you to surrender your US Citizenship until you prove you are a Citizen of another country. The State Department will not allow you to become a man or woman "without a country."

Of course surrendering your Citizenship or Residency relieves you of the necessity of filing US tax returns in future years except with respect to any of your future earnings the have a US source.

Step Two: You must then get final approval of the Internal Revenue Service. You must file a final US tax return (A Dual Status Return) and Form 8854 to determine if you owe an exit tax or not. If you are married, both you and your spouse must go through this procedure separately.

As an Attorney/ CPA I have advise and assisted over 70 clients with their US Citizenship or Green Card surrender. Let us help you. READ MORE DETAILS OF THE PROCEDURES HERE.

Mitt Romney 2010 Tax Return - View it Here and See the Tax Results of His Many Foreign Holdings

2012-01-26T11:23:00.000-08:00

Mitt Romney's 2010 tax return (203 pages) is a study in the various IRS Forms required to report foreign income and holdings. It includes the following IRS forms required for various foreign items of income:

Form 1116- Foreign Tax Credits
Form 8865 - Foreign Partnerships
Form 926 - Contributions to Foreign Corporations
Form 5471- Foreign Corporation ownership
Form 8621- Passive Foreign Investment Company Reporting

LOOK AT AND REVIEW MITT ROMNEY'S 2010 TAX RETURN HERE

IRS Called Easy on Criminal Tax Evaders in Watchdog’s Critique

2012-01-22T12:49:00.000-08:00

Read Article about Criminal Tax Evaders and Voluntary Disclosure Program from Bloomberg Here

US Treasury Issues New FBAR instructons In January 2012

2012-01-22T12:29:00.000-08:00

The new instructions to Form TDF 90-22.1 (FBAR) instructs taxpayers to direct questions to 866-270-0733 (within the US) and 313-234-6146 for international callers.

The new instructions also include an email address for questions: FBARquestions@irs.gov.
DOWNLOAD THE LATEST FORM AND INSTRUCTIONS HERE.

Posted on January 20, 2012 in FBAR & Form 8938 | Permalink

2011 Chinese Taxes for Expatriates Living in China

2012-01-17T12:08:00.000-08:00

China Briefing has an excellent article stating the rules for US expatriates living in China with respect to their Chinese Income Tax Filing Requirements. The rates run for 3% to 45%. READ MORE HERE

Of course the income taxes you pay in China can be credited against our US income tax rate, and any excess (above the US tax amount on the same income) can be carried back 2 years and then carried over. To download our US expat tax questionnaire CLICK HERE

Taxpayer Advocate Office and IRS in vicious fight over Unfair Practices on FBAR Voluntary Offshore Disclosure Program

2012-01-15T11:56:00.000-08:00

The Taxpayer's Advocate Office is still on the side of the Taxpayer. They are in a vicious fight with the IRS over their "bait and switch" and unfair practices in the 2009 and 2011 Voluntary Offshore Disclosure Program with respect to the FBAR (TDF 90-22.1) penalties. If they cannot agree, the dispute may go to Congress. READ MORE HERE

IRS Used "Bait and Switch" Tactics in Prior Offshore Disclosure Programs per the Taxpayer Advocate Office

2012-01-11T16:52:00.000-08:00

This Article from CNBC describes the less than ethical actions (or perhaps straightforward) of the IRS in connection with the 2009 and 2011 Voluntary Disclosure Program. Many taxpayers paid more than they had to pay if they had not entered the program and the IRS took it! The Taxpayer Advocate Office of the IRS whose job it is to monitor the IRS and correct problems, errors and this type of actions included this information in their report to Congress. READ ARTICLE HERE

The IRS has announced a new Offshore Disclosure Program for 2012 and perhaps beyond which will be mostly the same as the 2011 program with some changes which the IRS has stated they will provide further details in the next few weeks. It is not too late to enter the program and perhaps reduce your penalties. With proper representation by an experienced Attorney and CPA, you will be protected from the IRS "Bait and Switch."

IRS Offshore Programs Produce $4.4 Billion to Date for Nation’s Taxpayers; Offshore Voluntary Disclosure Program Reopens

2012-01-09T11:50:00.000-08:00

The Internal Revenue Service today reopened the offshore voluntary disclosure program to help people hiding offshore accounts get current with their taxes and announced the collection of more than $4.4 billion so far from the two previous international programs.

The IRS reopened the Offshore Voluntary Disclosure Program (OVDP) following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. The third offshore program comes as the IRS continues working on a wide range of international tax issues and follows ongoing efforts with the Justice Department to pursue criminal prosecution of international tax evasion. This program will be open for an indefinite period until otherwise announced.

“Our focus on offshore tax evasion continues to produce strong, substantial results for the nation’s taxpayers,” said IRS Commissioner Doug Shulman. “We have billions of dollars in hand from our previous efforts, and we have more people wanting to come in and get right with the government. This new program makes good sense for taxpayers still hiding assets overseas and for the nation’s tax system.”

The program is similar to the 2011 program in many ways, but with a few key differences. Unlike last year, there is no set deadline for people to apply. However, the terms of the program could change at any time going forward. For example, the IRS may increase penalties in the program for all or some taxpayers or defined classes of taxpayers – or decide to end the program entirely at any point.

“As we’ve said all along, people need to come in and get right with us before we find you,” Shulman said. “We are following more leads and the risk for people who do not come in continues to increase.”

The third offshore effort comes as Shulman also announced today the IRS has collected $3.4 billion so far from people who participated in the 2009 offshore program, reflecting closures of about 95 percent of the cases from the 2009 program. On top of that, the IRS has collected an additional $1 billion from up front payments required under the 2011 program. That number will grow as the IRS processes the 2011 cases.

In all, the IRS has seen 33,000 voluntary disclosures from the 2009 and 2011 offshore initiatives. Since the 2011 program closed last September, hundreds of taxpayers have come forward to make voluntary disclosures. Those who have come in since the 2011 program closed last year will be able to be treated under the provisions of the new OVDP program.

The overall penalty structure for the new program is the same for 2011, except for taxpayers in the highest penalty category.

For the new program, the penalty framework requires individuals to pay a penalty of 27.5 percent of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the eight full tax years prior to the disclosure. That is up from 25 percent in the 2011 program. Some taxpayers will be eligible for 5 or 12.5 percent penalties; these remain the same in the new program as in 2011.

Participants must file all original and amended tax returns and include payment for back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties.

Participants face a 27.5 percent penalty, but taxpayers in limited situations can qualify for a 5 percent penalty. Smaller offshore accounts will face a 12.5 percent penalty. People whose offshore accounts or assets did not surpass $75,000 in any calendar year covered by the new OVDP will qualify for this lower rate. As under the prior programs, taxpayers who feel that the penalty is disproportionate may opt instead to be examined.

The IRS recognizes that its success in offshore enforcement and in the disclosure programs has raised awareness related to tax filing obligations. This includes awareness by dual citizens and others who may be delinquent in filing, but owe no U.S. tax. The IRS is currently developing procedures by which these taxpayers may come into compliance with U.S. tax law. The IRS is also committed to educating all taxpayers so that they understand their U.S. tax responsibilities.

More details will be available within the next month on IRS.gov. In addition, the IRS will be updating key Frequently Asked Questions and providing additional specifics on the offshore program.

IRS Offers in Compromise for Expatriates

2012-01-05T18:55:00.000-08:00

Sometimes, though not often, US expatriates after filing all past returns discover the owe a large amount of taxes penalties and interest to the IRS. These taxes may be attributable to income earned before becoming an expatriate and living outside the USA. These taxpayers often ask us about filing an offer in compromise.

An offer in compromise allows you to settle your tax debt for less than the full amount you owe. It may be a legitimate option if you can't pay your full tax liability, or doing so creates a financial hardship. We consider your unique set of facts and circumstances:

Ability to pay;
Income;
Expenses; and
Asset equity.

The IRS generally approves an offer in compromise when the amount offered represents the most we can expect to collect within a reasonable period of time. You should explore all other payment options before submitting an offer in compromise because current statistics indicated only about 15% of thosefiled are accepted by the IRS. The Offer in Compromise program is not for everyone. If you hire a tax professional to help you file an offer, be sure to check his or her qualifications. There are many advertisements on TV that offer this service but generally only take a large nonrefundable down payment when it is clear your offer in compromise will not be accepted by the IRS.

Make sure you are eligible

Before we can consider your offer, you must be current with all filing and payment requirements. You are not eligible if you are in an open bankruptcy proceeding.

We have help many expats file successful offers in compromise. We do not accept filings that do not have a good chance of being accepted by the IRS.

Quick Guide to 2011 Tax Rates and Other Rules

2012-01-05T10:19:00.000-08:00

The AICPA has published a quick guide to tax rates and other specific numbers for tax year 2011. It is a useful quick guide to calculate your potential tax liability and other specific rules. It includes long term capital gain rates, self employment tax rates, exemptions, standard deductions, dependent deductions, etc. Click here to view it.

IRS Uses John Does Summons to Catch Taxpayers Not Paying Taxes

2011-12-31T16:49:00.000-08:00

With anormal summons, the IRS seeks information about a specific taxpayer whose identity it knows. A John Doe summons allows the IRS to get the names of all taxpayers in a certain group. The IRS needs a judge to approve it, but recent IRS success may to lead to more.

A federal judge recently gave the IRS permission to serve a John Doe summons on California’s State Board of Equalization. The IRS wants names of Californians who gifted real property to their children or grandchildren between 2005 and 2010. The IRS believes many failed to file federal gift tax returns reporting family transfers. It’s not just Californians in the crosshairs. The IRS has already received information about intra-family property transfers from county and state officials in other states.

The IRS is using the John Does summons to force foreign banks doing business in the US to reveal information on their US depositors with accounts outside the US. Its use in the future may include other businesses doing business in the US which can provide the IRS with information about US taxpayers assets abroad.

Final Form 8938- Statement of Foreign Financial Assets Released

2011-12-30T04:51:00.000-08:00

US Taxpayers including US Citizens, US Permanent Residents, and US Expatriates may have to file Form 8938 with their US Income tax returns for 2012 to report their foreign financial assets. The estimated time to complete this form is 1 to 3 hours.

Every taxpayer with assets located outside the US should review the instructions to this form to determine if they must file it. Read the Instructions to Form 8938 here. Failure to file the Form 8938 when required can result in severe monetary penalties and criminal prosecution.

View the 2012 tax year Form 8938 here.

FATCA Produces Fear Among US Expatriates and Foreign Banks

2011-12-30T04:30:00.000-08:00

US Expatriates living Abroad and Foreign Financial Institutions are all in fear of the "sledge hammer" rules they must comply with in order to satisfy the IRS reporting rules on accounts owned by US taxpayers. Some foreign banks are refusing to open bank accounts for US taxpayers in order to avoid having to comply with the extensive FATCA report rules.

US taxpayers with sufficient foreign assets will have to start filing form 8938 with their 2012 tax returns which could take up to three hours to complete. That new form is in addition to the existing foreign assets reporting forms which must be filed which include Forms TDF 90-22.1, 5471, 8865, 3520, etc.

Taxpayers and financial institutions that fail to comply with the foreign assets tax reporting rules face severe monetary penalties and possible criminal prosecution. We can help you avoid these dire consequences.

Read more in this New York Times Article

Many Tax Provisions Set to Expire at Year-End

2011-12-23T15:49:00.000-08:00

Many Tax Provisions Set to Expire at Year-End

2011 Year End Tax Planning Moves for US Expatriate Taxpayers

2011-12-22T09:08:00.000-08:00

By Don D. Nelson, Attorney, CPA, and Charles Kauffman, CPA
Kauffman Nelson LLP, Certified Public Accountants

- The Foreign earned income exclusion for 2011 is now $92,900 per calendar year. The allowable foreign housing exclusion or deduction has also been increased.
- If you have over a certain minimum amounts of foreign financial assets, in 2011 you must file Form 8938 with your 2011 tax return to report those assets. This filing is in addition to filing Forms TDF 90-22.1, 5471, 8865, 3520, etc.
- Realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, you can sell the original holding, then buy back the same securities at least 31 days later. It may be advisable for us to meet to discuss year-end trades you should consider making.
- Postpone income until 2012 and accelerate deductions into 2011 to lower your 2011 tax bill. This strategy may enable you to claim larger deductions, credits, and other tax breaks for 2011 that are phased out over varying levels of adjusted gross income (AGI). These include child tax credits, higher education tax credits, the above-the-line deduction for higher-education expenses, and deductions for student loan interest. Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases, it may pay to actually accelerate income into 2011. For example, this may be the case where a person's marginal tax rate is much lower this year than it will be next year.
- If you believe a Roth IRA is better than a traditional IRA, and want to remain in the market for the long term, consider converting traditional-IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA if eligible to do so. Keep in mind, however, that such a conversion will increase your adjusted gross income for 2011.
- If you converted assets in a traditional IRA to a Roth IRA earlier in the year, the assets in the Roth IRA account may have declined in value, and if you leave things as-is, you will wind up paying a higher tax than is necessary. You can back out of the transaction by recharacterizing the rollover or conversion, that is, by transferring the converted amount (plus earnings, or minus losses) from the Roth IRA back to a traditional IRA via a trustee-to-trustee transfer. You can later reconvert to a Roth IRA.
- It may be advantageous to try to arrange with your employer to defer a bonus that may be coming your way until 2012.
- Consider using a credit card to prepay expenses that can generate deductions for this year such as charitable donations. Remember, in general, only contributions to US charities are deductible on your US tax return.
- If you expect to owe state and local income taxes when you file your return next year, consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2011 if doing so won't create an alternative minimum tax (AMT) problem.
- Estimate the effect of any year-end planning moves on the alternative minimum tax (AMT) for 2011, keeping in mind that many tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes. These include the deduction for state property taxes on your residence, state income taxes (or state sales tax if you elect this deduction option), miscellaneous itemized deductions, and personal exemption deductions. Other deductions, such as for medical expenses, are calculated in a more restrictive way for AMT purposes than for regular tax purposes. As a result, in some cases, deductions should not be accelerated.
- You may be able to save taxes this year and next by applying a bunching strategy to “miscellaneous” itemized deductions, medical expenses and other itemized deductions.
- Unless Congress extends it, the up-to-$4,000 above-the-line deduction for qualified higher education expenses will not be available after 2011. Thus, consider prepaying eligible expenses if doing so will increase your deduction for qualified higher education expenses. Generally, the deduction is allowed for qualified education expenses paid in 2011 in connection with enrollment at an institution of higher education during 2011 or for an academic period beginning in 2011 or in the first 3 months of 2012.
- You may want to pay contested taxes to be able to deduct them this year while continuing to contest them next year.
- You may want to settle an insurance or damage claim in order to maximize your casualty loss deduction this year.
- If you are age 70-1/2 or older, own IRAs and are thinking of making a charitable gift, consider arranging for the gift to be made directly by the IRA trustee. Such a transfer, if made before year-end, can achieve important tax savings.
- Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes. You can give $13,000 in 2011 to each of an unlimited number of individuals but you can't carry over unused exclusions from one yearto the next. The transfers also may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.

Year-End Tax-Planning Moves for Businesses & Business Owners
- Businesses should consider making expenditures that qualify for the business property expensing option. For tax years beginning in 2011, the expensing limit is $500,000 and the investment ceiling limit is $2,000,000. And a limited amount of expensing may be claimed for qualified real property. These rules only apply to business located in the US and are not available to businesses located abroad. Those planning on purchasing new depreciable property this year or the next should try to accelerate their buying plans, if doing so makes sound business sense.
- If you are self-employed and haven't done so yet, set up a self-employed retirement plan. This must be done before year end. Remember you can only make a contribution to such a plan if you are taking the foreign earned income exclusion if you net taxable earnings from self employment exceed that exclusion.
- Depending on your particular situation, you may also want to consider deferring a debt-cancellation event until 2012, and disposing of a passive activity to allow you to deduct suspended losses.
- If you own an interest in a partnership or S corporation you may need to increase your basis in the entity so you can deduct a loss from it for this year (2012). This is done by making an additional capital contribution or loaning funds to the S Corporation.

These are just some of the year-end steps that can be taken to save on your international and expatriate taxes. By contacting us before year end, we can help you tailor a particular plan that will work best your international and expatriate tax situation.

Don Nelson/Charles Kauffman
Kauffman Nelson LLP

Many Expats may be able to Reduce the Taxes Owed the IRS

2011-12-21T17:29:00.000-08:00

Many taxpayers who owe back taxes, or are now filing a lot of past year tax returns want to know how to "make a deal" with the IRS for a lower amount than the taxes, interest and penalties the IRS shows due. Essentially this can only be done by filing an "Offer in Compromise." Most recently the IRS is only accepting less than 20 % of the Offers in Compromises filed with it. Essentially to qualify you must show due to age, illness, etc. that you have limited prospects of making enough money to pay your past unpaid tax bills and in that event pay the IRS the current value of most of your assets.

If IRS does not accept your offer in compromise, you can enter into a payment plan to pay your tax bill over time. If you cannot make any payments at this time, they may put their collection action on hold for a while in hopes that you will have sufficient funds to make payments later. They will file a tax lien which does mess up your credit. The good news is most tax liens expire in ten year and the IRS has in the past not taken any action to extend that time. Let us know if you need help dealing with the the IRS collection department or trying for an offer in compromise.

Be aware that most of the Companies on TV that advertise they can reduce the amount owed the IRS will take an advance payment of $4,000 to $10,000 (non-refundable) and more often than not fail to get your offer in compromise accepted. You should deal with reputable CPAs or Attorneys if you hire someone to file one for your.

Read more about Offers in Compromise on the IRS website.

Video on how to file for an IRS Offer in Compromise

IRS Releases Guidance on Foreign Financial Asset Reporting

2011-12-15T09:40:00.000-08:00

The Internal Revenue Service in coming days will release a new information reporting form that taxpayers will use starting this coming tax filing season to report specified foreign financial assets for tax year 2011.

Form 8938 (Statement of Specified Foreign Financial Assets) will be filed by taxpayers with specific types and amounts of foreign financial assets or foreign accounts. It is important for taxpayers to determine whether they are subject to this new requirement because the law imposes significant penalties for failing to comply.

The Form 8938 filing requirement was enacted in 2010 to improve tax compliance by U.S. taxpayers with offshore financial accounts. Individuals who may have to file Form 8938 are U.S. citizens and residents, nonresidents who elect to file a joint income tax return and certain nonresidents who live in a U.S. territory.

Form 8938 is required when the total value of specified foreign assets exceeds certain thresholds. For example, a married couple living in the U.S. and filing a joint tax return would not file Form 8938 unless their total specified foreign assets exceed $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year.

The thresholds for taxpayers who reside abroad are higher. For example in this case, a married couple residing abroad and filing a joint return would not file Form 8938 unless the value of specified foreign assets exceeds $400,000 on the last day of the tax year or more than $600,000 at any time during the year.

Instructions for Form 8938 explain the thresholds for reporting, what constitutes a specified foreign financial asset, how to determine the total value of relevant assets, what assets are exempted, and what information must be provided.

Form 8938 is not required of individuals who do not have an income tax return filing requirement.

The new Form 8938 filing requirement does not replace or otherwise affect a taxpayer’s obligation to file an FBAR (Report of Foreign Bank and Financial Accounts). For more go to the FBAR page on this website.

Failing to file Form 8938 when required could result in a $10,000 penalty, with an additional penalty up to $50,000 for continued failure to file after IRS notification. A 40 percent penalty on any understatement of tax attributable to non-disclosed assets can also be imposed. Special statute of limitation rules apply to Form 8938, which are also explained in the instructions.

Form 8938, the form’s instructions, regulations implementing this new foreign asset reporting, and other information to help taxpayers determine if they are required to file Form 8938 can be found on the FATCA page of irs.gov.

See TD 9567.

IRS announces more information on "reasonable cause" excuse and elimination or reduction of FBAR (TDF 90-22.1) late filing penalties.

2011-12-09T10:38:00.001-08:00

The IRS has issued a Fact Sheet for U.S. citizens or dual citizens residing outside the U.S. who may have been unaware of their U.S. tax and information filing obligations and are now seeking to come into compliance. The Fact Sheet outlines information about the delinquent filing of federal income tax returns and Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBARs).

Background. U.S. citizens must file a federal income tax return for any tax year in which their gross income is equal to or greater than the applicable exemption amount and standard deduction. A U.S. citizen is required to report his worldwide income on his federal income tax return—that is, all income, regardless of which country is the source of the income. Generally, a taxpayer only need to file returns going back six years.

Under Code Sec. 6651(a)(1), a taxpayer who fails to timely file their tax return is subject to a penalty equal to 5% of the unpaid tax, plus an additional 5% for each month (or fraction thereof), up to 25%. No penalty is due if no tax is due. Code Sec. 6651(a)(2) generally provides for an addition to tax in the case of any failure to pay the tax shown on any return required to be filed on its due date, unless it is shown that the failure is due to reasonable cause and not willful neglect.

The Code Sec. 6651(a)(2) penalty commences on the due date of the return, determined without regard to filing extensions and is 1/2% of the amount of tax shown on the return, plus an additional 1/2% for each month (or fraction thereof), up to 25%.

Code Sec. 6651(c)(1) provides that the failure to file penalty is reduced by the failure to pay penalty for any month where both apply.

Background on FBARs. Each U.S. person who has a financial interest in or signature or other authority over any foreign financial accounts, including bank, securities, or other types of financial accounts in a foreign country, if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year, must report that relationship each calendar year by filing an FBAR with the Department of the Treasury on or before June 30th of the succeeding year.

Potential penalties for failure to file/pay. The fact sheet provided guidance on reasonable cause with respect to the reasonable cause for the failure to file or pay penalties. Generally, reasonable cause relief is granted when the taxpayer can demonstrate to the IRS that he/she exercised ordinary business care and prudence but nevertheless failed to meet the tax burden. Factors demonstrating whether or not ordinary business care and prudence were exercised include: the reasons provided for failing to meet the tax obligations; the taxpayer's compliance history; the length of time between the taxpayer's failure to meet the tax obligation and the subsequent compliance; circumstances beyond the taxpayer's control.

The facts and circumstances that the IRS considers in determining whether reasonable cause exists are: the taxpayer's education; whether the taxpayer has been previously subject to the tax; whether the taxpayer has been penalized before; whether there were recent changes in the tax forms or law that the taxpayer could not reasonably be expected to know; and the level of complexity of a tax or compliance issue.

Depending on facts and circumstances of a particular case, taxpayers may be able to establish reasonable cause if they can demonstrate that they were not aware of specific obligations to file returns or pay taxes. In addition to the failure to file and failure to pay penalties, the IRS said that other civil penalties may arise, including the accuracy-related penalty, fraud penalty and the other information reporting penalties.

Potential FBAR penalties. A taxpayer that fails to file a FBAR may be subject to either a willful or non-willful civil penalty, in the absence of reasonable cause. Generally, the civil penalty for willfully failing to file an FBAR can be up to the greater of $100,000 or 50% of the total balance of the foreign account at the time of the violation. Alternatively, non-willful violations that the IRS concludes are not due to reasonable cause are subject to a penalty of up to $10,000 per violation. No penalties are imposed if the IRS determines the violation was due to reasonable cause.

Factors weighing in favor of a determination that an FBAR violation was due to reasonable cause include reliance upon the advice of a professional tax advisor who was informed of the existence of the foreign financial account, that the unreported account was established for a legitimate purpose and there were no indications of efforts taken to intentionally conceal the reporting of income or assets, and that there was no tax deficiency (or there was a tax deficiency but the amount was de minimis) related to the unreported foreign account. Factors weighing against such a determination include whether the taxpayer's background and education indicate that he should have known of the FBAR reporting requirements, whether there was a tax deficiency related to the unreported foreign account, and whether the taxpayer failed to disclose the existence of the account to the person preparing his tax return. No single factor is determinative, the Fact Sheet said.

Although the IRS has established penalty mitigation guidelines, examiners may nevertheless determine that a penalty is not appropriate or that a lesser (or greater) penalty amount than the guidelines would otherwise provide is appropriate. In some instances, examiners may issue a warning letter rather than impose a penalty.

The Fact Sheet advises that if a taxpayer learns that he was required to file FBARs for earlier years, he should file the delinquent FBARs and attach a statement explaining why they were filed late. A taxpayer need not file FBARs that were due more than six years ago, since the statute of limitations for assessing FBAR penalties is six years from the due date of the FBAR. No penalty will be asserted if the IRS determines that the late filings were due to reasonable cause.

In addition, the Fact Sheet notes that beginning in 2012, U.S. taxpayers who have an interest in certain specified foreign financial assets with an aggregate value exceeding $50,000 must report those assets to the IRS on Form 8938 (Statement of Specified Foreign Financial Assets) with their tax return.

The Fact Sheet can be viewed on the IRS website athttp://www.irs.gov/newsroom/article/0,,id=250788,00.html.

Surrender of your US Citizenship or Loss of Citizenship Can Eliminate Need to File US Tax Returns

2011-12-05T06:21:00.001-08:00

We have assisted hundreds of US expats with the surrender of their US Citizenship or Permanent Residency. If you go through the process you will never have to file a US Tax Return again. The State Department does require that you have Citizenship in another country before they will allow you to surrender your US Citizenship. It is a two part process. The legal surrender at the US Embassy or consulate and the second part is filing the proper forms with the IRS. You must file at least the last five years US Tax returns and other foreign reporting forms and pay any taxes, interest and penalties that might be due along with a Form 8854.

Read the State Department rules on citizenship surrender or loss HERE. For assistance email us at ddnelson@gmail.com or visit our website at www.TaxMeLess.com

US IRS to go easy on American residents in Canada Per the Globe & Mail

2011-12-02T18:40:00.001-08:00

The U.S. Internal Revenue Service is poised to waive potentially massive penalties for Americans who agree to come clean and don't owe any taxes, The Globe and Mail has learned.

The new rules will be announced within weeks by the IRS, according to David Jacobson, the U.S. Ambassador to Canada, who has been swamped with complaints from anxious Canadians.

"What the IRS is saying here is that if ... you don't owe taxes to the U.S., and you file your return and they show you don't owe taxes, there aren't going to be any penalties for having filed late," Mr. Jacobson said in an interview Thursday.

Fears of a looming U.S. tax crackdown has caused a wave of angst among the roughly one million Americans living in Canada. Many of them long ago stopped filing, assuming they owed no tax.

READ MORE IN THE GLOBE & MAIL ARTICLE HERE

Retirement Plans That May Be Available to Expats Abroad

2011-11-30T17:36:00.001-08:00

As a US expatriate, you may be eligible to create a tax deductible (for US tax purposes) retirement plan if you operate your own business abroad through your own sole proprietorship or by utilizing a US corporation or LLC. The funds contributed are tax deductible and the earnings grow tax free until you withdraw the funds when you retire. AN IRS EXPLANATION OF THE AVAIL ABLE PLANS IS HERE

It is important to keep in mind, that if you operate abroad through a sole proprietorship, in most situations you can only make a contribution to an IRA or self employed retirement plan if the net taxable profit from your business exceeds your foreign earned income exclusion (if you are taking it). We can help you put together a US tax deductible retirement plan that will work for you.

Unless provided otherwise by a US tax treaty with the country in which you work (and there are only a few treaties that have favorable provisions) if a contribution is made to a foreign pension plan by your employer in your behalf, you must report that contribution as income on your US tax return and any earnings made on the funds in your foreign pension plan may also be immediately taxable to you. If you have a separate account in that foreign pension plan you may also be obligated to file Forms 3520 and 3520A each year to report information on that separate account which the IRS deems a foreign trust. Failure to file these two forms can result in extremely large penalties.

New FBAR form with Revised Instructions Just Released by IRS

2011-11-30T16:48:00.001-08:00

The IRS just release in November a new FBAR (TDF 90-22.1) form with revised instructions which clarify some of the filing requirements and resolve some of the open issues concerning when to file that form.

If you are filing it late (after June 30th following the end of a calendar year) the instructions still advise you to attach a reasonable late filing excuse, but fail to state whether or not attaching that excuse will reduce the potential late filing penalty of up to $10,000 for "unwillfully" filing the form late.

SEE THE FORM AND READ THE NEW INSTRUCTIONS HERE

How Many Wealthy People are there in the US and the World?

2011-11-25T09:25:00.001-08:00

Private Wealth Magazine has published an article that sets worth the number of individuals in the US and the world that are worth $30 million US or more. Surprisingly there are not as many (if there figures are correct) as you might think. There are 62,950 in the US with 10,390 are those located in California. That's not a lot considering there are over 300 Million residents in the USA. There are 42,525 in Asia.

READ THE ARTICLE AND STATISTICS HERE

Ex-UBS banker sentenced for aiding U.S. tax evasion

2011-11-21T09:58:00.001-08:00

A former senior UBS banker who helped the U.S. government expand its crackdown on offshore tax evasion was sentenced to five years probation on Friday for advising wealthy Americans on ways to hide their money from U.S. tax authorities. Renzo Gadola, who worked at Swiss bank UBS AG from 1995 to 2008, pleaded guilty in December to charges of conspiracy to defraud the United States. Almost immediately after his arrest on Nov. 8, 2010, Gadola started cooperating with U.S. officials, providing key insight into other bankers and Swiss financial institutions offering offshore banking services, according to prosecutors. He is currently out on bail.

U.S. authorities, who suspect tens of thousands of Americans are using Swiss banks to avoid paying billions of dollars in taxes, are conducting a widening criminal investigation into scores of Swiss banks and international banks with Swiss operations. Banks under investigation include Credit Suisse, HSBC Holdings Plc and Basler Kantonalbank, a large Swiss cantonal, or regional, bank, according to U.S. judicial sources. Cantonal banks are largely government-owned in Switzerland.

Gadola turned over the names of bankers and participated in recorded conversations with clients, according to an unsealed government document filed last week requesting leniency in his sentencing.

The case against Gadola, an investment adviser based in Switzerland, highlighted how some bankers continued to help wealthy Americans conceal money from the Internal Revenue Service (IRS) even amid a U.S. probe into UBS that mushroomed into a major international judicial and diplomatic affair. In 2009, UBS paid $780 million to settle criminal charges from the U.S. Department of Justice that it helped thousands of wealthy Americans evade taxes. UBS ultimately agreed to disclose 4,450 client names and ended its U.S. cross-border banking business. The bank was accused by federal prosecutors of helping some 17,000 American clients with $20 billion in assets hide their accounts from the IRS.

Gadola's case involved a Mississippi client who kept $445,000 in a safe deposit box before transferring it first to UBS and then to a Basler Kantonalbank account. The unidentified client said he wanted to declare the money under a voluntary disclosure program launched by the IRS, but Gadola advised against it, arguing the money would go undetected by officials.

Martin Lack, a former senior UBS banker, was indicted in August for selling offshore tax evasion services. Lack, a Swiss national, is a fugitive. Lack was Gadola's business partner after Gadola left UBS, and the two worked to help American clients hide money in Swiss cantonal banks following the crackdown on UBS, according to people briefed on the matter.

INVESTMENTS IN FOREIGN MUTUAL FUNDS AND OTHER INVESTMENTS REQUIRE MANY SPECIAL IRS FORMS

2011-11-16T10:20:00.001-08:00

Investments in foreign stocks, investment companies, foreign corporations that hold investements, etc. from a U.S. tax point of view a could be for a U.S. individual, pension fund, or trust a paperwork nightmare . If you are thinking of investing in Foreign stocks, please remember your friends at the IRS. Any investment gains you make will be offset by IRS penalties if you do not do the proper paperwork. To comply with the rules and keep the the US taxes down you should be filing form 8621 each year with your tax return.

Do not buy foreign mutual funds (funds not sold in the US). These are PFICs (“Passive Foreign Investment Companies”) and they create a metric ton of complexity and accounting expense for your U.S. income tax returns. (This, by the way, is one of the U.S. government’s little non-tariff trade barriers, designed to discourage U.S. capital being deployed into foreign capital markets).
Remember your FBAR. The account you open that will buy the stock will need to be reported on Form TD F 90-22.1.

Remember Form 8938. This is the new reporting form for foreign financial assets, largely duplicating the FBAR reporting requirements.

Foreign tax credit. Undoubtedly a tax of some kind will be imposed for the foreign country where the investment is located. This will end up on an individual return on Form 1116. This form will allow you to take a foreign tax credit against your US income tax paid on the investment income.

What if you die while owning foreign investments? Be sure you have a plan for simple transfer of your accounts to your heirs if you die. The cost of probate procedures in many foreign countries could eliminate any stock market profits you make. If you set up a foreign trust to try to reduce those foreign estate costs, you will then have to file forms 3520 and 3520A each year to report that trust.

Expats Guide to Surviving and IRS Audit

2011-11-09T09:37:00.000-08:00

The Chairman of Thomson Reuters China has written a guide to help expats survive IRS audits. In the past several years the IRS has hired thousands of new personnel in its International Division and the number of expatriate tax audits are increasing dramatically and will continue to increase in the future. READ THE ARTICLE HERE.

The IRS has discovered that tens of thousands of expats are taking the incorrect foreign earned income exclusion and foreign tax credits which has directly resulted in the increase in Tax Audits. Taxpayers who do their own returns on consumer tax return software often make errors on their returns due to lack of guidance. Remember all such errors may result in additional taxes due, interest and penalties which can often be very high.

Our firm has represented hundreds of taxpayers in IRS audits with great success. Please email us if you need help. Thanks. ddnelson@gmail.com

Bank Secrecy from the IRS Is Now History in Switzerland

2011-11-08T08:25:00.000-08:00

Reuters reports that a Swiss bank will be turning over to the IRS names of its secret US depositors. Read Article Here. This is clear evidence that US Taxpayers with foreign bank accounts will not be able to avoid reporting them in the future. The only remaining issue is how many years it will take until the IRS gets most of the banks in the world to give them information on the deposits by US taxpayers.

The criminal penalty for not filing the FBAR forms to report foreign bank accounts is up to 5 years in jail. The maximum civil penalty is 50% of the highest balance in each foreign account for each year.

US Flow Through Tax Election for Your Foreign Corporation or LLC

2011-11-07T15:25:00.000-08:00

You can make an election if you have a foreign corporation or LLC which may (depending on your individual business circumstances) to treat that entity as a flow through entity for your US tax return. This means all profits and losses from the foreign entity flow through to you tax return. It also means you can offset any foreign taxes paid by the foreign entity against your US tax on that flow through income taking it as a foreign tax credit which will normally offset your US tax on that flow through income dollar for dollar. If the foreign tax rate is higher than your US tax rate, that will mean you will owe no US tax on that foreign entity's income on your US return.

Only certain foreign corporations or business organizations are eligible for the US flow through election. A list of the entities which are not eligible for this election are listed by country and included in the instructions for IRS Form 8832. It is best to review this list and see what types of foreign entities will be eligible to make the flow through election if it would be beneficial to your US taxes prior to forming a foreign corporation or LLC.

You may have to talk with an International Tax Expert to determine if a flow through election will benefit your business plan. It does avoid possibilities of double taxation (if you plan to distribute most of the income to yourself) and Controlled Foreign Corporation Subpart F rules as well as other potential US tax problems. Most foreign attorneys and accountants who help you form your foreign business entity do not know these US tax rules. It is often difficult after the fact to change the type of entity (depending on the foreign country in which it is formed) if you later discover that you do wish to have the income flow through to your US return. We have helped well over a hundred expatriate business owners determining which type of foreign entity will be best for them under US tax law.

2011-11-07T09:56:00.000-08:00

The link below is to the letter written by American Citizens Abroad to the IRS Commissioner setting for the unfairness and inequities of the recent IRS Voluntary Offshore Disclosure Programs when applied to the six million ordinary citizens residing abroad. These individuals should not be penalized for not filing tax forms very few taxpayers were aware existed such as the FBAR forms, foreign corporation forms, passive foreign investment company form, etc. READ the LETTER HERE

SWISS GOVERNMENT OFFERS TO MAKE DEAL WITH IRS

2011-11-04T12:11:00.000-07:00

Reuters reports the Swiss government has offered to pay a $10 Billion dollar penalty to the IRS and US Justice Department for civil penalties in connection with its alleged co - conspirator activities which allowed US taxpayers to avoid paying taxes on their income and secret assets held abroad. This article shows how strong the current IRS effort to get foreign bank to reveal information on their US account holders actually is.

The IRS will not accept the proposed settlement unless the names of all US depositors and details of their accounts are included in the deal. Read More Here.

Form 8938 proposed instructions analyzed

2011-11-01T15:44:00.000-07:00

Trusts and Estates Magazine has analyzed the proposed instructions to the 2011 Form 8938 for reporting foreign financial assets. Read here. The good news is if you have already filed forms 3520, 5471, 8865, 8621, 8891 , you just have to state so on the form 8938, and do not have to fill out the rest of the form. The filing thresholds, penalties, statute of limitations, etc are set forth in this easy to read article.

US Nonresidents with Assets in the US will have their US Estates Subject to US up to 34% estate taxes

2011-10-27T17:23:00.000-07:00

US nonresidents with certain assets located in the United States will cause their estates to have to file US Estate Tax returns on the value of their assets (with some exceptions) located in the USA. The tax is based on the Fair Market Value of their Assets and can be up to 35%. Nonresidents only get an exemption from this tax equal to the first $60,000 value of the fair market value of their assets in the US. The balance of the estate's assets are subject to the estate tax. Real estate which was owned by a deceased nonresident is subject to this tax. The estate can only deduct the mortgage balance due from the fair market value if the estate agrees to report to the IRS the value an details of the decedents worldwide assets including those in Mexico.

Due to the large chunk this estate tax can take out of a nonresident's estate, it is best to do some advance planning to attempt to reduce it. Email us if you want help. Read more about the nonresident estate tax here

10/31/11 Last Day to Enter California Voluntary Compliance Program

2011-10-26T14:39:00.000-07:00

Taxpayers have until Monday, October 31, to participate in California’s Voluntary Compliance Initiative 2 (VCI 2). Taxpayers who participate in VCI 2 benefit from penalty waiver and protection from criminal prosecution on underreported tax liabilities from abusive tax avoidance transactions and offshore financial arrangements.

To participate, taxpayers must provide amended returns, participation agreements, and payments to the FTB by the October 31 deadline. Extensions cannot be given. Mail postmarked and faxes received on or before October 31 will be accepted.

For more information on this program and eligibility requirements, visit the FTB’s Web site atwww.ftb.ca.gov/Voluntary_Compliance_Initiative_2/index.shtml or call the VCI 2 hotline at (888) 825-9868 .

Tax Rules for Contractors in Afghanistan, Iraq and Middle East

2011-10-25T07:33:00.000-07:00

Foreign Earned Income Exclusion Concerns for Contractors in Iraq and Afghanistan and Middle East
The IRS has issued Memorandum Number AM2009-0003 regarding the availability of the FEIE to contractors working in Iraq and Afghanistan. It states that IRS will be looking closely at contractors who claim to meet the bona fide residence test, but whose family and home are back in the US and who travel there often on leave. Unfortunately there is not a lot of case law on the subject and the IRS rules and legislative history leave a lot of room for interpretation. However, contractors should understand the rules may have changed, and they may have to defend their claim to the FEIE.

Costa Rica Banks Will Report US Taxpayers Holdings to IRS

2011-10-22T06:01:00.000-07:00

The Tico Times reports that in 2013, Costa Rica Banks will start reporting US Citizen Bank Accounts and holdings to the Internal Revenue Service (read article here). If this applies to your situation as a resident of Costa Rica or property owner, you should immediately begin to report all financial accounts located outside of the US using the IRS FBAR form TDF 90-22.1. Failure to file this form each year (it is due on 6/30 following the end of each calendar year) can result in IRS penalties of $10,000 or more per year and possible criminal prosecution.

Another IRS requirement is that you report your Costa Rica Corporation, whether active or dormant, using form 5471 attached to your US tax return each year. Some years you may also have to file form 926 also. There are no exceptions to this rule. The penalty for not filing that form is also $10,000 per year.

In most situations, these forms are just reporting forms, and do not result in any additional tax due. Best to file now to avoid bigger problems in another year when the IRS will get the lists from the Costa Rica Banks. We can help.

Transferring You Taxable Profits Offshore to Reduce Taxes

2011-10-17T11:18:00.000-07:00

If you are a US person or company and do business abroad, you may be able to follow Google's strategy by setting up foreign corporations in certain low tax or no tax jurisdictions. This has reduced their effective income tax rate to slightly more than 18% which is one half the rate paid by most US businesses. Google utilizes Ireland, The Netherlands and Bermuda to accomplish this tax reduction. Read the Bloomberg article and find out how. Perhaps you can follow their lead. Contact us for a mini-consultation to find out if this strategy will work for your business if you are doing business outside of the US.

Special Extended Filing Date for pre-2010 FBAR Signatory Powers IS November 1, 2011

2011-10-13T08:57:00.000-07:00

November 1, 2011 is the deadline for persons whose relationship to foreign accounts is as signatory only (i.e., those persons who have no ownership or title interest in any foreign accounts but serve as signatory only) to file FBARs for pre-2010 years. See Notice 2011-54, 2011-29 IRB 53. Those who qualify for this extended deadline should take action to file immediately.

The problem for such signatories, of course, is that U.S. owners (title or beneficial) may have their own FBAR filing requirements and, unless the owners filed (or will file) pursuant to a voluntary disclosure (OVDI or regular (quiet or noisy)), the signatory FBARs will not match to owner FBARs. For those U.S. taxpayer owners who decided to go forward without correcting the past, their signatories (usually family members or friends) are at risk if they choose not to file the signatory FBARs within this extended deadline. If they file, their FBARs could be the last link in the chain in identifying the U.S. taxpayer owners who have not gotten right with the IRS and, if they don't file, they are at risk of huge penalties. This choice is not a good one for family or friends. Owners of the accounts should consider now getting right with the IRS (however they do so, whether by quiet or noisy disclosure) so as to mitigate the potential damage all signatories.

Swiss Bankers Charged with Helping 180 US clients hide assets abroad

2011-10-12T06:01:00.000-07:00

Two Julius Baer Group Ltd. (BAER) client advisers were charged with helping U.S. customers of the Zurich- based bank evade taxes, according to an indictment and a person with knowledge of the matter.

Daniela Casadei and Fabio Frazzetto conspired with more than 180 U.S. clients and others at the bank to hide at least $600 million in assets from the Internal Revenue Service, according to the indictment in federal court in New York and the person, who wasn’t authorized to speak about the matter. The indictment refers to the bank as Swiss Bank No. 1. Read more in Bloomberg

FORMER EMPLOYEE'S RESPONSIBILITY TO REPORT FORMER EMPLOYERS BANK ACCOUNTS IN WHICH NO FINANCIAL INTEREST IS HELD

2011-10-12T05:52:00.000-07:00

An former employees responsibility to report foreign financial accounts of their former employer on their personal FBAR (form TDF 90-22.1) is explained and limited with the following ruling FIN 2011-G003 They are not expected to maintain records of those accounts nor is former employer obligated to provide them with that information. The former employee must supply as much information as they have on the account. This ruling does not apply to current employees with signature authority who still must supply all information on their employers foreign accounts.

If You Failed to Enter the IRS Offshore Disclosure Program (At Risk Taxpayers)

2011-10-02T10:03:00.000-07:00

You should immediately seek competent legal and tax advice on how best to proceed with filing your past tax returns and IRS foreign asset reporting forms now that the September 9, 2011 deadline has passed, if you failed to enter the Program.

Most delinquent t taxpayers that have not disclose their foreign assets, filed the special IRS Offshore Forms, or have not filed their tax returns for past years probably do not face criminal action, but may incur horrendous penalties which grow worse the longer they wait to come forward. You alternatives are now fewer than they used to be but there are still steps you can take.

There are no clear preferable courses of action but if you talk with a professional and learn your alternatives, it will help you make a decision on planning your future course of action. Best to talk with an experienced tax attorney in any event to give yourself the privacy and confidentiality of attorney-client privilege. Contact us to make an appointment for a phone or skype consultation to discuss your individual situation and create a strategy to proceed. Offshore Disclosure Email.

To read more about the IRS General Disclosure Program click here.

The 75% Fraud Penalty (Plus Possible Prison Time)

2011-10-01T18:27:00.000-07:00

If you get audited, and the IRS decides your tax return fraudulently understates your tax bill, you are in really big trouble. You will be hit with a penalty equal to 75% of the understatement. Plus you will be charged interest. And you could face criminal charges and possible prison time. In the next few years audits of expatriates and form 2555 (foreign earned income exclusion) will increase substantially due to recent discoveries about how many such forms were incorrect and were being filed by expats not eligible for the exclusion.

Committing tax fraud takes some work, because it goes beyond simple ignorance of the tax rules and regulations. You have to intentionally do really bad things like keep two sets of books, alter or destroy documents, hide unreported income overseas, or fail to report income from illegal activities (this is not a complete list by any stretch). Bottom line: You can't commit tax fraud without knowing it.

Anyone accused of tax fraud should hire an attorney who specializes in big-time IRS problems. A CPA or Enrolled Agent can't provide the equivalent of the attorney-client privilege, and those accused of tax fraud will need that privilege. Also, non-attorneys are not competent to deal with the criminal charges that will often go along for the ride with tax fraud cases.

IRS Releases Draft of Instructions to Form 8938- 2011 Required Tax Form to Report Foreign Financial Assets

2011-09-30T10:19:00.000-07:00

The IRS has released draft instructions to Form 8938. Form 8938 must be filed with your 2011 income tax return to report Foreign Financial Assets if the total value of those assets exceed a reporting thresholds. Read the draft instructions here. What ever happened to the IRS Paperwork Reduction Act which to our knowledge was never repealed. See the current IRS draft of Form 8938.

It is interesting to note you do not have to report your ownership of foreign real estate unless it is held in a foreign trust, corporation, etc. At this point in time, it also appears you do not have to report any gold or other assets buried in your back yard (abroad) or held in your personal safe in your offshore villa.

These drafts are still subject to revision before the end of 2011.

US Expats Living Abroad can Get An Additional 2 month Extension of Time to File 2010 returns until December 15th.

2011-09-29T10:59:00.000-07:00

US Expats living abroad on 4/15, get an automatic extension to file their returns until 6/15. On June 15th if you file Form 4868 an expat can get an additional extension until October 17th.

Now expats can secure an additional extension of time to file their return until December 15th, if they send in a letter by October 15th requesting an additional two months of time to file their 2010 income tax return. We strongly recommend the letter be sent by certified mail return receipt since you will not hear back from the IRS unless your request is denied. You must state the reason(s) you need the additional time in the letter. The letter should be mailed to: Department of the Treasury , Internal Revenue Service Center, Austin, TX 73301-0215. You can read more about this additional extension request on page 4 of IRS publication 54.

China Will Now Collect ChineseSocial Security from Foreign Workers

2011-09-23T11:03:00.000-07:00

From October 15, expats working in mainland China will be forced to pay 11 per cent of their salaries to the government in exchange for access to benefits such as pension coverage and medical insurance.

While employees will see a significant chunk of their tax-home pay disappear, their employers are also being hit by the new tax, as companies are forced to contribute a further 37 per cent of the foreign staff’s salaries.

The move could discourage multinationals from sending foreign workers to China in the future, while employees will be concerned about another raid on their salaries. Income tax in some cities in China is already charged at 45 per cent at the top tier.

Given China’s hunger for foreign talent, especially in cities such as Shanghai, it has been quick to promote the benefits for foreign workers.

Possible FBAR Penalties That May be imposed When Opting Out of Voluntary Disclosure Program

2011-09-20T12:02:00.000-07:00

The CPA Insider has an excellent article by Janice Eiseman on the possible FBAR penalties that might be imposed a taxpayer that chose not to participate in the 2011 Voluntary Disclosure Program or opts out and just files the forms outside of that program. It appears based on case law and IRS procedures often the penalty for non willfully failing to file can be less that the $10,000 the IRS suggests it might be. Click here to read the article.

IRS Voluntary Disclosure after 9/9/11

2011-09-19T10:38:00.000-07:00

Standard Taxpayer IRS Voluntary Disclosure is still available after 9/9/11.

If you missed the 9/9/11 Deadline to enter the 2011 iRS Voluntary Disclosure Program you still can take advantage of the IRS Voluntary Disclosure Program which has always been in effect. This procedure should be followed if you have unfilled past tax returns and also have FBAR, Foreign Corporation, Foreign Partnership, Foreign Trust, and other special IRS forms which have not been filed in a timely manner. The procedure described below is only available if you come forward first before the IRS discovers you have not been filing.

Read the details of the program below.

Voluntary Disclosure Practice

(1) It is currently the practice of the IRS that a voluntary disclosure will be considered along with all other factors in the investigation in determining whether criminal prosecution will be recommended. This voluntary disclosure practice creates no substantive or procedural rights for taxpayers, but rather is a matter of internal IRS practice, provided solely for guidance to IRS personnel. Taxpayers cannot rely on the fact that other similarly situated taxpayers may not have been recommended for criminal prosecution.

(2) A voluntary disclosure will not automatically guarantee immunity from prosecution; however, a voluntary disclosure may result in prosecution not being recommended. This practice does not apply to taxpayers with illegal source income.

(3) A voluntary disclosure occurs when the communication is truthful, timely, complete, and when:

a. the taxpayer shows a willingness to cooperate (and does in fact cooperate) with the IRS in determining his or her correct tax liability; and
b. the taxpayer makes good faith arrangements with the IRS to pay in full, the tax, interest, and any penalties determined by the IRS to be applicable.

(4) A disclosure is timely if it is received before:

a. the IRS has initiated a civil examination or criminal investigation of the taxpayer, or has notified the taxpayer that it intends to commence such an examination or investigation;
b. the IRS has received information from a third party (e.g., informant, other governmental agency, or the media) alerting the IRS to the specific taxpayer’s noncompliance;
c. the IRS has initiated a civil examination or criminal investigation which is directly related to the specific liability of the taxpayer; or
d. the IRS has acquired information directly related to the specific liability of the taxpayer from a criminal enforcement action (e.g., search warrant, grand jury subpoena).

(5) Any taxpayer who contacts the IRS in person or through a representative regarding voluntary disclosure will be directed to Criminal Investigation for evaluation of the disclosure. Special agents are encouraged to consult Area Counsel, Criminal Tax on voluntary disclosure issues.

(6) Examples of voluntary disclosures include:

a. a letter from an attorney which encloses amended returns from a client which are complete and accurate (reporting legal source income omitted from the original returns), which offers to pay the tax, interest, and any penalties determined by the IRS to be applicable in full and which meets the timeliness standard set forth above. This is a voluntary disclosure because all elements of (3), above are met.
b. a disclosure made by a taxpayer of omitted income facilitated through a barter exchange after the IRS has announced that it has begun a civil compliance project targeting barter exchanges; however the IRS has not yet commenced an examination or investigation of the taxpayer or notified the taxpayer of its intention to do so. In addition, the taxpayer files complete and accurate amended returns and makes arrangements with the IRS to pay in full, the tax, interest, and any penalties determined by the IRS to be applicable. This is a voluntary disclosure because the civil compliance project involving barter exchanges does not yet directly relate to the specific liability of the taxpayer and because all other elements of (3), above are met
c. a disclosure made by a taxpayer of omitted income facilitated through a widely promoted scheme regarding which the IRS has begun a civil compliance project and already obtained information which might lead to an examination of the taxpayer; however, the IRS has not yet commenced an examination or investigation of the taxpayer or notified the taxpayer of its intent to do so. In addition, the taxpayer files complete and accurate returns and makes arrangements with the IRS to pay in full, the tax, interest, and any penalties determined by the IRS to be applicable. This is a voluntary disclosure because the civil compliance project involving the scheme does not yet directly relate to the specific liability of the taxpayer and because all other elements of (3), above are met.
d. A disclosure made by an individual who has not filed tax returns after the individual has received a notice stating that the IRS has no record of receiving a return for a particular year and inquiring into whether the taxpayer filed a return for that year. The individual files complete and accurate returns and makes arrangements with the IRS to pay the tax, interest, and any penalties determined by the IRS to be applicable in full. This is a voluntary disclosure because the IRS has not yet commenced an examination or investigation of the taxpayer or notified the taxpayer of its intent to do so and because all other elements of (3), above, are met.

(7) Examples of what are not voluntary disclosures include:

a. a letter from an attorney stating his or her client, who wishes to remain anonymous, wants to resolve his or her tax liability. This is not a voluntary disclosure until the identity of the taxpayer is disclosed and all other elements of (3) above have been met.
b. a disclosure made by a taxpayer who is under grand jury investigation. This is not a voluntary disclosure because the taxpayer is already under criminal investigation. The conclusion would be the same whether or not the taxpayer knew of the grand jury investigation.
c. a disclosure made by a taxpayer, who is not currently under examination or investigation, of omitted gross receipts from a partnership, but whose partner is already under investigation for omitted income skimmed from the partnership. This is not a voluntary disclosure because the IRS has already initiated an investigation which is directly related to the specific liability of this taxpayer. The conclusion would be the same whether or not the taxpayer knew of the ongoing investigation.
d. a disclosure made by a taxpayer, who is not currently under examination or investigation, of omitted constructive dividends received from a corporation which is currently under examination. This is not a voluntary disclosure because the IRS has already initiated an examination which is directly related to the specific liability of this taxpayer. The conclusion would be the same whether or not the taxpayer knew of the ongoing examination.
e. a disclosure made by a taxpayer after an employee has contacted the IRS regarding the taxpayer's double set of books. This is not a voluntary disclosure even if no examination or investigation has yet commenced because the IRS has already been informed by the third party of the specific taxpayer's noncompliance. The conclusion would be the same whether or not the taxpayer knew of the informant's contact with the IRS.

We can help you make a Voluntary Disclosure and provide you with the complete confidentiality and privacy of "Attorney-client" privilege. Do not wait until it is too late.

CURRENT IRS PROGRESS COMBATING INTERNATIONAL TAX EVASION

2011-09-15T14:27:00.000-07:00

WASHINGTON — The Internal Revenue Service continues to make strong progress in combating international tax evasion, with new details announced today showing the recently completed offshore program pushed the total number of voluntary disclosures up to 30,000 since 2009. In all, 12,000 new applications came in from the 2011 offshore program that closed last week.

The IRS also announced today it has collected $2.2 billion so far from people who participated in the 2009 program, reflecting closures of about 80 percent of the cases from the initial offshore program. On top of that, the IRS has collected an additional $500 million in taxes and interest as down payments for the 2011 program — a figure that will increase because it doesn’t yet include penalties.
“By any measure, we are in the middle of an unprecedented period for our global international tax enforcement efforts,” said IRS Commissioner Doug Shulman. “We have pierced international bank secrecy laws, and we are making a serious dent in offshore tax evasion.”
Global tax enforcement is a top priority at the IRS, and Shulman noted progress on multiple fronts, including ground-breaking international tax agreements and increased cooperation with other governments. In addition, the IRS and Justice Department have increased efforts involving criminal investigation of international tax evasion.
The combination of efforts helped support the 2011 Offshore Voluntary Disclosure Initiative (OVDI), which ended on Sept. 9. The 2011 effort followed the strong response to the 2009 Offshore Voluntary Disclosure Program (OVDP) that ended on Oct. 15, 2009. The programs gave U.S.taxpayers with undisclosed assets or income offshore a second chance to get compliant with the U.S. tax system, pay their fair share and avoid potential criminal charges.
The 2009 program led to about 15,000 voluntary disclosures and another 3,000 applicants who came in after the deadline, but were allowed to participate in the 2011 initiative. Beyond that, the 2011 program has generated an additional 12,000 voluntary disclosures, with some additional applications still being counted. All together from these efforts, taxpayers came forward and made 30,000 voluntary disclosures.
“My goal all along was to get people back into the U.S. tax system,” Shulman said. “Not only are we bringing people back into the U.S. tax system, we are bringing revenue into the U.S. Treasury and turning the tide against offshore tax evasion.”
In new figures announced today from the 2009 offshore program, the IRS has $2.2 billion in hand from taxes, interest and penalties representing about 80 percent of the 2009 cases that have closed. These cases come from every corner of the world, with bank accounts covering 140 countries.
The IRS is starting to work through the 2011 applications. The $500 million in payments so far from the 2011 program brings the total collected through the offshore programs to $2.7 billion.
“This dollar figure will grow in the months ahead,” Shulman said. “But just as importantly, we have changed the risk calculus. Americans now understand that if they try to hide assets overseas, the chances of being caught continue to increase.”
The financial impact can be seen in a variety of other areas beyond the 2009 and 2011 programs.

Criminal prosecutions. People hiding assets offshore have received jail sentences running for months or years, and they have been ordered to pay hundreds of thousands and even millions of dollars.
UBS. UBS AG, Switzerland's largest bank, agreed in 2009 to pay $780 million in fines, penalties, interest and restitution as part of a deferred prosecution agreement with the U.S. government.

The two disclosure programs provided the IRS with a wealth of information on various banks and advisors assisting people with offshore tax evasion, and the IRS will use this information to continue its international enforcement efforts.

Expatriates Living Abroad Can Request An Additional Extension of time to December 15th.

2011-09-15T11:44:00.000-07:00

If you are an expat living abroad on 4/15, you receive an automatic extension of time until June 15th to file your income tax return return with the IRS.

If you cannot file your return within the automatic 2-month extension period, you generally can get an additional 4 months (using form 4868) to file your return, for a total of 6 months. The 2-month period and the 6-month period start at the same time. You have to request the additional 4 months by the new due date allowed by the 2-month extension.

The additional 4 months of time to file (unlike the original 2-month extension) is not an extension of time to pay. You must make an accurate estimate of your tax based on the information available to you. If you find you cannot pay the full amount due with Form 4868, you can still get the extension. You will owe interest on the unpaid amount from the original due date of the return.

You also may be charged a penalty for paying the tax late unless you have reasonable cause for not paying your tax when due. Penalties for paying the tax late are assessed from the original due date of your return, unless you qualify for the automatic 2-month extension. In that situation, penalties for paying late are assessed from the extended due date of the payment (June 15 for calendar year taxpayers).

Additional extension of time for taxpayers out of the country. In addition to the 6-month extension, taxpayers who are out of the country can request a discretionary 2-month additional extension of time to file their returns (to December 15 for calendar year taxpayers).

To request this extension, you must send the Internal Revenue Service a letter explaining the reasons why you need the additional 2 months. Send the letter by the extended due date (October 15 for calendar year taxpayers) to the following address:

Department of the Treasury
Internal Revenue Service Center
Austin, TX 73301-0215

You will not receive any notification from the Internal Revenue Service unless your request is denied.

How U.S Tax Policy Is Forcing 5 Million Americans Abroad To Reconsider Citizenship

2011-09-14T05:21:00.000-07:00

Read the article in the Business Insider about the onerous US tax policy on US expatriates and green card holders that is forcing millions to consider giving up their US Citizenship or Residency status by CLICKING HERE. We can help you surrender your US Citizenship or Permanent Resident status including preparing all applicable required special tax forms. Read about the procedures and requirements HERE. Contact us if you wish assistance via email at US Expatriation. To date we have advised or assisted over 30 previous green card holders or citizens surrender their US status and in most situations never have to file any US tax returns again.

Foreign Earned Income Exclusion - Seaman & Ships Employees

2011-09-09T01:00:00.000-07:00

Benefits under section 911 (Foreign Earned Income Exclusion of $92,900 for 2011) are conditioned upon the taxpayer being present or residing in a foreign country. A ship employee’s presence or residence aboard a ship does not qualify as presence or residence in a foreign country for purposes of section 911 even though the ship is of a foreign registry or is in international waters. The regulations have consistently defined the term "foreign country" as " any territory under the sovereignty of a government other than that of the United States." See Treas. Reg. section 1.911-2(h). It includes the territorial waters of the foreign country as determined in accordance with the laws of the United States. In Revenue Ruling 67-52, 1967-1 C.B. 186, cited in L.R. Martin, 50 T.C. 59 (1968), the Service ruled that the Antarctica region is not under the sovereignty of any government and, therefore, is not considered a foreign country for purposes of section 911. Also, in Revenue Ruling 73-181, 1973-1 C.B. 347, the Service ruled that physical presence on a fishing boat in international waters, adjacent to the territorial waters of a foreign country, does not satisfy the presence requirement of Section 911(d)(2). In Souza, 33 T.C. 817 (1960), the court held that a U.S. registered fishing vessel operating off the coast of Peru beyond the 3 mile territorial waters limit but within the 200 mile limit recognized by Peru as its territorial waters does not constitute presence in a foreign country for purposes of section 911. The court ruled, the fact that a vessel is of U.S. or foreign registry should have no effect on the determination of whether its crews members are present or resident in a foreign country. Consequently, the high seas and Antarctica are not considered a foreign country for purposes of section 911. See also, Balestries, 47 BTA 241.

Amercian Citizens Abroad Call for Repeal of Foreign Bank Account Reporting on US Taxpayer Offshore Accounts

2011-09-07T06:57:00.000-07:00

American Citizens Abroad (ACA) is advocating for the repeal of the draconian IRS rules requiring foreign banks withhold and report on foreign bank and financial accounts held by US taxpayers located outside of the USA. Read the Forbes Magazine Article by clicking on this link.

2011 Foreign Earned Income Exclusion Increases

2011-08-31T14:44:00.000-07:00

For 2011, the foreign earned income exclusion for wages earned while working and living abroad will be $92,900. That is a $1,400 increase from that allowed for 2010. If both spouses work abroad, each can exclude their earned income from US taxes up to that amount. One spouse cannot use the other spouses unused portion of that exclusion.

If your are married and live abroad with your spouse, consider making her an employee or starting her own business since she will also receive a foreign earned income exclusion for 2011 of of $92,900 to be applied against her taxable income on her US income tax return.

You can also claim a deduction for foreign rental expenses, utilities and maintenance above a certain amount up to a maximum amount which varies per the country you in which you are living and working.

Quiet or Silent Disclosure May Not be Best Way to Go With Respect to Foreign Financial Accounts, Foreign corps, trusts, and partnerships

2011-08-27T09:34:00.000-07:00

Forbes Magazine Article Does not recommend that taxpayers try "silent or quiet" disclosure to reveal their offshore bank accounts, financial accounts, foreign corporations, foreign partnerships or foreign trusts. The IRS says they are looking for individuals who are attempting to file past special foreign asset reporting forms and will hit them with the maximum penalties and possible criminal prosecution. Click Here to Read Article.

The IRS has extended the deadline for entering the 2011 Voluntary Offshore Disclosure Program to 9/9/11 from the original deadline of 8/31/11. This will avoid the possible huge penalties which can be incurred if a taxpayer attempts to silently or quietly disclose.

IRS Extends 2011 Voluntary Offshore Disclosure Filing Deadline to September 9, 2011

2011-08-26T19:19:00.000-07:00

Note: Though you may have missed the program which ended 9/9/11, you still can file all past unfiled tax returns including forms 5471, 8865, 3520, FBAR, etc., under the regular IRS disclosure program which has always existed. Coming forward and entering this program in most situations will avoid any possible criminal prosecution and you can negotiate with the IRS to attempt to reduce the penalties they might try to impose for filing late offshore reporting tax forms. See our website at www.taxmeless.com to learn more about this procedure.

If you have entered the 2011 Program, and are representing yourself, our firm can provide you with guidance and advice if you wish to continue your self representation, or we can step in and act as your representative before the IRS. We can also help you if you are not satisfied with your current representative. If you tax representative is an Attorney, they can provide you with the privacy and confidentiality of Attorney-Client privilege which is not available from a CPA or EA.

IRS Statement: OVDI Deadline Extension(Aug. 26, 2011)

Due to the potential impact of Hurricane Irene, the IRS has extended the due date for offshore voluntary disclosure initiative requests untilSeptember 9, 2011. For those taxpayers who have not yet submitted their request and any documents, the following actions are necessary by September 9, 2011:

Identifying information must be submitted to the Criminal Investigation office. This includes name, address, date of birth, and social security number and as much of the other information requested in the Offshore Voluntary Disclosures Letter as possible. This information must be sent to:

Offshore Voluntary Disclosure Coordinator
600 Arch Street, Room 6404
Philadelphia, PA 19106.

Send a request for a 90-day extension for submitting the complete voluntary disclosure package of information to the Austin campus. This request must be sent to:

Internal Revenue Service
3651 S. I H 35 Stop 4301 AUSC
Austin, TX 78741
ATTN: 2011 Offshore Voluntary Disclosure Initiative

WHEN ARE FOREIGN PENSION PLAN CONTRIBUTIONS TAXABLE ON US TAX RETURNS?

2011-08-25T09:12:00.000-07:00

US expatriates working for foreign employers may participate in foreign pension plans. These plans normally have beneficial tax treatment under local law. Unfortunately, these foreign arrangements generally do not meet the US "qualification rules". As a result, the beneficial treatment under local law is often not available to US citizens working abroad..

US QUALIFIED DEFERRED COMPENSATION

US employer sponsored pension plans qualify for special tax treatment under the Internal Revenue Code: tax deductible contributions for the employer; earnings in the plan are tax exempt; and the employee is not taxed until the benefits are received upon retirement or withdrawal of those pension funds. These tax benefits are not available unless the plan meets the specific requirements of the Internal Revenue Code.

NON-QUALIFIED DEFERRED COMPENSATION

The determination of when amounts deferred under a non-qualified deferred compensation arrangement are includible in the gross income of the taxpayer depends on the facts and circumstances of the arrangement and which Code section applies to those facts.

IRC § 402(b) Plans

Employer sponsored non-qualified funded deferred compensation plans are generally governed by the provisions of IRC § 402(b). US employees who participate in such a plan are taxed on the amount of the contributions made by the employer (once the benefits are vested or not subject to a substantial risk of forfeiture). If the employee is a "highly compensated" (compensation exceeds $105,000 or part of the top 20% of employees) the employee is taxed on both the contribution and the growth in the plan each year (to the extent the benefits are vested. (Non-Highly compensated employees are not taxed on the growth in the plan, but are taxed when the benefits are distributed.)

IRC § 409A

The provisions of IRC § 409A apply to deferred compensation plans not covered by IRC § 402(b), plans covered by a tax treaty or foreign pension plans that are available on a broad base to the employer's employees (but only to the extent of non-elective deferrals and employer contributions as limited by US rules).

Under IRC § 409A, if the deferred compensation arrangement does not meet the requirements of IRC § 409A, the employee will be subject to normal income tax, a 20% penalty tax and an interest charge. To meet the rules of IRC § 409A, the plan must provide that distributions from the deferred compensation plan are only allowed on separation from service, death, a specified time (or under a fixed schedule), change in control of a corporation, occurrence of an unforeseeable emergency, or if the participant becomes disabled.

The plan may not allow for the acceleration of benefits, except as provided by regulations. The plan must provide that compensation for services performed during a tax year may be deferred at the participant's election only if the election to defer is made no later than the close of the preceding tax year, or at such other time as provided in regulations.

The actual time and manner of distributions must be specified at the time of initial deferral.

INCOME TAX TREATY-PENSIONS

The normal US income tax rules may be altered by applicable treaty provisions; for example, the United States and the United Kingdom Income Tax Treaty. While the treaty does not specifically provide that each country's qualified plans will be treated as qualified plans by the other country, the treaty effectively provides for such a result with tax deferrals and tax reductions, but subject to certain limits.

In the context of a US citizen employed in the UK and participating in a pension plan established by the UK employer, the rules are that the employee may deduct (or exclude) contributions made by or on behalf of the individual to the plan; and benefits accrued under the plan are not taxable income. The Treaty further provides that the deduction (or exclusion) rule only applies to the extent the contributions or benefits qualify for tax relief in the UK and that such relief may not exceed the reliefs that would be allowed in the US under its domestic rules.

With respect to distributions the general rule under the Treaty is that a pension received by a resident of one country is only taxable by the country of residence. For Lump Sum payments, the general rule is that only the country of the situs of the pension plan may tax the distribution. However, as in most US treaties, the US retains the right to tax its citizens as if the treaty were not in force; with the result that the US retains its right to tax its citizens on both periodic distributions as well as lump sum distributions. Double taxation is avoided through the use of the foreign tax credit rules.

HOW TO TREAT CONTRIBUTIONS TO YOUR FOREIGN PENSION PLAN

Where a US citizen employee participates in a foreign pension plan, it is likely that the plan will not have met the US qualification rules. Thus, the employee will be subject to US tax on the contributions to the plan and the growth in the plan. For employees that live in a jurisdiction that imposes an income tax at rates higher than the US rate, it is likely that the employee will have generated a pool of "excess foreign tax credits". These credits may be used to offset the US tax on foreign sourced income and therefore may be used to reduce (or eliminate) the US tax that may currently arise on the deferred compensation.

If the employee has "excess foreign tax credits", (and provided the deferred compensation is "foreign sourced income"), the current US tax on such income may be partially or fully offset. Another possibility is for the US taxpayer to make a claim under an applicable treaty (if the country of employment has a Tax Treaty with the US).. If there is a treaty with proper pension provisions, and the contributions to the plan have not exceeded the US plan limitations, the contributions to the plan and the growth in the plan should not be subject to current US income tax. If there is no treaty with the country the expat is living in, then there is no deferral of pension contributions by a foreign employer.

An expat taxpayer has the choice of using excess foreign tax credits or invoking an applicable tax treaty to avoid having to pay current US income tax on contributions and the growth in the foreign deferred compensation scheme. Whether to use excess credits or to invoke the treaty will depend on a number of factors such as which may vary each particular situation.

TAX REPORTING:

There are a number of reporting requirements that may apply in addition to the individual's income tax return. This may include certain foreign trust reporting returns (form 3520 and 3520A), as well as the Treasury report on Foreign Bank and Financial Accounts which is form TD F 90-22.1. This report must be filed when your foreign accounts(when combined together at their highest balances during the year) exceed $10,000 and covers not only bank accounts but arrangements outside the US that are virtually any type of financial account. This form must be filed by June 30 of each year, and there are no extensions. Substantial penalties (including criminal penalties) may apply.

US QUALIFIED DEFERRED COMPENSATION

NON-QUALIFIED DEFERRED COMPENSATION

IRC § 402(b) Plans

IRC § 409A

The actual time and manner of distributions must be specified at the time of initial deferral.

INCOME TAX TREATY-PENSIONS

HOW TO TREAT CONTRIBUTIONS TO YOUR FOREIGN PENSION PLAN

TAX REPORTING:

Will Canada Revenue Agency Help the IRS Collect the Penalties for Various Unfiled Foreign Reporting Forms?

2011-08-23T10:29:00.000-07:00

Click here to visit the link to recent article in the Vancouver Sun about Canada Revenue Agency Opinion. on enforcing IRS penalties for not filing FBARS, Foreign corporation and partnership forms, etc. It appears they will not help the IRS collect such penalties if assessed.

Ninth Circuit finds Fifth Amendment (self incrimination) inapplicable to offshore banking records

2011-08-23T09:03:00.000-07:00

M.H. v. United States; No. 11-55712 (8/19/2011)

The Ninth Circuit recently held that the Fifth Amendment privilege against self-incrimination may not be used by a taxpayer under grand jury investigation for the use of his undisclosed Swiss bank accounts.

Facts. An unamed taxpayer was the target of a grand jury investigation to determine whether he used undisclosed Swiss bank accounts to evade paying federal taxes. Records indicating that the taxpayer had transferred assets from an account at UBS AG to an account with UEB Geneva in 2002 was disclosed to the U.S. under a 2009 deferred prosecution agreement between the U.S. Department of Justice and UBS.

District Court. The U.S. District Court for the Southern District of California granted a motion to compel the taxpayer to provide his records pertaining to his foreign bank accounts under the Required Records Doctrine. Under the doctrine, records that are required to be maintained by law fall outside the scope of the Fifth Amendment privilege, when certain conditions are satisfied.

The taxpayer argued that the information requested could conflict with other information he may have provided to the IRS. Thus, production of the requested records would be self incriminating. Moreover, the taxpayer argued that the denial of maintaining such evidence would also be self incriminating because the failure to maintain such documentation is a felony.

Circuit Court. The Ninth Circuit affirmed the lower court's decision, finding that under Grosso v. U.S., 390 U.S. 62 (1968) documents that are regulatory, customarily kept and have some public aspects apply to documents that must maintained under the Bank Secrecy Act.

The decision can be viewed at http://www.ca9.uscourts.gov/datastore/opinions/2011/08/19/11-55712.pdf.

Delinquent U.S. Foreign Information Returns: Is Filing Under the 2011 OVDI Appropriate?

2011-08-22T09:05:00.000-07:00

Read more about whether or not you should enter the OVD program in the following article form the AICPA Tax Advisor publication. Click here to read the article: .

IRS updates list of treaties qualifying foreign dividends for preferential rates

2011-08-19T11:13:00.000-07:00

Notice 2011-64, 2011-37 IRB

A new notice updates the list of U.S. tax treaties that meet requirements for dividends from foreign corporations to qualify for preferential rates. The notice also clarifies the requirements for treatment as a qualified foreign corporation.

Background. A noncorporate taxpayer's adjusted net capital gain is taxed at a maximum rate of 15% or, to the extent it would have been taxed at a rate below 25% if it had been ordinary income, at a maximum rate of 0%. (Code Sec. 1(h))

Adjusted net capital gain is net capital gain for the tax year (i.e., the excess of net long-term capital gains over net short-term capital losses for a tax year):

less the sum of specified types of long-term capital gain that are taxed at a maximum rate of 28% (gain on the sale of most collectibles and gain on the unexcluded part of Code Sec. 1202 small business stock) or 25% (unrecaptured section 1250 gain, i.e., gain attributable to real estate depreciation),

plus qualified dividend income.

Qualified dividend income—generally, dividends received during the tax year from domestic corporations and “qualified foreign corporations,” subject to holding period requirements and specified exceptions—is effectively treated as adjusted net capital gain, and therefore taxed at the same rates that apply to adjusted net capital gain. (Code Sec. 1(h)(11))

Subject to certain exceptions, a qualified foreign corporation is any foreign corporation that is either (i) incorporated in a U.S. possession (Code Sec. 1(h)(11)(C)(i)(I)), or (ii) eligible for benefits of a comprehensive income tax treaty with the U.S. that IRS determines is satisfactory for purposes of this provision and that includes an exchange of information program (the “treaty test”). (Code Sec. 1(h)(11)(C)(i)(II)) A foreign corporation that does not satisfy either of these two tests is treated as a qualified foreign corporation with respect to any dividend paid by it if the stock on which the dividend is paid is readily tradable on an established securities market in the U.S. (Code Sec. 1(h)(11)(C)(ii))

A qualified foreign corporation does not include any foreign corporation that for its tax year in which the dividend was paid, or the preceding tax year, is a Code Sec. 1297 passive foreign investment company. (Code Sec. 1(h)(11)(C)(iii)) A dividend from a qualified foreign corporation is also subject to the other limitations in Code Sec. 1(h)(11). For example, a shareholder receiving a dividend from a qualified foreign corporation must satisfy the Code Sec. 1(h)(11)(B)(iii) holding period requirements.

Updated list. Notice 2011-64 updates the list to add two U.S. income tax treaties that entered into force after the publication of Notice 2006-101: the U.S. income tax treaties with Bulgaria (which entered into force on Dec. 15, 2008) and Malta (which entered into force on Nov. 23, 2010). (Notice 2011-64, Sec. 2)

Other requirements. Notice 2011-64 also clarifies that a foreign corporation must be eligible for benefits of one of the U.S. income tax treaties listed in the Appendix in order to be treated as a qualified foreign corporation under Code Sec. 1(h)(11)(C)(i) 's treaty test. Accordingly, the foreign corporation must be a resident under the relevant treaty and satisfy any other requirements of that treaty, including the requirements under any applicable limitation on benefits provision. For purposes of determining whether it satisfies these requirements, a foreign corporation is treated as though it were claiming treaty benefits, even if it does not derive income from sources within the U.S. (Notice 2011-64, Sec. 3)

Effective date. Notice 2011-64 is effective with respect to: (1) Bulgaria for dividends paid on or after Dec. 15, 2008; (2) Malta for dividends paid on or after Nov. 23, 2010; (3) Bangladesh for dividends paid on or after Aug. 7, 2006; (4) Barbados for dividends paid after Dec. 19, 2004; (5) Sri Lanka for dividends paid on or after July 12, 2004; and (6) all other U.S. income tax treaties listed in the appendix for tax years beginning after Dec. 31, 2002. (Notice 2011-64, Sec. 4)

Tax Havens in Zug Switzerland and Ireland

2011-08-15T06:36:00.000-07:00

The popular news show 60 MINUTES has done an excellent piece on the tax havens being used by large US Corporations to shelter untold amounts of income from US high tax rates. The two places mentioned are Zug, Switzerland and Ireland. Read the article here.

The tax rates they are paying in these two locations are about 16-18 percent.

Individual entrepreneurs may be able to do the same (assuming they structure their business correctly) if they have an operating business that sells goods or services and those sales are to international customers. It will not work with respect to some types of income if the foreign corporation put in place has certain types of income call Subpart F income.

FBAR filing rules and Chart of Potential Civil and Criminal Penalties for non filing or late filing

2011-08-11T21:07:00.000-07:00

Possible Civil and Criminal Penalties that can be imposed by the IRS for failure to file FBAR (TDF 90-22.1) forms or filing those forms late as well as other rules concerning that form are can read at the link to the following IRS webpage: FBAR Rules, Civil and Criminal Penalties

The penalties may be reduced if you enter the 2011 IRS Offshore Voluntary Disclosure Program prior to its deadline of 8/31/11.

1,470 Millionaires Didn’t Pay Income Taxes in 2009

2011-08-09T06:53:00.000-07:00

The IRS data showed there were 235,413 taxpayers making $1 million or more in 2009, of whom 1,470 paid no federal income taxes. Among the possible reasons, according to ABC News, could be write-offs for charitable deductions, investments in tax-exempt state and municipal bonds, or foreign tax credits.

In contrast, the average income for taxpayers fell that year in the wake of the financial crisis by $3,516 to $54,283, a drop of approximately 6.1 percent, according to the Huffington Post.

IRS Reminds Taxpayers that the Aug. 31 Deadline Is Fast Approaching for the Second Special Voluntary Disclosure Initiative of Offshore Accounts

2011-08-08T09:42:00.000-07:00

WASHINGTON — U.S. taxpayers hiding income in undisclosed offshore accounts are running out of time to take advantage of a soon-to-expire opportunity to come forward and get their taxes current with the Internal Revenue Service.

The IRS today reminded taxpayers that the 2011 Offshore Voluntary Disclosure Initiative (OVDI) will expire on Aug. 31, 2011. Taxpayers who come forward voluntarily get a better deal than those who wait for the IRS to find their undisclosed accounts and income. New foreign account reporting requirements are being phased in over the next few years, making it ever tougher to hide income offshore. As importantly, the IRS continues its focus on banks and bankers worldwide that assist U.S. taxpayers with hiding assets overseas.

“The time has come to get back into compliance with the U.S. tax system, because the risks of hiding money offshore keeps going up,” said IRS Commissioner Doug Shulman. “Our goal is to get people back into the system. The second voluntary initiative gives people a fair way to resolve their tax problems.”

The 2011 OVDI was announced on Feb. 8, 2011, and follows the 2009 Offshore Disclosure Program (OVDP). The 2011 initiative offers clear benefits to encourage taxpayers to come forward rather than risk detection by the IRS. Taxpayers hiding assets offshore who do not come forward will face far higher penalties along with potential criminal charges.

For the 2011 initiative, there is a new penalty framework that requires individuals to pay a penalty of 25 percent of the amount in the foreign bank accounts in the year with the highest aggregate account balance covering the 2003 to 2010 time period. Some taxpayers will be eligible for 5 or 12.5 percent penalties in certain narrow circumstances.

Participants also must pay back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties. All original and amended tax returns must be filed by the deadline.

The IRS has made available the 2011 OVDI information in eight foreign languages for those taxpayers with undisclosed offshore accounts. The agency took this step to reach taxpayers whose primary language may not be English. These translations include the following languages: Chinese (Traditional andSimplified), Farsi, German, Hindi, Korean, Russian, Spanish and Vietnamese.

The IRS decision to open a second special disclosure initiative was based on the success of the first program and many more taxpayers coming forward after the program closed on Oct. 15, 2009. The first special disclosure initiative program closed with about 15,000 voluntary disclosures regarding accounts at banks in more than 60 countries. Many taxpayers came in after the first program closed. These taxpayers were deemed eligible to take advantage of the special provisions of the second initiative.

Further details about this initiative are provided in a series of questions and answers.

Tax Frauds You Should Be Wary About

2011-07-27T13:50:00.000-07:00

Here are five year-round scams every taxpayer should know about.

1. Hiding Income Offshore The IRS aggressively pursues taxpayers involved in abusive offshore transactions and the promoters who facilitate or enable these schemes. Taxpayers have tried to avoid or evade U.S. income tax by hiding income in offshore banks and brokerage accounts, or by using offshore debit cards, credit cards, wire transfers, foreign trusts, employee-leasing schemes, private annuities or life insurance plans.

In February, the IRS announced a second voluntary disclosure initiative to bring offshore money back into the U.S. tax system. The new voluntary disclosure initiative will be available through Aug. 31, 2011.
2. Phishing Scam artists use phishing to trick unsuspecting victims into revealing personal or financial information. Scams take the form of e-mails, phony websites or phone calls that offer a fictitious refund or threaten an audit or investigation to lure victims into revealing personal information. The IRS never initiates unsolicited e-mail contact with taxpayers about their tax issues. Phishers use the information to steal the victim’s identity, access their bank accounts and credit cards or apply for loans. Please forward suspicious scams to the IRS at phishing@irs.gov. You can also visitwww.irs.gov, keyword phishing, for additional information.
3. Return Preparer Fraud Dishonest tax return preparers cause trouble for taxpayers by skimming a portion of the client’s refund or charging inflated fees for tax preparation. They attract new clients by promising refunds that are too good to be true. To increase confidence in the tax system, the IRS now requires all paid return preparers to register with the IRS, pass competency tests and attend continuing education. Taxpayers can report suspected return preparer fraud to the IRS on Form 3949-A, Information Referral.
4. Filing False or Misleading Forms The IRS continues to see false or fraudulent tax returns filed to obtain improper tax refunds.
Scammers often use information from family or friends to file false or fraudulent returns, so beware of requests for such data. Don’t claim deductions or credits you are not entitled to and never willingly allow others to use your information to file false returns. If you participate in such schemes, you could be liable for financial penalties or even face criminal prosecution. The IRS takes refund fraud seriously, has programs to aggressively combat it and stops the vast majority of incorrect refunds.
5. Frivolous Arguments Promoters of frivolous schemes encourage people to make unreasonable and outlandish claims to avoid paying the taxes they owe. If a scheme seems too good to be true, it probably is. The IRS has a list of frivolous legal positions that taxpayers should avoid on www.irs.gov. These arguments are false and have been thrown out of court repeatedly.

For the full list of 2011 Dirty Dozen tax scams or to find out how to report suspected tax fraud, visit www.irs.gov.

California's New Voluntary Compliance Initiative Includes Unreported Foreign Income

2011-07-08T07:06:00.000-07:00

California's Voluntary Compliance Initiative 2 will run from August 1, 2011 through October 31, 2011. It provides (for those who file amended returns and participate) for reduced penalties and can avoid criminal action by California for those who have participated in abusive tax avoidance transactions or offshore financial arrangements.

What is an offshore financial arrangement?

An offshore financial arrangement (OFA) is any transaction designed to avoid or evade California income or franchise tax through the use of: (a) offshore payment cards, including credit, debit, or charge cards issued by banks in foreign jurisdictions, or (b) foreign banks, financial institutions, corporations, partnerships, trusts, or other entity. This would include interest, dividends, capital gains, rental income, etc. that were not reported on your California tax return solely because those items were located or occurred in a offshore countries.

What is an abusive tax avoidance transaction?

Abusive tax avoidance transaction (ATAT) means a:

• Tax shelter as defined under Internal Revenue Code (IRC) Section 6662(d)(2)(C)

• Reportable transaction as defined under IRC Section 6707A(c)(1) that is not adequately disclosed in

accordance with IRC Section 6664(d)(2)(A),

• Listed transaction as defined under IRC Section 6707A(c)(2),

• Gross misstatement within the meaning of IRC Section 6404(g)(2)(D), or

• Transaction to which the noneconomic substance transaction (NEST) penalty applies under Revenue and

Taxation Code (RTC) Section 19774.

Read More Here. Let us help you amend your current and past returns and enter the program while there is still time to take advantage of its benefits.

Attorney-Client Privilege - CPAs, Enrolled Agents, and Tax Preparers Do Not Have It

2011-07-07T09:26:00.000-07:00

When you are discussing your personal tax situation (and problems) with your CPA, Enrolled Agent or tax preparer, everything you say to them and all of their files and notes on your conversations with them, must be revealed to the IRS if subpoenaed or requested in a legal action. They can also be forced to testify on everything you said during meetings with the preparer or on the phone.

When you consult with a licensed attorney, everything you tell them, including notes in their files, and in most situations the tax research and their advice and recommendations to you is privileged and private. The attorney cannot be forced to reveal any of those items if subpoenaed or questioned by the IRS or in a legal matter.

You need to keep this Attorney-client privilege in mind when consulting a tax professional concerning entering any of the IRS Voluntary Disclosure Programs and seeking counsel on past unfiled tax returns or tax problems (both civil and criminal). Discussing the situation with anyone other than an attorney could later be used against you.

It is often best when their are potential tax problems or possible criminal consequences to have an Attorney actually hire the accountant to prepare any required returns in order to keep as much as information as legally possible from being subject to discovery. Documents that are connected with the actual preparation or information which is on your tax return (or information which should be on your return) cannot be kept confidential.

IRS Issues another draft version of Form 8938 for foreign financial asset holders

2011-06-29T07:21:00.000-07:00

Form 8938, “Statement of Specified Foreign Financial Assets”

The IRS has issued another new draft Form 8938, “Statement of Specified Foreign Financial Assets,” which is available on IRS's website. Form 8938 will be used by individuals to report an interest in one or more specified foreign financial assets.

Background. For tax years beginning after Mar. 18, 2010, taxpayers with an interest in a “specified foreign financial asset” during the tax year must attach a disclosure statement to their income tax return for any year in which the aggregate value of all such assets is greater than $50,000.

“Specified foreign financial assets” are: (1) depository or custodial accounts at foreign financial institutions, and (2) to the extent not held in an account at a financial institution, (a) stocks or securities issued by foreign persons, (b) any other financial instrument or contract held for investment that is issued by or has a counterparty that is not a U.S. person, and (c) any interest in a foreign entity.

For most taxpayers on a Calendar year basis, this form will be due with their 2011 tax return.

The draft Form 8938 was released on June 22nd without instructions. However, the draft form references the instructions throughout, which indicates that they will likely be issued soon.

Part I of the draft form requires information about foreign deposit and custodial accounts, including the maximum value of any such account during the tax year. Part II has similar entries for “other foreign assets,” but notes that specified foreign financial assets that have been otherwise reported on Forms 3520, 3520-A, 5471, 8621, or 8865, do not have to be included on Form 8938. Part III asks for a summary of tax items attributable to the accounts and assets reported in Parts I and II, including associated items such as interest, dividends, and royalties. Part IV requires disclosure of the number of the filed forms referenced in Part II on which any foreign financial assets that were excepted from Part II were reported.

You can be view the new draft form on the IRS website at http://www.irs.gov/pub/irs-dft/f8938--dft.pdf.

Foreign Bank and Financial Account Report (FBAR)(TDF 90-22.1) is due 6/30/11 and cannot be extended.

2011-06-21T12:54:00.000-07:00

Form TDF 90-22.1 to report your foreign financial and bank accounts is due 6/30/11 and cannot be extended. There is a penalty of $10,000 or more for not filing this form or filing it late. It is filed separately from your US tax return.

The FBAR form and instructions can be downloaded here.
The FBAR must be filed if the combined highest balances in your foreign bank accounts, pension accounts, stock brokerage accounts, etc. equal or exceed $10,000 at any time during 2010.
If you have not filed this form in past years but are required to, the IRS can busject you to much greater penalties and criminal prosecution unless you enter the 2011 IRS Voluntary Offshore Disclosure Program which may reduce your penalties and stop possible criminal prosecution by its deadline 8/31/11.
The IRS is currently securing lists of US depositors from foreign banks and financial institutions and will be checking in the future and imposing penalties if they discover you should have filed this form and did not do so.
Failing to file this form has much more serious monetary and criminal consequences in most situations than failing to file your personal tax returns late.

Please contact us for a mini consultation if you wish a consultation protected by Attorney client privilege on your personal situation. We have helped hundreds of expatriates catch up with their past unfiled returns and FBAR forms.

RS Extends Voluntary Disclosure Deadline

2011-06-17T05:46:00.000-07:00

The Internal Revenue Service has given taxpayers an extra 90 days to provide a voluntary disclosure of their offshore bank accounts, foreign corporations, foreign partnerships and LLCs, and Passive Foreign Investment Companies, if they have made a “good faith” attempt to gather the necessary materials.

In an update made on June 2, 2011 to the 2011 Offshore Voluntary Disclosure Initiative, a new question asks about what happens if the taxpayer cannot comply by the August 31, 2011, deadline for the latest voluntary disclosure program.

The update expands upon an earlier answer, FAQ 25, describing all of the materials that must be sent to the IRS, including copies of previously filed tax returns and foreign account statements. The update noted, “A taxpayer may request an extension of the deadline to complete his or her submission if the taxpayer can demonstrate a good faith attempt to fully comply with FAQ 25 on or before August 31, 2011. The good faith attempt to fully comply must include the properly completed and signed agreements to extend the period of time to assess tax (including tax penalties) and to assess FBAR penalties.

“Requests for up to a 90 day extension must include a statement of those items that are missing, the reasons why they are not included, and the steps taken to secure them. Requests for extensions must be made in writing and sent to the Austin Service Center on or before August 31, 2011.

Internal Revenue Service
3651 S. I H 35 Stop 4301 AUSC
Austin, TX 78741”

Extension of Time fo File FBAR Form - if you only sign but have no financial interest

2011-06-16T11:45:00.000-07:00

The IRS has extended the time you have to file the FBAR (TDF 90-22.1form) to report Foreign Bank and Financial Accounts if you only sign on the account (signature authority) but have NO financial interest in the account for tax years 2009 and earlier. If this is your situation, you now have until November 1, 2011 to file all applicable FBAR forms with respect to such accounts. This extension of time does not apply to the 2010 FBAR forms which are still due on 6/30/11 even if you only sign, but have no financial interest.

This extension of time does not affect the date requirement to file FBARs for the IRS 2009 or 2011 Offshore Voluntary Disclosure Programs.

Taxpayers outside the U.S. face a June 15 deadline

2011-06-14T07:43:00.000-07:00

Taxpayers outside the U.S. who qualify for an automatic two-month extension must file their 2010 federal income tax returns by June 15, IRS said in a reminder. This deadline applies to U.S. citizens and resident aliens who both live and work outside the country, and to members of the military serving outside the U.S. Taxpayers utilizing this extension must attach a statement to their return specifying which of these conditions applies, IRS stressed. Most taxpayers abroad now qualify to use IRS Free File to prepare and electronically file their returns, IRS said. According to the agency, higher-income taxpayers should explore this option due to the foreign earned income exclusion. The $58,000 income limit applies after the exclusion of up to $91,500 is subtracted. Consequently, this makes Free File available to many higher-income taxpayers. Taxpayers who cannot meet the June 15 deadline can receive an automatic extension until Oct. 17. This is an extension of time to file, not an extension of time to pay,

IRS FAILS INTERNATIONAL TAX QUESTION TEST

2011-06-04T19:54:00.000-07:00

The IRS recently announced a new email form on their website, www.irs.gov for the sole purpose of allowing tax payers to send them international tax questions with the promise they would respond with an answer from an expert within a reasonable time. We decided to test that question form and see what kind of answer was sent back.

We asked them a question on Form 5471 (foreign corporation tax form) involving a filing issue that was specifically addressed and answered on page 1 or 2 of the IRS instructions to Form 5471. We then waited for the email answer which came in about a week.

Their answer thanked us for our question and then state it was a complex question and we should consult a CPA or other tax professional for an answer because they were not able to answer it. The IRS response showed us:

One more time that a taxpayer cannot rely on the IRS who writes and administers the International Tax system to answer questions even if they indicate they will do so and should know the answer.
A question that was answered on page 2 of the instructions for Form 5471 was too difficult for the IRS to handle....then how do they expect taxpayers to handle it.
The IRS creates a lot of business for tax professionals like us.

IRS REVISES FREQUENTLY ASKED QUESTIONS ON 2011 VOLUNTARY OFFSHORE DISCLOSURE PROGRAM

2011-06-03T09:28:00.000-07:00

The IRS on June 2, 2011, changed certain questions and answers on its Frequently Asked Questions page which contains the rules to its 2011 Voluntary Offshore Disclosure Program. The new information provides some significant further guidance for those taxpayers trying to personally decide if they wish to enter the program. Some of the additional information which is useful includes.

Procedures to get an extension of time beyond the original 8/31/11 deadline
Additional Questions and Answers (51.1 to 51.3) indicating factual situations when a taxpayer may elect to Opt out of participating in the program because the civil penalties imposed outside of the program may be less than those imposed if the taxpayer chose to enter the program.

Look at the revised FAQ ..... note at the top of the page the Questions and Answers that have been changed or added as of June 2,2011 Contact us if you wish to discuss your individual situation or these new changes.

IRS ISSUES NEW DRAFT OF FORM 8938 TO BE USED IN 2011 TO REPORT FOREIGN FINANCIAL ASSETS

2011-06-02T21:51:00.000-07:00

The IRS has issued a new draft of Form 8938, Statement of Specified Foreign Financial Assets which must be filed for 2011with returns to report foreign financial assets. The form is now more complex than the prior draft. This is not the final version so there could be further changes before it is finalize. Download a pdf version of the draft form here.

FBAR Filing Deadline Extended for Certain Financial Professionals

2011-05-31T13:44:00.000-07:00

WASHINGTON — The Internal Revenue Service and the Financial Crimes Enforcement Network (FinCEN) today announced that a small subset of individuals with only signature authority required to file the Report of Foreign Bank and Financial Accounts (FBARs) will receive a one-year extension beyond the upcoming filing date of June 30, 2011.

FinCen today issued Notice 2011-1 that extends the deadline until June 30, 2012, for the following individuals:

An employee or officer of a covered entity who has signature or other authority over and no financial interest in a foreign financial account of another entity more than 50 percent owned, directly or indirectly, by the entity (a “controlled person”).
An employee or officer of a controlled person of a covered entity who has signature or other authority over and no financial interest in a foreign financial account of the entity or another controlled person of the entity.

All other U.S. persons required to file an FBAR this year are required to meet the June 30, 2011, filing date. Unlike with federal income tax returns, extensions of time to file are not available.

Today’s notice was issued to facilitate more accurate compliance of FBAR filings in the wake of recent finalization of regulations. The FBAR filing requirements, authorized under one of the original provisions of the Bank Secrecy Act, have been in place since 1972.

On Feb. 24, 2011, FinCEN published a final rule that amended the Bank Secrecy Act regarding FBARs.

The FBAR form is used to report a financial interest in, or signature or other authority over, one or more financial accounts in foreign countries.

U.S. persons are required to file FBARs Form TD F 90-22.1 annually if they have a financial interest in or signature authority over financial accounts, including bank, securities or other types of financial accounts, in a foreign country, if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year.

US Expatriate Tax Return Extension

2011-05-29T15:27:00.000-07:00

US Expats get an automatic extension to file their IRS Form 1040 returns until 6/15/11 for 2010 if they live abroad on 4/15. You can get a further extension until 10/15/11 if you file for one prior to 6/15 using form 4868. We will electronically file that form for you without charge providing you ask us to prepare your expat return. That form also extends the due date of Forms 5471, 8865, 3520 and form 5500EZ.

Though not officially confirmed by the IR S, many articles have appeared in the media stating extending your tax returns does reduce your chances of IRS Audit. We have found that true in our 30 years of experience. Therefore, extending your return even though it might be completed might be an excellent idea.

Keep in mind an extension does not extend the time you must pay any taxes due from the regular 4/15 date. If you do not any taxes due, penalties and interest will accrue until any tax due for 2010 is paid in full.

US Tax Ramifications of Forming a Foreign Corporation to Do Business Abroad

2011-05-29T14:08:00.000-07:00

There are significant consequences (on your US tax return) when you form a foreign corporation in a country outside of the USA to operate your business or make investments in any other country in the world. Most offshore accountants and attorneys do not know enough about US international taxation to advise you of the consequences which should be considered in advanced. It is much harder to correct the US tax problems which WILL occur later if you do not do your US tax planning in advance.

You need to consider the following US IRS reporting and election consequences:

Controlled foreign corporation rules
Subpart F income possibilities
Passive foreign investment company rules.
Possible Flow Through Election for US tax purposes.
Subpart F personal holding company rules
The need to file FBAR forms to report foreign bank accounts
Transfer Pricing
Possible Tax on Transferring intangible property and tangible property to a foreign corporation

We can help you plan your foreign corporation structure to avoid unpleasant and possibly expensive consequences for failing to consider the rules set forth above. Many of these items are difficult to deal with after you have already formed your foreign corporation.

Keep in mind their are also special rules which apply to foreign partnerships, foreign LLCs and foreign trusts which must also be considered.

IRS NOW LOOKING AT COUNTY RECORDER RECORDS TO LOCATE REAL ESTATE GIFT TRANSFERS WHICH ARE NOT REPORTED ON FORM 709

2011-05-26T07:20:00.000-07:00

The Wall Street Journal reports the IRS is now investigating real estate transfers to determine if proper Gift Tax Returns (form 709) are reported. The IRS is getting real estate transfer records in many states. This new procedure could naturally be extended at any time to discover real estate sales which have not been reported on personal tax returns.

Gift tax returns must be filed when the value of the gift exceeds $13,000. Real estate sales must be reported if there is any gain or loss.

This new procedure will result in many additional audits. If you need help filing a Form 709 for any gift exceeding $13,000 let us know. This rule applies to gifts made by US Citizens and Permanent Residences whether living in the US or abroad. It also applies regardless of the location of the property gifted or to whom it is gifted.

Possible Consequences of "Silent Disclosure" of Undisclosed Foreign Bank Accounts - And Failing to Enter IRS Offshore Voluntary Disclosure Program

2011-05-23T14:04:00.000-07:00

A Boston venture capitalist and director at Boston Private Bank and Trust Company was charged with failing to report his foreign bank account and income to the Department of the Treasury. Principal Deputy Assistant Attorney General of the Department of Justice’s Tax Division John A. DiCicco, U.S. Attorney for the District of Massachusetts Carmen M. Ortiz and William P. Offord, Special Agent in Charge of the Internal Revenue Service (IRS) Criminal Investigation, Boston Division made the announcement today.

According to the criminal information and plea agreement filed today, from 2003 to 2008, Michael Schiavo, 53, of Westford, Mass., held an account in his name at HSBC Bank Bermuda (formerly the Bank of Bermuda). In 2006, with the assistance of his business partner Peter Schober, Schiavo arranged to have income from a venture capital investment directed to Schober’s secret account at UBS AG in Switzerland. From there, Schiavo’s share of the investment, $99,273, was wired to his HSBC Bank Bermuda account. Schiavo knew that this payment was taxable income in the United States, but deliberately chose not to report it, or the interest income that accrued in the HSBC Bank Bermuda account, to the IRS. In so doing, Schiavo deprived the IRS out of $40,624 in taxes.

U.S. citizens and resident aliens have an obligation to report to the IRS on the Schedule B of a U.S. Individual Income Tax Return, Form 1040, whether that individual has a financial interest in, or signature authority over, a financial account in a foreign country in a particular year by checking “Yes” or “No” in the appropriate box and identifying the country where the account was maintained. U.S. citizens and resident aliens have an obligation to report all income earned from foreign bank accounts on the tax return and to pay the taxes due on that income. These same taxpayers who have a financial interest in, or signature authority over, one or more financial accounts in a foreign country with an aggregate value of more than $10,000 at any time during a particular year are required to file with the Department of the Treasury a Report of Foreign Bank and Financial Accounts, Form TD F 90-22.1 (the FBAR). The FBAR for the applicable year is due by June 30 of the following year.

According to the criminal information and plea agreement, on Oct. 6, 2009, following widespread media coverage of UBS’s disclosure to the IRS of account records for undeclared accounts held by U.S. taxpayers and the IRS’s Voluntary Disclosure Program, Schiavo made a “silent disclosure” by preparing and filing FBARs and amended Forms 1040 for tax years 2003 to 2008, in which he reported the existence of his previously undeclared account at HSBC Bank Bermuda. He made such filings notwithstanding the availability of the IRS’s Offshore Voluntary Disclosure Program. The Offshore Voluntary Disclosure Program was a program administered by the IRS that was intended to serve as a vehicle for U.S. taxpayers to attempt to avoid criminal prosecution by disclosing their previously undeclared offshore accounts and paying tax on the income earned in those accounts. On its website, the IRS strongly encourages taxpayers to come forward under the Offshore Voluntary Disclosure Program and warns them that taxpayers who instead make silent disclosures risk being criminally prosecuted for all applicable years.

According to the criminal information and plea agreement, Schiavo also admitted that for tax years 2003 through 2008, he willfully failed to file FBARs with the Department of the Treasury and failed to disclose that he had an interest in a financial account in HSBC Bank Bermuda. He further admitted that for tax years 2003 through 2008, he prepared, signed under penalties of perjury, and filed false individual income tax returns with the IRS that falsely represented that he did not have an interest in any foreign financial accounts. According to the plea agreement, Schiavo agreed to pay a civil money penalty of $76,283, half the value of high balance of the HSBC Bank of Bermuda account, for failing to file the FBAR.

Schiavo faces up to five years in prison, followed by three years of supervised release and a $250,000 fine. Schober was charged separately with failing to disclose his secret UBS AG bank account and is awaiting sentencing.

US Expatriate Tax Return Due Dates

2011-05-16T09:00:00.000-07:00

Your US expatriate tax return is due 6/15/11 if you lived and worked abroad on 4/15/11 for tax year 2010. It can be extended until 10/15/11 if an extension is filed before that date. Please contact us if you wish assistance filing that extension or wish to determine how much needs to be paid in (if any tax is due) at that time to stop interest and penalties from accruing.
Your FBAR Form - TDF 90-22.1 (foreign bank account and financial account reporting form) must be received by the IRS by 6/30/11 for the tax year 2010 and cannot be extended for any reason. There is a $10,000 penalty that may be imposed for late filing.
Your required forms for foreign corporations, foreign partnerships and LLCs, and disregarded foreign entities must be filed by the regular or extended due date for your personal tax return.
Your Form 3520 for foreign trusts must be filed separately from your personal tax return, but is due by the extended due date of your personal tax return.

We have done over 5,000 expat and international tax forms for clients in over 50 countries around the world. We have the expertise, experience and professional expertise which is difficult to find. Please call or email us if you need assistance at ddntax@gmail.com

See How Your Tax Dollars Are Spent

2011-05-15T22:33:00.000-07:00

In his State of the Union Address, President Obama promised that this year, for the first time ever, American taxpayers would be able to go online and see exactly how their federal tax dollars are spent. Just enter a few pieces of information about your taxes, and the taxpayer receipt will give you a breakdown of how your tax dollars are spent on priorities like education, veterans benefits, or health care.

Amercian Bar Association - Comments on IRS 2011 Voluntary Offshore Disclosure Program by Panelists

2011-05-12T09:01:00.000-07:00

A panel of practitioners from the American Bar Association Tax Section on May 8, grappled with the "one-size-fits-all" IRS's voluntary offshore disclosure program, finding that it is often ill-suited for some of their clients who may not have willfully evaded their tax obligations.

Speaking at the May meeting of the American Bar Association Section of Taxation, John McDougal, special trial attorney in the IRS Office of Chief Counsel explained that where taxpayers opted out of the IRS's voluntary offshore disclosure program in favor of a regular audit, the examiners were expected to look at all applicable tax years. Absent fraud, the statute of limitations is generally six years, although McDougal said that if there was an entity involved, and the entity failed to file information returns, "all bets were off" and the IRS could go as far back as it liked.

Background. On February 8, 2011, the IRS announced a new 2011 Voluntary Disclosure Initiative (OVDI) for taxpayers to disclose their unreported offshore accounts. To participate in the OVDI, taxpayers must file or amend their tax returns and Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts (FBAR)) and pay all delinquent taxes, interest and penalties by August 31, 2011. The initiative covers tax years 2003 through 2010.

In exchange for participating in the OVDI, taxpayers with undisclosed offshore accounts can avoid criminal prosecution for their unpaid taxes and may be subject to significantly reduced penalties.

Under the OVDI, taxpayers will be subject to a 25 percent penalty on the highest aggregate account balance on their undisclosed account(s) between the 2003 and 2010. If the value of the undisclosed account(s) was less than $75,000 at all times during the tax years in question, the penalty is reduced to 12.5 percent. Moreover, in limited situations, a penalty of 5% may be imposed. Additionally, participants in the OVDI are required to pay an accuracy-related penalty equal to 20 percent of the underpayment of tax with interest for the tax years at issue and, if applicable, the failure to file and failure to pay penalties.

McDougal noted that the 2011 OVDI covers eight years instead of six under the 2009 initiative. "The Commissioner decided that it would be unfair to give people that didn't come in last time a walk on the two other years (2003/2004) that were included in the first initiative," he said. Also mentioned was the fact that the penalty under the 2011 OVDI was 25 percent as opposed to 20 percent under the 2009 OVDI.

With respect to the 5 percent penalty, McDougal said that taxpayers that did not open up the foreign account would be generally eligible for the reduced penalty, although if the bank required the taxpayer to open up the account to get it in their name, the IRS wouldn't hold that against taxpayers.

Voluntary disclosure vs. examination. McDougal said that agents were not to make any factual determinations with respect to disclosures on matters pertaining to willfulness and reasonable cause. Taxpayers seeking to have the IRS consider their arguments on willfulness or reasonable cause are required to opt out of OVDI and ask for an examination. The caveat, however, is that all penalties and all tax years are on the table in a regular examination.

Mark Matthews of Morgan Lewis & Bockius LLP, said that practitioners felt that the IRS viewed that everybody coming into the program has significant criminal exposure. In his view, the problem lies with clients that are in a gray area, where there may be no criminal exposure. The opportunity presented through the OVDI must be balanced against other civil penalties that may be faced if the taxpayer is detected on audit or otherwise. "The perception is that the agent's are leaning very hard to keep you in the program," he said, finding that agents pressure taxpayers by telling them that they will look back at several tax years if they opt-out of the OVDI.

Larry Campagna of Chamberlain Hrdlicka said that he believed that the OVDI makes a presumption of willfulness. "The FBAR penalty in particular, is the government's burden to prove willfulness," he said. "They can assess the penalty if they want to but they have to go to court and prove willfulness to collect the penalty." In his practice, Campagna said he sees many clients that don't fit the program very well because they are in some sort of gray area with respect to willfulness, but the client is also not willing to take a penalty hit of 25 percent. Quiet disclosures are also very problematic, he said.

Once taxpayers participate in the OVDI, agents do not have the flexibility to to mitigate the 25 percent penalty for reasons associated with reasonable cause or willfulness, McDougal said.

Criminal Prosecutions of Taxpayers Who Failed to Disclose Foreign Bank Accounts and Interest

2011-04-27T09:38:00.000-07:00

Read about the Justice Departments Criminal Prosecution of Taxpayers who have failed to report foreign bank and financial accounts and report the income from those accounts on their US tax returns.

Read about the results of one of these criminal cases a year later (from the original charge) on April 25, 2011.

We recommend if you are in this situation that you consider entering the 2011 IRS Offshore Voluntary Disclosure Program to try avoid these consequences. We have helped many clients who wish to participate in the program. The IRS does not limit their activity to the pursuit of wealthy individuals. Their actions and plans include individuals of all income levels and wealth.

IRS Announces Fraudulent Tax Returns Surge in 2011 Filing Season

2011-04-20T11:12:00.000-07:00

Money Magazine say the IRS identified 335,341 tax returns claiming $1.9 billion in fraudulent refunds as of March 4, 2011, according to the findings of an audit conducted by the Treasury Inspector General for Tax Administration. That's a whopping 181% increase from the same period last year. Read More Here

The 75% Fraud Penalty (Plus Possible Prison Time)

2011-04-18T12:53:00.001-07:00

Committing tax fraud takes some work, because it goes beyond simple ignorance of the tax rules and regulations. You have to do really bad things like keep two sets of books, alter or destroy documents, hide unreported income overseas, or fail to report income from illegal activities (this is not a complete list by any stretch). Bottom line: You can't commit tax fraud without knowing it.

WHITE HOUSE HAS ON LINE CALCULATOR TO SHOW WHERE YOUR INCOME TAX AND SOCIAL SECURITY TAXES GO

2011-04-18T07:13:00.000-07:00

The President has released an on line calculator on the White House Website showing where your taxes go. Just type in your income level or actual figures from your tax return and you can see what you are paying for. Click here to learn why you pay taxes.

US Expatriate Tax Return and related Foreign Tax Forms Due Dates

2011-04-17T17:00:00.000-07:00

If you live and work abroad your personal 2010 tax return is automatically extended until 6/15/11, but if you wish to avoid penalties and interest on any underpayments you should pay in the amount due (or estimate) by 4/18/11. Your first quarter estimated tax for 2011 is also due to be made on 4/18/11 using form 1040 ES. You can extend until 10/15/11 your expatriate tax return on or before 6/15/11 by filing Form 4868 with the appropriate box checked. If you need to extend your expatriate return beyond that date in order to qualify for the foreign earned income exclusion you need to file Form 2350.

If you do not file the necessary form to extend your personal return and end up owing taxes, failure to properly extend the form will result in the large penalty of 5% per month of the tax due up to a maximum penalty of 25% of the tax due plus interest. Best to not miss filing that extension due to this high penalty.

Your TDF 90 -22.1 Form reporting foreign financial, bank accounts, etc., must be received by 6/30/11 at the Detroit address on that form. No extensions can be obtain. Late filing can result in penalties of $10,000 or more.

Your Form 5471 for Foreign Corporations, 8865 for foreign partnerships and LLCs, 3520 for foreign trusts and Mexican Fideicomisos, and Form 8858 for disregarded entities are all on the due dae of your personal return or its extended due date if that is later and you have filed an extension.

General Electrics Zero Tax Bill Involves Utilization of Legal US Tax Code Provisions Available to Expats with their own Businesses Located Abroad

2011-04-15T13:14:00.000-07:00

The New York Times has an excellent article describing how General Electric has managed to reduce its tax bill by legally locating its business in low tax countries and utilizing provisions of the US tax code that apply to Foreign Corporations. If you have your own small to medium business abroad, you too can take advantage of this type of tax planning even though you are not as big as GE. We can help.

As the company expanded abroad, the portion of its profits booked in low-tax countries such as Ireland and Singapore grew far faster. From 1996 through 1998, its profits and revenue in the United States were in sync — 73 percent of the company’s total. Over the last three years, though, 46 percent of the company’s revenue was in the United States, but just 18 percent of its profits.

Passport Information May Be Used by the IRS to Collect Unpaid Taxes

2011-04-15T09:16:00.000-07:00

The State Department issued passports to 16 million individuals during fiscal year 2008 and some 224,000 of these individuals owed more than $5.8 billion in unpaid federal taxes as of Sept. 30, 2008, according to a report released on April 11 by the Government Accountability Office (GAO).

The State Department cannot restrict the issuance of passports to delinquent taxpayers, and federal law bars IRS from disclosing any taxpayer information to the State Department without a taxpayer's consent. However, federal law does permit certain restrictions on the issuance of passports to individuals, such as individuals owing child support debts over $2,500, the report noted.

The GAO selected 25 passport recipients to investigate for abuse related to the federal tax system or criminal activity. “These case studies were chosen, among other things, by the more egregious amount of federal taxes owed and cannot be generalized beyond the cases presented,” GAO said. Of these cases, at least 10 passport recipients had been indicted or convicted of federal laws. In addition, IRS assessed trust fund recovery penalties on several passport recipients when the individual did not remit payroll taxes to the federal government. At least 16 passport recipients traveled outside the country while owing federal taxes, and at least 4 resided in another country at the time of GAO's investigation.

Two individuals used the identities of deceased individuals to fraudulently obtain passports and then used these passports to travel to Mexico, France, and Africa. In one case, the unpaid tax debt belonged to a deceased individual, and in the other case, the debt was incurred by the imposter. “If Congress is interested in pursuing a policy of linking federal tax debt collection to passport issuance, it may consider taking steps to enable State to screen and prevent individuals who owe federal taxes from receiving passports,” GAO said. “This could include asking State and IRS to jointly study policy and practical issues and develop options with appropriate criteria and privacy safeguards.” The report is available athttp://www.gao.gov/new.items/d11272.pdf.

No 1 Item on IRS List of Tax Scams is Taxpayers Hiding Assets Abroad

2011-04-11T11:06:00.000-07:00

The IRS has released their list of the 12 most common tax cheating and scam methods. Hiding income and assets offshore is the first item on the list. The IRS aggressively pursues taxpayers involved in abusive offshore transactions as well as the promoters, professionals and others who facilitate or enable these schemes. Taxpayers have tried to avoid or evade U.S. income tax by hiding income in offshore banks, brokerage accounts or through the use of nominee entities. Taxpayers also evade taxes by using offshore debit cards, credit cards, wire transfers, foreign trusts, employee-leasing schemes, private annuities or insurance plans.

The 2011 IRS Voluntary Offshore Disclosure Program ends 8/31/11. As both an Attorney and CPA we can advise you on the program, and represent you should you enter it.

Justice Department Investigating US Citizens With Bank Accounts in India

2011-04-08T13:02:00.000-07:00

The Justice Department said Thursday it is trying to get a court order that would allow the Internal Revenue Service to request bank account records from HSBC Bank’s India unit to help identify U.S. residents who are evading federal taxes. (click here to read more)

Federal law requires U.S. taxpayers to pay federal income taxes on all income earned worldwide. U.S. taxpayers must also report foreign financial accounts if the total value of the accounts exceeds $10,000 at any time during the calendar year. A willful failure to report a foreign account can result in a penalty of up to 50 percent of the amount in the account at the time of the violation.

Doug Shulman, IRS
Commissioner

PASSIVE FOREIGN INVESTMENT COMPANY SPECIAL RULES FOR TAXES - Form 8621

2011-04-07T20:10:00.000-07:00

For purposes of income tax in the U.S., U.S. persons owning shares of a passive foreign investment company (PFIC) may choose between (i) current taxation on the income of the PFIC or (ii) deferral of such income subject to a deemed tax and interest regime. The provision was enacted as part of the Tax Reform Act of 1986 as a way of placing owners of offshore investment funds on a similar footing to owners of U.S. investment funds (regulated investment companies). The original provisions applied for all foreign corporations meeting either an income or an asset test. However, 1997 amendments limited the application in the case of U.S. Shareholders of controlled foreign corporations.

PFIC Defined

Any foreign (i.e., non-U.S.) corporation meeting either the income test or the asset test is a PFIC with respect to each shareholder when the test is met. PFIC status applies separately for each U.S. person owning shares, and also separately with respect to shares acquired at different times. PFIC status does not, itself, have any impact on the foreign corporation or foreign shareholders.

The income test is met if 75% or more of the foreign corporation's gross income is passive income, defined as foreign personal holding company income with modifications.

The asset test is met if 50% or more of the foreign corporation's average assets (as defined in the IR Code) produce, or could produce passive income, or are assets (such as cash and bare land) that produce no income. The test is applied based on the foreign corporation's adjusted basis, for U.S. tax purposes, of the assets, or at the election of the particular shareholder, fair market values of the assets.

Look-thru of 25% subsidiaries: Interests in 25% or more owned foreign corporations are treated similarly to partnership interests (i.e., looked through) for the income test and the asset test.

Effect of PFIC Status

If a U.S. person receives income from a PFIC or recognizes gain from disposition of shares of a PFIC, such person is subject to a tax and interest regime. A shareholder may elect out of this regime (see QEF below). The regime applies only to any distribution or gain in excess of 125% of the average distributions for the prior three years. This regime is as follows: First, such income or gain (in excess of the 125%) is allocated pro rata to each day of the person's holding period for the particular shares. Next, the amounts allocated to prior years after 1986 are excluded from current year taxable income. Then tax is computed on amounts allocated to each prior year at the maximum rate of tax applicable to the type of taxpayer for such year (prior year tax). Then interest is computed on such prior year tax as if it were an underpayment of tax (interest charge). Finally, current year tax is increased by the aggregate of prior year tax amounts and interest charge amounts.

The interest charges are computed using daily compounding. Thus, the interest charges and prior year tax amounts may exceed the income recognized, if the holding period of the shares is long enough.

Shareholders of a PFIC (including a QEF) are eligible for foreign tax credit with respect to the current and deemed prior year taxes, including the deemed paid credit for 10% corporate shareholders of the PFIC.
Shareholders of a PFIC should consider filing IRS Form 8621 to make certain elections which may reduce their tax burden. Read more about the PFIC rules by downloading the IRS Instructions.

US Individual Income & Social Security Rates Compared with Other Countries

2011-04-07T09:59:00.000-07:00

The percentage of income that the average worker pays for income taxes and social security taxes is set forth below for various countries:

Germany 41.3%
Austria 32.7%
Italy 29.3%
France 27.7%
United Kingdom 25.3%
Canada 22.6%
USA 22.4%
Japan 20.1%

The US does not look that bad and is far from the highest. These figures were put together by the Organization for Economic Cooperation and Development for the year 2009.