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

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

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)

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 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.

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

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

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

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

  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

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

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

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

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.

INDIVIDUAL & CORPORATE TAX RATES BY COUNTRY

International US Tax Law

Wikipedia has an excellent listing of the income tax and VAT tax rates for most of the countries in the world. Use this schedule to determine where you want to live personally and locate your offshore business.

Contact us for US Tax Planning and Strategies concerning your Offshore and International business operation and personal tax.

Visit our websites for more information.  www.TaxMeLess.com  and www.ExpatAttorneyCPA.com

Foreign Financial Transactions (FBAR Reporting)

Persons connected with the transportation into or out of the U.S. of monetary instruments exceeding a specified dollar amount on any one occasion must report the transaction, subject to a number of exceptions. 

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Except as provided below, each United States person (as defined below) who has a financial interest in or signature or other authority over bank accounts, securities accounts, or other financial accounts in foreign countries, must make a report of those relationships for each calendar year during any part of which the aggregate value of the accounts exceeded $10,000. The report is made on Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts or FBAR. 


A United States person means:

... a U.S. citizen,

... a individual who is a resident alien under Code Sec. 7701(b) of the U.S., the District of Columbia, the Indian lands (as that term is defined in the Indian Gaming Regulatory Act), and the Territories and Insular Possessions of the U.S.,

... an entity, including a corporation, partnership, trust or limited liability company organized or formed under U.S. laws or the law of any State, the District of Columbia, the U.S. Territories and Insular Possessions or Indian Tribes. 

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Signature or other authority means the authority of an individual (alone or in conjunction with another) to control the disposition of money, funds or other assets held in a financial account by direct communication (whether in writing or otherwise) to the person with whom the financial account is maintained. 

For this purpose, a reportable account includes:

... bank account , e.g., a savings deposit, demand deposit, checking, or any other account maintained with a person engaged in the business of banking,

... a securities account (an account with a person engaged in the business of buying, selling, holding or trading stock or other securities),

... an account with a person in the business of accepting deposits as a financial agency,

... an insurance or annuity policy with a cash value,

... an account with a broker or dealer for futures or options transactions in any commodity on, or subject to rules of, a commodity exchange or association, or

... a mutual fund or similar pooled fund which issues shares available to the general public that have a regular net asset value determination and regular redemptions. ²⁸

 

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In addition, a debit card account is a financial account, and a credit card account may be treated as a financial account under certain circumstances. ²⁹

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Accounts that are not subject to the FBAR reporting requirement include:

... an account of a department or agency of the U.S., a State or subdivision or Indian Tribe.

... an account of an international financial institution of which the U.S. is a member.

... an account in a U.S. military banking facility or a U.S. military finance facility operated by a U.S. institution designated by the U.S. government to serve U.S. government installations abroad.

... correspondent or nostro accounts that are maintained by banks and used solely for bank to bank settlements

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A U.S. person with a financial interest in 25 or more foreign financial accounts need only provide the number of financial accounts and certain other basic information on the report. The person will be required to provide detailed information when requested. 

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Participants and beneficiaries in retirement plans under Code Sec. 401(a) , Code Sec. 403(a) , Code Sec. 403(b) as well as owners and beneficiaries of individual retirement accounts under Code Sec. 408 or Roth IRAs under Code Sec. 408A are not required to file an FBAR with respect to a foreign financial account held by or on behalf of the retirement plan or IRA. 

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The FBAR is due to be received by the IRS by June 30 following the year for which it applies. That due date cannot be extended for any reason.  It is filed separately from your personal tax return.

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Persons with signature authority over, but no financial interest in, a foreign financial account must file FBARs for the 2008, 2009, 2010 and earlier calendar years by June 30, 2011. 

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Corporations, partnerships, trusts, and LLCs  must all file Form TD F 90-22.1 on their foreign financial accounts.

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The Supreme Court has upheld the constitutionality of the foreign financial transaction reporting requirements. Extreme civil monetary penalties and criminal prosecution can result from failure to file these forms.

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US Expatriates Living and Working Abroad Get Automatic Extension of Time to File Return until 6/15/11 - All Others due 4/18/11

Your tax return is due on 4/18/11 for the 2010 tax year. You can extend your return and pay in any tax due (to avoid interest and penalties on late payment) by filing Form 4868.  You may also need an extension for state tax purposes if you owe taxes to any US state. You need to refer to the tax rules of each particular state to determine how to extend that tax return.

However, if you are a US expatriate living and working abroad on 4/18/11, you get an automatic extension of time to file your 2010 personal return until 6/15/11 and then that expatriate return can be extended until 10/15/11 using Form 4868.

It is important to extend your return because the late filing penalty for non extended returns is 5% per month of any tax due with that return up to a maximum of 25%.  The penalty for paying taxes late, if you file an extension, is only 1/2 % per month an a small interest charge.

TYPES OF INFORMATION AND QUESTIONS ASKED IN IRS AUDIT OF WEALTHY TAXPAYERS- DOWNLOAD ACTUAL AUDIT QUESTIONS

The IRS has stepped up audits of wealthy taxpayers and others at the higher income levels. The Wall Street Journal has released a copy of the audit requests given one of those taxpayers. You can download a copy of the IRS audit questionnaire here.

Though you may not consider yourself wealthy, this questionnaire will give you a good idea of the possible questions the IRS will ask you upon audit. Read it and plan to have you tax return prepared based on the types of questions you may be asked later on audit. Audits usually do not occur until 2-3 years after the return is actually filed. Remember, when audited if you have written documentation of an item of income or expense, it is probable that the IRS agent will accept that item on your tax return. If you have no written support, it is probable that item will be disallowed.


Do not ever represent yourself on an IRS or State Audit. It is always best to have an independent tax practitioner represent you so you can in most situations avoid talking with the IRS auditor in person and perhaps making statements that will hurt you.