DRAMATIC INCREASE IN US EXPATRIATES SURRENDERING THEIR CITIZENSHIP (AND TAX FILING REQUIREMENT WITH THE IRS) -HERE ARE LEGAL RULES - THERE ARE ALSO SEPARATE AND COMPLEX IRS TAX RULES

 

 A. THE IMMIGRATION & NATIONALITY ACT  Section 349(a)(5) of the Immigration and Nationality Act (INA) (8 U.S.C. 1481(a)(5)) is the section of law governing the right of a United States citizen to renounce abroad his or her U.S. citizenship. That section of law provides for the loss of nationality by voluntarily and with the intention of relinquishing nationality: "(5) making a formal renunciation of nationality before a diplomatic or consular officer of the United States in a foreign state, in such form as may be prescribed by the Secretary of State."

B. ELEMENTS OF RENUNCIATION A person wishing to renounce his or her U.S. citizenship must voluntarily and with intent to relinquish U.S. citizenship: appear in person before a U.S. consular or diplomatic officer, in a foreign country at a U.S. Embassy or Consulate; and sign an oath of renunciation Renunciations abroad that do not meet the conditions described above have no legal effect. Because of the provisions of Section 349(a)(5), U.S. citizens can only renounce their citizenship in person, and therefore cannot do so by mail, electronically, or through agents. In fact, U.S. courts have held certain attempts to renounce U.S. citizenship to be ineffective on a variety of grounds, as discussed below. Questions concerning renunciation of U.S. citizenship in the United Statespursuant to INA section 349(a)(6) must be directed to United States Citizenship and Immigration Services (USCIS) of the Department of Homeland Security. 

 C. REQUIREMENT - RENOUNCE ALL RIGHTS AND PRIVILEGES A person seeking to renounce U.S. citizenship must renounce all the rights and privileges associated with such citizenship. In the case of Colon v. U.S. Department of State, 2 F.Supp.2d 43 (1998), the U.S. District Court for the District of Columbia rejected Colon’s petition for a writ of mandamus directing the Secretary of State to approve a Certificate of Loss of Nationality in the case because, despite his oath of renunciation, he wanted to retain the right to live in the United States while claiming he was not a U.S. citizen. 

 D. DUAL NATIONALITY / STATELESSNESS Persons intending to renounce U.S. citizenship should be aware that, unless they already possess a foreign nationality, they may be rendered stateless and, thus, lack the protection of any government. They may also have difficulty traveling as they may not be entitled to a passport from any country. Statelessness can present severe hardships: the ability to own or rent property, work, marry, receive medical or other benefits, and attend school can be affected. Former U.S. citizens would be required to obtain a visa to travel to the United States or show that they are eligible for admission pursuant to the terms of the Visa Waiver Program. If unable to qualify for a visa, the person could be permanently barred from entering the United States. If the Department of Homeland Security determines that the renunciation is motivated by tax avoidance purposes, the individual will be found inadmissible to the United States under Section 212(a)(10)(E) of the Immigration and Nationality Act (8 U.S.C. 1182(a)(10)(E)), as amended. Renunciation of U.S. citizenship may not prevent a foreign country from deporting that individual to the United States in some non-citizen status.

 E. TAX & MILITARY OBLIGATIONS /NO ESCAPE FROM PROSECUTION Persons who wish to renounce U.S. citizenship should be aware of the fact that renunciation of U.S. citizenship may have no effect on their U.S. tax or military service obligations . You must file special forms and final tax returns with the IRS to avoid having to file taxes in the future. In addition, the act of renouncing U.S. citizenship does not allow persons to avoid possible prosecution for crimes which they may have committed or may commit in the future which violate United States law, or escape the repayment of financial obligations, including child support payments, previously incurred in the United States or incurred as United States citizens abroad.

 F. RENUNCIATION FOR MINOR CHILDREN/INDIVIDUALS WITH DEVELOPMENTAL OR INTELLECTUAL DISABILITIES Citizenship is a status that is personal to the U.S. citizen. Therefore parents may not renounce the citizenship of their minor children. Similarly, parents/legal guardians may not renounce the citizenship of individuals who lack sufficient capacity to do so. Minors seeking to renounce their U.S. citizenship must demonstrate to a consular officer that they are acting voluntarily, without undue influence from parent(s), and that they fully understand the implications/consequences attendant to the renunciation of U.S. citizenship. Children under 16 are presumed not to have the requisite maturity and knowing intent to relinquish citizenship; children under 18 are provided additional safeguards during the renunciation process, and their cases are afforded very careful consideration by post and the Department to assess their voluntariness and informed intent. Unless there are emergent circumstances, minors may wish to wait until age 18 to renounce citizenship.

 G. IRREVOCABILITY OF RENUNCIATION Finally, those contemplating a renunciation of U.S. citizenship should understand that the act is irrevocable, except as provided in section 351 of the INA (8 U.S.C. 1483), and cannot be canceled or set aside absent a successful administrative review or judicial appeal. Section 351(b) of the INA provides that an applicant who renounced his or her U.S. citizenship before the age of eighteen (or lost citizenship related to certain foreign military service under the age of 18) can have that citizenship reinstated if he or she makes that desire known to the Department of State within six months after attaining the age of eighteen. See also Title 22, Code of Federal Regulations, section 50.20. See also Section 50.51 of Title 22 of the Code of Federal Regulations regarding the administrative review of previous determinations of loss of U.S. citizenship. Renunciation is the most unequivocal way by which a person can manifest an intention to relinquish U.S. citizenship. 

In addition to the legal rules set forth above, you must also separately comply with the IRS rules to achieve your goal of no longer filing US tax returns and paying US taxes. Those rules are complex and require filing the form 8854 along with a final tax return. We have counsel hundred of clients in this procedure and assisted them filing the required forms with great success for over 10 years. Contact us if you need assistance and help. We are CPAs and Attorneys and can provide you with ALL of the expertise you need.  Our next blog post will discuss the Tax requirements adn rules. EMAIL US WITH QUESTIONS FOR FOR HELP

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

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

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."

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

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

IRS Voluntary Disclosure after 9/9/11

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

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.

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

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

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?

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 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.

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

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.

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

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: .

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

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.

RS Extends Voluntary Disclosure Deadline

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”

IRS REVISES FREQUENTLY ASKED QUESTIONS ON 2011 VOLUNTARY OFFSHORE DISCLOSURE PROGRAM

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.

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

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.