Bad Marks given by the IRS Taxpayer Advocate on Voluntary Offshore Disclosure Program in Its report to Congress

The IRS National Taxpayer Advocate reported the following to Congress:


The IRS’s Offshore Voluntary Disclosure programs and their failure to distinguish adequately between “bad actors” and “benign actors.” The IRS has sought to increase enforcement of Foreign Bank and Financial Accounts (FBAR) reporting requirements in recent years and has offered a series of voluntary disclosure programs designed to settle with taxpayers who had failed to file required FBAR forms. However, the report says, the programs generally applied a “one-size-fits-all” approach that required the payment of significant penalties and did not distinguish between “bad actors” and “benign actors.” By generally requiring taxpayers who make voluntary disclosures to “opt out” of the disclosure program and submit to comprehensive audits in order to avoid draconian penalties, the report argues that the program has caused excessive burden and fear for taxpayers who had reasonable cause for not filing FBAR forms or whose failure to file was inadvertent.

This confirms the IRS has not created a fair and just  program to allow those middle class US Citizens living abroad who were unaware of their US filing and foreign assets reporting obligation to come forward and correct the problem without the risk of unfair civil and criminal penalties. Hopefully this report will encourage Congress and the IRS to soften the procedures and to take into account these citizens or green card holders were never effectively informed of their obligations by the IRS or the US Government.

We can help you catch up now and represent you before the IRS under the current offshore disclosure program. We have advised or represented over a hundred clients so far surface with the IRS with great success.

YOU CANNOT FILE YOUR TAX RETURN UNTIL JANUARY 30TH PER IRS NOTICE

Following the January tax law changes made by Congress under the American Taxpayer Relief Act (ATRA), the Internal Revenue Service announced today it plans to open the 2013 filing season and begin processing individual income tax returns on Jan. 30.

The IRS will begin accepting tax returns on that date after updating forms and completing programming and testing of its processing systems. This will reflect the bulk of the late tax law changes enacted Jan. 2. The announcement means that the vast majority of tax filers -- more than 120 million households -- should be able to start filing tax returns starting Jan 30.

The IRS estimates that remaining households will be able to start filing in late February or into March because of the need for more extensive form and processing systems changes. This group includes people claiming residential energy credits, depreciation of property or general business credits. Most of those in this group file more complex tax returns and typically file closer to the April 15 deadline or obtain an extension.

“We have worked hard to open tax season as soon as possible,” IRS Acting Commissioner Steven T. Miller said. “This date ensures we have the time we need to update and test our processing systems.”

The IRS will not process paper tax returns before the anticipated Jan. 30 opening date. There is no advantage to filing on paper before the opening date, and taxpayers will receive their tax refunds much faster by using e-file with direct deposit.

“The best option for taxpayers is to file electronically,” Miller said.

The opening of the filing season follows passage by Congress of an extensive set of tax changes in ATRA on Jan. 1, 2013, with many affecting tax returns for 2012. While the IRS worked to anticipate the late tax law changes as much as possible, the final law required that the IRS update forms and instructions as well as make critical processing system adjustments before it can begin accepting tax returns.

The IRS originally planned to open electronic filing this year on Jan. 22; more than 80 percent of taxpayers filed electronically last year.

Who Can File Starting Jan. 30?

The IRS anticipates that the vast majority of all taxpayers can file starting Jan. 30, regardless of whether they file electronically or on paper. The IRS will be able to accept tax returns affected by the late Alternative Minimum Tax (AMT) patch as well as the three major “extender” provisions for people claiming the state and local sales tax deduction, higher education tuition and fees deduction and educator expenses deduction.

Who Can’t File Until Later?

There are several forms affected by the late legislation that require more extensive programming and testing of IRS systems. The IRS hopes to begin accepting tax returns including these tax forms between late February and into March; a specific date will be announced in the near future.

The key forms that require more extensive programming changes include Form 5695 (Residential Energy Credits), Form 4562 (Depreciation and Amortization) and Form 3800 (General Business Credit). A full listing of the forms that won’t be accepted until later is available on IRS.gov.

Fiscal Cliff New Tax Bill Extends an Amazing Number of Tax Benefits

The new Fiscal Cliff Tax Bill passed yesterday extended over 100 special tax benefits for businesses and individuals through to 2013 and permanently extended many of those tax breaks permanently. The article linked below will allow you to see if your favorite tax provision was extended.

Read the details of the extended tax breaks in the JOURNAL OF ACCOUNTANCY ARTICLE HERE

YEAR END TAX PLANNING - DOWNLOAD OUR EXPAT TAX PLANNING NEWSLETTER

There is still time to save taxes prior to the end of 2012. It is very clear taxes are going up in 2013 and therefore taking steps now to recognize income and accelerate deductions may be of benefit.  There are numerous other things you can do now to reduce your taxes which are included in our newsletter. DOWNLOAD OUR YEAR END TAX PLANNING NEWSLETTER HERE.

US Expats in Mexico and Denmark on 1/1/13 Will Have Their Financial and Tax Information Disclosed to US

The United States has entered into its second and thir  bilateral exchange of financial and tax information agreements regarding the implementation of FATCA with  Mexico and Denmark.  This new agreements target non-compliant U.S. taxpayers owning foreign accounts.The agreemenst will be  become  on January 1, 2013.

The reciprocal nature of the United States' agreement with  Mexico and Denmark will allow the countries to use the automatic exchange of information to discover non-compliant taxpayers. The good old days of "what happens in Mexico, stays in Mexico" are almost over.

Now is the time to start reporting to the IRS all of your previously unreported Mexican and Denmark business and financial activities before these new programs are geared up.  If in the future the IRS discovers you have unreported income or assets in Mexico or Denmark, and you have not been filing the proper reporting forms with your tax return, it most certainly will impose high monetary penalties and will most likely also seek criminal penalties. The average prison sentence for tax evasion usually runs 3-4 years.  

We can help you catch up. Email us at ddnelson@gmail.com or visit our website at www.TaxMeLess.com  

Investment income tax under healthcare law- Explained

The U.S. Internal Revenue Service has released new rules for investment income taxes on capital gains and dividends earned by high-income individuals that passed Congress as part of the 2010 healthcare reform law.

The 3.8 percent surtax on investment income, meant to help pay for healthcare, goes into effect in 2013. It is the first surtax to be applied to capital gains and dividend income.

The tax affects only individuals with more than $200,000 in modified adjusted gross income (MAGI), and married couples filing jointly with more than $250,000 of MAGI.

The tax applies to a broad range of investment securities ranging from stocks and bonds to commodity securities and specialized derivatives.

The 159 pages of rules spell out when the tax applies to trusts and annuities, as well as to individual securities traders.

The  new regulations include a 0.9 percent healthcare tax on wages for high-income individuals.

Both sets of rules will be published on Wednesday in the Federal Register. The proposed rules are effective starting Jan. 1. 

Together, the two taxes are estimated to raise $317.7 billion over 10 years, according to a Joint Committee on Taxation analysis released in June.

To illustrate when the tax applies, the IRS offered an example of a taxpayer filing as a single individual who makes $180,000 in wage income plus $90,000 from investment income. The individual's modified adjusted gross income is $270,000. The 3.8 percent tax applies to the $70,000, and the individual would pay $2,660 in surtaxes, the IRS said.

The IRS plans to release a new form for taxpayers to fill out for this tax when filing 2013 returns.

The new rules leave some questions unanswered, tax experts said. It was unclear how rental income will be treated under the new rules at this time.

This new tax will definitely increase the compliance burden on individuals as taxes become even more complex.

How The IRS will find you Abroad When you Have Not Been Filing US Tax Returns

We are often asked by expatriates living abroad who have not filed their US tax returns for many years (and have seemed to have dropped of any IRS list)  how the IRS could ever find them or determine they are not filing their US tax return each year.  Here are just  some of the ways:

1.  Applying for social security benefits or pension benefits

2. Opening US bank and financial accounts

3. Inheriting money from their parents or others and failing to report income generated by those funds.

4. A Whistle blower. The IRS pays finders fees for those who turn in tax evaders whether the snitch is a US person or a foreign person.  The largest whistle blower fee paid to date  is $104 million.

5. Renew a passport (you now must give the Government your social secuirty number) which is then sent to the IRS.

6. From a foreign countries tax agency exchanging information with the IRS under treaties or  FATCA.

7. Form public domain information on the internet, websites, Linkedin, Facebook, Twitter, etc.

8. Registering the birth of a child born abroad with the US Embassy.

9. Marriages or divorces (that are public record) that reveal your existence.

10. By entering the US with a foreign passport that shows you were born in the USA

11. Stolen information from foreign banks and financial institutions given to the IRS

12. When your older children apply to US colleges or learning institutions and list information about their payments who long ago dropped out filing tax returns.

13. From other Americans in the US or abroad who do business with you

14. From suspicious activities forms filed with the IRS (yes this is an actual IRS form often filed by Banks or other financial institutions, car dealers, etc ).

15. As a result of information provided to it by the Serious Organised Crimes Office (SOCA) or   the US Treasury's Financial Crimes Enforcement Network.

16. From data provided the IRS by other taxpayers entering the Offshore Disclosure Program.

17. Forming a corporation or LLC in a foreign country that requires you register yourself as the owner your US  citizenship.

An ever increasing number of countries are agreeing with the IRS (over 50 currently) that the best way for each of them to collect more taxes is to share information about their residents with other countrys' tax agencies.  Computers and the internet are making it easier to gather data and locate those who previously could successfully disappear into the world.  It is difficult to guess exactly when in the near future, but for sure within the next 5 to 10 years  there  will be no where to run and no where to hide.

We can help you surface with the IRS before its too late. Write for more information to ddnelson@gmail.com and our website at www.TaxMeLess.com 

US Tax Treaties May Allow Nonresidents to be Taxed at Lower Rates

Tax treaties may allow residents of foreign countries to be taxed at a reduced rate, or to be exempt from U.S. income taxes on certain items of income they receive from sources within the United States.  Whenever you are a US Nonresident and the US has a tax treaty with your resident country, you MUST review that treaty to determine if it has benefits.

Treaties rarely benefit US Citizens or Green Card Holders due to the savings clause contained in almost all treaties which state that the IRS can still continue to tax its US tax residents and Citizens under the regular tax law regardless of what a treaty might state.  A US taxpayer residing in a treaty country may be able to use the treaty to avoid adverse tax consequences in that country. There is no standard treaty so each applicable treaty must be reviewed to determine its consequences.  Unfortunately the language used in the treaties if often vague and unclear. The IRS has not done much to clear up the ambiguities and to explain those parts which are unclear.

• Tax Treaty Overview
• Researching Tax Treaties
• Claiming Tax Treaty Benefits
• Competent Authority Agreements
• Competent Authority Assistance
• Items of Interest
• Certification of U.S. Residency for Tax Treaty Purposes
• The Effect of Tax Treaties
• The Transition Rules Regarding Articles 19 and 20 of the USA-Japan Income Tax Treaty of 2004
• The U.S. Model Income Tax Convention and Model Technical Explanation
• Mandatory Tax Treaty Arbitration

Look here for the complete texts of many of the tax treaties in force and their accompanying Treasury Technical Explanations. For further information on tax treaties refer also to the Treasury Department’s Tax Treaty Documents page.

Why US Expats and Residents May want to give gifts or do Estate Planning Before Year End

It might be wise for everyone to consider making gifts before year end to their children or other loved ones and consider other estate planning strategies. Previously its was thought Congress might extend the currently generous annual gift tax exclusion and the lifetime estate and gift tax exemption which is until the end of 2012 over $5 million.  In 2013 the exclusion will go back to $1 million.

Nonresidents (not a US Citizen or permanent resident) only get a $60,000 exclusion with respect to estate taxes on their assets located in the US.

If Congress decides the funds are needed next year due to the "Fiscal Cliff" they may not extend the current exemptions and now is the time to act.  Read more in the following Forbes Article Will the Estate and Gift Tax Boomerang?

We can help you with revise or amend your living trust, wills, and successfully make last minute gifts to tax advantage of the current rules which may end 12/31/12. Email us at ddnelson@gmail.com. 

U.S. engages with more than 50 jurisdictions to curtail offshore tax evasion

The US Treasury, announced that it is engaged with more than 50 foreign country jurisdictions to improve international tax compliance as part of efforts to implement the information reporting and withholding tax provisions under the Foreign Account Tax Compliance Act (FATCA).

 The U.S. has already signed a bilateral agreement with the government of the U.K. Treasury is in the process of finalizing intergovernmental agreements and hopes to finish negotiations in this respect with: France, Germany, Italy, Spain, Japan, Switzerland, Canada, Denmark, Finland, Guernsey, Ireland, Isle of Man, Jersey, Mexico, the Netherlands, and Norway.                                                                                                       

Treasury is also maintaining an active dialog with several countries to conclude an intergovernmental agreement. Jurisdictions include: Argentina, Australia, Belgium, the Cayman Islands, Cyprus, Estonia, Hungary, Israel, Korea, Liechtenstein, Malaysia, Malta, New Zealand, the Slovak Republic, Singapore, and Sweden. The government expects to finalize the agreements with many of the listed countries by the end of the year.

Additionally, Treasury is discussing viable options for intergovernmental cooperation with: Bermuda, Brazil, the British Virgin Islands, Chile, the Czech Republic, Gibraltar, India, Lebanon, Luxembourg, Romania, Russia, Seychelles, Saint Maarten, Slovenia, and South Africa.

The government stated it will continue exploring ways of engaging other interested jurisdictions in intergovernmental cooperation including at a meeting of senior government officials and financial institutions.

WHAT DOES THIS MEAN TO US TAXPAYERS LIVING ABROAD? Now is the time to file all past unfiled US tax returns and report all foreign bank accounts, financial accounts, foreign corporations and partnerships, foreign mutual funds, etc.  If you wait until the IRS gets your information from a foreign source, the risk of high monetary penalties and criminal prosecution increases dramatically.  We can help you get compliant and avoid these problems before it is too late.  Email us at ddnelson@gmail.com for further assistance or with questions.

  

CALIFORNIA 2011 RETROACTIVE TAX INCREASE

The California voters have spoken. They passed 

Proposition 30  which retroactively increases income taxes effective January 1, 2012 for those with high incomes. The following rate increases are effective for seven years:

Governor's Ballot Initiative
10.3% (1% increase) on income of:	$250,001–$300,000 for single/MFS; $340,001–$408,000 for HOH; and $500,001–$600,000 for MFJ.
11.3% (2% increase) on income of:	$300,001–$500,000 for single/MFS; $408,001–$680,000 for HOH; and $600,001–$1,000,000 for MFJ.
12.3% (3% increase) on income of:	More than $500,000 for single/MFS; More than $680,000 for HOH; and More than $1,000,000 for MFJ.

(Note: Income in excess of $1 million is also subject to the 1% mental health surcharge.)

Chief of IRS Criminal Investigation Divisions Comes After Those No Disclosing Foreign Accounts and Assets

 On October 18th, the chief of the IRS’ Criminal Investigation Division, Richard Weber, stated that his 4000 special agents will continue to focus on unreported foreign bank accounts.

You do not want to see one
of these in person

The requirement to file FBARs (Report of Foreign Bank and Financial Accounts) dates back to the Bank Secrecy Act in the 1970′s. No attempts were made to enforce this until until the last 4 to 5 years.  Failure to report a foreign account is a felony punishable by up to 5 years in prison. Civil penalties can include the greater of $100,000 or 50% of the high account balance for each year an account is unreported. Even “innocent” violations can result in penalties of up to $10,000 per year.

The  IRS has been looking at banks outside of Switzerland (where they originally began their enforcement efforts). Those banks includes several Israeli banks as well as financial institutions in the Bahamas, India, China, Australia,  Hong Kong, Liechtenstein and others not yet announced.

Speaking before a New York CPA group, Weber said that the IRS and Department of Justice would soon be announcing a new round of indictments involving unreported accounts. These prosecutions will involve banks outside of Switzerland.   The IRS has posted CID special agents around the world.  One indication is that they now have a field office in Panama which was a popular place for US taxpayers to hide their money and income.

There is presently an amnesty program to help taxpayers with unreported accounts. This includes those with foreign hedge funds, investments, bank accounts, CD’s and the like. The program, called the 2012 Offshore Voluntary Disclosure Program offers greatly reduced penalties and a promise of no criminal prosecution.  This program may not work for everyone. Some taxpayers may achieve lower or no penalties by negotiating directly with the IRS outside of the Disclosure program.  The important part is not to wait until the IRS discovers you first because it will then be too late to avoid higher penalties and criminal prosecution.

The procedures and rules for entering the program or surfacing with the IRS outside of the program are complicated.  You should speak with  a tax lawyer right away if you are one of the millions with unreported accounts (and other foreign assets that require reporting on your tax return such as foreign corporations, foreign partnerships and LLCS, passive foreign investment companies, etc.)

Don D. Nelson, Attorney, CPA with over 20 years of expatriate and international tax experience has represented or advises hundreds of clients with a wide variety of offshore reporting issues. His  clients include dual nationals, US permanent residents, taxpayers with offshore accounts, and expatriates who have businesses abroad or who have retired in other countries.

For more information, contact him at ddnelson@gmail.com.  All inquiries are protected by the attorney – client privilege and kept in strict confidence.

US Nonresidents Must Pay Tax on Their US Income

If you are a US nonresident (this is someone who does not have a green card or is not a US Citizen) and come to the US to work for a few months, you are obligated file a US tax return on your US source earnings (whether paid by a US company or a foreign company).  Your earnings might be exempt from tax under US tax treaty with your home country, but you still need to file the return to claim that  treaty exemption. Depending on the social security agreements in effect, it might even be subject to US self employment tax (social security) if you are an independent contract.

If you as a nonresident are going to file a US tax return, you need to secure a taxpayer identification number also. That process has recently become somewhat cumbersome and difficult.


A nonresident working in the US may under the laws of the state in which he or she works also be required to file a state tax return.

Failure to file a tax return will result in the statute of limitations for later requiring a return or tax to never run out.  Therefore, when in doubt you should as a nonresident always file a return.

The good news is that US nonresidents are not subject to tax on their interest income from banks, savings and loans and US treasury bills or on their capital gains from the sale of US stocks (so long as theses are investments and not connected with their US business).

Learn more about the US taxation of nonresidents at www.TaxMeLess.com 

List of IRS Tax Resources

The following IRS resources  listed on our website including  tax publications for US expatriates, US nonresidents,  US tax treaties, etc should answer most of your tax questions.  CLICK HERE TO GO TO RESOURCE PAGE.

If you have other questions, please email us at ddnelson@gmail.com.  Don D. Nelson, Attorney at Law, CPA.

NEW ZEALAND TO NEGOTIATE FATCA AGREEMENT WITH THE US

New Zealand will negotiate a FATCA agreement with the US. This means bank, stock broker and other financial information on US Citizens and green card holders living in New Zealand or with accounts there will be sent to the US IRS.

There will be no way to avoid extreme penalties and possible criminal prosecution once this agreement becomes effective. Now is the time to file all past due US tax returns and foreign account reporting forms. The IRS will not be as lenient once they receive the information from New Zealand and discover you have not filed these forms.  Dual Citizens and Green Card holders must still file a US tax return on their worldwide income regardless of their status.  Let us know if you need help.  We offer the privacy and confidentiality of  Attorney client privilege to all clients. Write us a ddnelson@gmail.com.  Visit our website at www.taxmeless.com  for more information on your US filing requirements.

READ MORE HERE.

Avoiding California State Income Taxes Moving Abroad

It is often difficult to give up your obligation to pay California taxes when starting to work abroad.  California is an "Intent State."  That California wants to continue to tax you until you show the intent of moving your tax domicile to another country or state.  They  look at all of the facts and circumstances in retrospect years later to determine if you actually had the "intent" to move your tax residency to another country.

There is a solution to the ambiguities involved with successfully giving up your California residency for tax purposes. That is the Safe Harbor Rule which can be used. Under that rule:

• You must remain living and working outside of California for at least 546 days under a contract of employment;
• You do not have more than $200,000 in investment income;
• You do not return to California more than 45 days during any calendar year.

If you meet these criteria, you are automatically deemed to be a California nonresident for the period you work abroad even though you may still have a California drivers license, voter registration, etc.

It is important to successfully avoid California tax domicile status when living abroad since California does not allow the foreign earned income exclusion or foreign tax credits. If means if you remain a California tax resident a lot of taxes may be due.

Some states make it even tougher to give up the obligation to pay state taxes when working abroad. Virigina and New Mexico are just a few.

We can help you avoid continuing having to pay state taxes when you move abroad to work or retire. Contact us if you have questions or concerns at ddnelson@gmail.com.

IRS INFLATION ADJUSTMENT - DEDUCTION INCREASES FOR 2013

• The foreign earned income exclusion will go from $95,100 to $97,600 for 2013.  Remember if both spouses work they can each claim up to that amount on their separate foreign wages on form 2555.
• The gift tax exclusion (threshold after which you must file a gift tax return) is increased from $13,000 to $14,000.  If a husband and wife both give the gift (and both are US taxpayers) they can claim a combined exclusion of $28,000 in 2013.  Gifts for education costs and health care are not subject to gift tax.
• The maximum contribution limits by an employee to a 401K plan increases to $17,500 in 2013.
• The social security ceiling for wages subject to that tax increases to $113,700 in 2013 from the current $110,100. Their is no ceiling on the 2.3 percent medicare tax.

GUILTY OF WILLFUL FAILING TO FILE FBAR(TDF 90-22.10)?

If you sign your return and check "No" on schedule B indicating you have no foreign bank accounts that need to be reported (when you actually did have accounts) the Court has held that act alone shows willful failure to file the FBAR form. The taxpayer was fined $200,000 for failing to file the FBAR for tax year 2000.  READ MORE HERE           

Another issue we are often asked about if how far back will the IRS go to seek information from Foreign Banks on US holders of accounts. The IRS is now asking Liechtenstein Landesbanks for records going back to 2004. This is the first announcement that clearly indicates if you have not been filing FBAR forms for past years it is best to go back and file those forms now. The statute of limitations is six years on FBAR forms for the IRS to seek civil and criminal penalties.

We recommend if you are required to file the form all taxpayers immediately file their FBARs before the IRS gets lists from foreign banks.  They will be cross-checking the information on the banks lists with those who have filed FBARs.  Anyone who has not filed is subject to criminal penalties and monetary penalties up to 1/2 the highest balance in each account for each year that the FBAR is not filed.

Expats Can Extend Tax Return Due Date Up Until 12/15/12 If Previous Extension Filed

All taxpayers are generally entitled to an automatic 6-month extension of time to file their returns by filing Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return, , with the Internal Revenue Service.

In addition to this 6-month extension, taxpayers who are out of the country (as defined in the Form 4868 instructions) can request a discretionary 2-month additional extension of time to file their returns (to December 15 for calendar year taxpayers).

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

Internal Revenue Service CenterAustin, TX 73301-0215USA

You will not receive any notification from the Internal Revenue Service unless your request is denied for being untimely.  Therefore it is best to send this letter extension request by Certified Mail Return Receipt or another method where you have proof the request was sent in timely.  If you are sending your request by DHL, UPS or Fed Exp from abroad, the street address for delivery is on our website at www.taxmeless.com.

The discretionary 2-month additional extension is not available to taxpayers who have an approved extension of time to file on Form 2350 (for U.S. citizens and resident aliens abroad who expect to qualify for special tax treatment).

UAE to Join the Network to Exchange Tax Data with US and Other Countries

The UAE is expected shortly to join the  OCED which is the network of countries that join have joined together to share economic data which includes tax data on residents of those countries with other members of the OCED.  The USA is a member of the OCED which means US expats living in those other countries will have their income and other  financial information reported to the US International. Do not make the mistake of thinking because the United Arab Emirates has no income taxes information on your will not be sent to the IRS.. READ MORE HERE ABOUT THE UAE tax information sharing arrangement.

For an up to date list of the OCED members who are sharing tax information with each other CLICK HERE.  If you live and work on one of these countries, your income and financial information will ultimately or may have already been shared with the IRS.