Expats Guide to Surviving and IRS Audit

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

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

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

US Flow Through Tax Election for Your Foreign Corporation or LLC

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

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

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

SWISS GOVERNMENT OFFERS TO MAKE DEAL WITH IRS

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

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

Form 8938 proposed instructions analyzed

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

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

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

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

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

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

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

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

Tax Rules for Contractors in Afghanistan, Iraq and Middle East

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

Costa Rica Banks Will Report US Taxpayers Holdings to IRS

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

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

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

Transferring You Taxable Profits Offshore to Reduce Taxes

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

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

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

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