TDF 90-22.1 FOREIGN FINANCIAL ACCOUNT REPORT DUE 6/30/10 - STREET ADDRESS TO USE FOR DHL, FED EXP OR UPS DELIVERY

TDF 90-22.1 FOREIGN FINANCIAL ACCOUNT REPORT DUE 6/30/10 - STREET ADDRESS TO USE FOR DHL, FED EXP OR UPS DELIVERY 

The following street address should be used to file TDF 90-22.1 (FBAR) form when the US mail is not available for delivery. These private delivery services will not deliver to the PO Box shown delivery address shown on the form's instructions.:

IRS Detroit Computing Center
Attn: FBAR Mailroom
4th Floor
985 Michigan Ave.
Detroit, MI 48226
(313) 234-1062
This form must be filed immediately. If it does not arrive by 6/30/10, you may incur a $10,000 late filing penalty. The fine can be greater if you do not file at all and also might include criminal prosecution.  When in doubt whether you owe the form to the US Treasury, best to file just to be certain there are no problems since it does not cause any additional income tax cost, and is only a reporting form.

IRS PROPOSES JOINT AUDITS OF INTERNATIONAL COMPANIES - INDIVIDUALS WILL PROBABLY BE NEXT

The IRS Commissioner has proposed joint audits of International Companies by the US and the tax agency of the Country in which they are doing business abroad.  This is a further extension of the general worldwide opinion that if all country taxing agencies work together they will all benefit by increased tax collection.

This is just the first step of what will most likely follow in a few years (or less) which will be joint country audits of individuals living and working abroad.  This means that in the future the IRS  and the foreign country taxing agency will institute joint audits of US individuals living and working abroad.

The commissioner also talked about the new rules for 2010 about reporting foreign financial assets. For more click here or on the caption to this article to go to the details of the Commissioner's remarks.

Due Date for Other Foreign Tax Reporting Forms

Form 5471 ( filed if you own a foreign corporation) and Form 8865 (filed if you participate in a foreign partnership) are both due by the extended due date of your personal tax return. Forms 3520 (for foreign trusts) is also due by the extended due date of your personal tax return.  However form 3520A which is also filed for foreign trusts is due on 3/15 of each year, but can be extended using Form 7004 to September 15th following the end of the calendar year.

There are severe and punitive penalties for failing to file these forms at  at all or for filing them late.

IMPORTANT DUE DATES ARE NEAR FOR EXPATRIATES

If you were living and working abroad on 4/15/10, the due date of your return (but not payment of any tax due) was automatically extended until 6/15/10. You can further extend your personal income tax return by filing Form 4868 by 6/15/10 until 10/15/10. The extension must be send by US mail or UPS, DHL or Fed Express overnight express service and dated or postmarked on the 15th.

The Foreign Bank and Financial Account reporting form TDF 90-22.1 is must be received by the Detroit address it must be mailed to (it is filed separately from your Form 1040) by 6/30/10. Failure to file that form or filing it late will result in an IRS penalty of $10,000 or more. This form must be filed if your personal foreign accounts or the foreign accounts you sign on but have no ownership interest equal or exceed $10,000 at any time during 2009 when all accounts are aggregated together (combined in one total). That means even though no individual account exceeds $10,000 if you combine the highest balances during 2009 together an that amount is met or exceeded you must file the form. This includes foreign stock broker accounts and any type of foreign account in which an entity holds custody of financial assets (such as credit balances in foreign credit card accounts)

US Department of Justice to Seek Criminal Prosecution Against Those Using Offshore Banks to Evade Taxes

In addition to the recent case against the Swiss bank UBS, the US Department of Justice will pursue thousands of additional situations of U.S. citizens evading taxes through offshore bank accounts and when appropriate seek criminal prosecution.

According to Reuters, Kevin Downing, a senior tax attorney at the DOJ, said the U.S. expects to examine between 4,000 and 7,000 cases with both banks and governments cooperating in the probe.
Last year, UBS agreed to pay $780 million and hand over 4,450 client names to settle charges after it admitted helping U.S. clients evade U.S. tax law.

Last year, roughly 15,000 Americans with offshore accounts participated in an amnesty program that reduced penalties and avoid criminal prosecution.

There is nothing illegal about having money in offshore bank and financial accounts. However, you must report all income produced on your US tax returns and file Form TDF 90-22.1 for each calendar year by June 30th of the following year if the highest balances in all accounts during the year (when combined together) equal $10,000 or more at any time during the year. If this form is not timely filed, you can be criminally prosecuted.

502 Expats Renounce Their US Citizenship in fourth quarter of 2009

According to government records, 502 expatriates renounced U.S. citizenship or permanent residency in the fourth quarter of 2009 — more than double the number of expatriations in all of 2008. And these figures don't include the hundreds — some experts say thousands — of applications languishing in various U.S. consulates and embassies around the world, waiting to be processed. While a small number of Americans hand in their passports each year for political reasons, the new surge in permanent expatriations is mainly because of taxes. Click on the Banner to this article to go to the Time Magazine Article.

Our firm has helped scores of Expats with the Tax Planning and Special Tax Forms Required to successfully surrender Citizenship and stop paying US Taxes. Visit our website at www.TaxMeLess.com for more.

Fast Facts on US Expatriate Taxation and International Tax Preparation

·         If you are a US Citizen you must file a US tax return every year unless your income is less than $ 9,350  (for 2009 and lower for earlier years) or have self employment-independent contractor  net income of more than $  400 US per year.  You are taxable on your world wide income regardless of whether you filed a tax return in your country of residence.

·         As an US expatriate living abroad on 4/15, your 2009 tax  return is automatically extended until 6/15 but any taxes due must be paid by 4/15 to avoid penalties.  The return can be further extended until 10/15/10 if the proper extension is filed.

·         For 2009 if you are a qualified expatriate you get a foreign earned income exclusion (earnings from wages or self employment) of $91,400, but this exclusion is only available if you file a tax return.

·         If your spouse works and lives abroad, and is qualified, she can also get at $91,400 foreign earned income exclusion.

·         You get credits against your US income tax obligation for taxes paid to foreign country but you must file a return to claim these credits.

·         If you own 10% or more of a  foreign  corporation, LLC or partnership or are a beneficiary of a Foreign Trust such as a  Fideicomiso in Mexico, you must file special IRS forms each year or incur substantial penalties which can be greater including criminal prosecution if the IRS discovers you have failed to file these forms.

·         Your net self employment income or independent contractor income  is subject to US self employment tax of 15.3% (social security) which cannot be reduced or eliminated by the foreign earned income exclusion unless you work in one of the few countries the US Social Security Administration has a social security agreement with.  If you live in one of those countries you must secure a required certificate to prove your exemption from US self employment tax.

·         If at any time during the tax year your combined highest balances in your  foreign bank and financial accounts such as brokerage accounts, etc. (when added together) ever equal or exceed $10,000US you must file a FBAR form with the IRS by June 30th for the prior calendar year or incur a penalty of $10,000 or more including criminal prosecution. This form does not go in with your personal income tax return and is filed separately at a separate address.

·         We understand the foreign income tax laws and can coordinate your US taxes with those you pay in your foreign country of residence to help you achieve the optimum tax strategy.

·         In the past year the IRS has hired more than 800 new employees to audit, investigate and discover Americans living abroad who have failed to file all necessary tax forms.

·         Often due to foreign tax credits and the the foreign earned income exclusion expats living abroad  when filing  all past year unfiled tax returns and end up owing no or very little US taxes.

·         Beginning in 2010 a new law is in effect which requires all US Citizens report all of their world wide financial assets if in total the value of those assets are $50,000 or more.  Congress has left it up to the IRS to define what is a “financial asset.”

·         Income from certain types of foreign corporations are immediately taxable on the US shareholder's personal income tax return.  If your corporation only provides your personal services to customers you may have a Foreign Personal Holding Company which would cause all income to be immediately taxable to you.

·         If you own investments in a foreign corporation or own foreign mutual fund shares you may be required to file the IRS forms for owning part of a Passive Foreign Investment Company (PFIC) or incur additional, taxes and penalties for your failure to do so. A PFIC is any foreign corporation that has more than 75% of its gross income from passive income or 50 percent or more of its assets produce or will produce passive income.

·         The IRS is now matching up your US passport with your US tax records and now knows if  you  have not been filing all required US tax returns while you are living  in Mexico.  The IRS recently sent Agents to Australia and China to locate bank accounts owned by Americans who are not reporting the income and ownership on the required IRS forms.

·         Download your 2009 US tax return questionnaire drafted expressly for Americans living in Mexico at  http://www.taxmeless.com/07_Expat_Questionnaire__v2.doc

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 Don  D. Nelson, Attorney, CPA has been assisting US Citizens and Permanent Residents in over 40 countries around the world with their US tax planning, tax return preparation, and other tax / legal matters for 20 years. He offers his clients attorney-client privilege which is not available from other tax accountants. He has helped hundreds of US expatriates around the world “catch up” filing their past late returns most often with little or no tax cost to you the delinquent taxpayer. Don has written expatriate and International tax articles for the Gringo Gazette and for EscapeArtist.com  for the last eight years. His main office is at 34145 Pacific Coast Highway #401, Dana Point, California 92629 USA.  Visit his website at www.TaxMeLess.com or www.expatattorneycpa.com . Email Don at ddnelson@gmail.com. US Phone 949-481-4094 or US fax 949-218-6483.  Our phone in Mexico is 52 624 131-5228, Skype address: dondnelson.

Our Tax Services Include

ü  Tax Return Preparation – current and past years

ü  All state returns

ü  US Tax Forms for Fideicomisos and Mexican Corporations

ü  IRS Collection and Audit Representation

ü  International Tax Planning & Strategies

ü  US and International Estate Planning

ü  Formation of US Corporations, LLCs, Limited Partnerships and Trusts in Nevada, California and other states

ü  US Citizenship Expatriation (Never have to pay US income taxes again)

ü  IRS and State Offers in Compromise and Payment Plans

Mini Tax Consultations are available for you to discuss with Don your personal tax situaton and secure his counsel resolving your tax problems  by phone or email. No personal visit is required.

   

IRS Increased its Audits of Small Companies Through Return per Audit Hour is only 1/8th of Return When Auditing Large Companies

The Internal Revenue Service (IRS) has reduced the number of hours agents spend auditing corporations with assets of $250 million or more by one-third since 2005 and increased the number of hours spent on audits of companies with assets of less than $10 million by 30 percent, according to a report bythe Transactional Records Access Clearinghouse (TRAC), a nonpartisan research group affiliated with Syracuse University.  

This trend in IRS priorities will not yield greater revenue gains. Data show that audits of larger corporations produce significantly higher returns per audit hour – $9,354, for audits of large corporations compared to $1,025 for small to mid-size companies. Revenue per audit hour for large companies increased from $6,594 in the five-year period revenue from audits of small to mid-size companies actually decreased in 2009 from the $1,294 reported for 2005.

 

IRS statistics show 94 percent of tax underreporting comes from large companies, with only 6 percent coming from small companies, the study reports.

 

The authors of the study, TRAC co-directors Susan Long and David Burnham, find that that the current political context makes this shift even more puzzling. "The dramatic collapse in the auditing of those corporations with assets of $250 million or more has occurred during a period of increasing national concerns about growing federal deficits, growing public distrust of big business, and intense worry about the extent of white collar crime personified by executives like the investment adviser, Bernard Madoff."

 

President Obama's 2008 Tax Return

Compare your tax return to President Obama's 2008 Federal Tax Return

U.S. begins new wave of UBS client tax fraud and evasion cases

 U.S. prosecutors are beginning a new wave of UBS-related tax-evasion cases against individuals ahead of the April 15 tax-filing deadline, sources familiar with the proceedings said on April 6, 2010. The first case in the new round of prosecutions — intended to create a splash of media attention before tax day — was filed on Tuesday in the U.S. District Court for the Southern District of Florida, where many of the cases have been prosecuted, according to court documents. The sources, who were not authorized to comment on the record, said cases coming within days will charge individuals with evading U.S. taxes by using accounts at the Swiss bank and will be prosecuted in New York City and elsewhere.

The government has secured eight guilty pleas so far from UBS clients since the bank admitted that it helped taxpayers avoid U.S. taxes. UBS last year paid the government $780 million and gave information about 250 accounts to the U.S. authorities. UBS AG client Paul Zabczuk of Woodlands, Texas, pleaded guilty to failing to account for funds held in a UBS account in Switzerland. Also last year, UBS settled the government's civil case against it and agreed to hand over 4,450 more client names, though that deal is tied up in legal wrangling in Switzerland.

The Internal Revenue Service and its lawyers want to make a "big splash" to remind people of their duty to report offshore income, one source said. The cases prosecuted so far involved UBS clients with accounts in the range of $10 million and less. Two sources said some of the new cases would be within that range. On April 5, Commissioner Shulman said the agency is still sifting through an additional 15,000 records it received from individuals who took part in an IRS amnesty program for offshore income that ended last year. The agency is looking for patterns in the records to identify other banks and advisers that helped wealthy individuals avoid taxes. That area will be "the next wave," of the investigation, Shulman said, without naming other banks.

NEW LAW ENACTED ENFORCING AND BROADENING REPORTING OF FOREIGN ENTITIES, ASSETS, ETC

The President recently signed into law the “Hiring Incentives to Restore Employment Act of 2010” (the HIRE Act, P.L. 111-47 ). The HIRE Act includes a comprehensive set of measures to reduce offshore noncompliance by giving IRS new administrative tools to detect, deter and discourage offshore tax abuses, as well as a three-year delay (through 2020) of implementation of worldwide allocation of interest—the liberalized rule for allocating interest expense between U.S. sources and foreign sources for purposes of determining a taxpayer's foreign tax credit limitation. An overview of these provisions follows.


Increased disclosure of beneficial owners


Reporting on certain foreign bank accounts. The Act imposes a 30% withholding tax on certain income from U.S. financial assets held by a foreign institution unless the foreign financial institution agrees to disclose the identity of any U.S. individual with an account at the institution (or the institution's affiliates) and to annually report on the account balance, gross receipts and gross withdrawals/payments from such account. Foreign financial institutions would also be required to agree to disclose and report on foreign entities that have substantial U.S. owners. Congress expects that foreign financial institutions will comply with these disclosure and reporting requirements in order to avoid paying this withholding tax. These provisions are effective generally for payments made after 2012.
Reporting on owners of foreign corporations, foreign partnerships and foreign trusts. The Act requires foreign entities to provide withholding agents with the name, address and tax identification number of any U.S. individual that is a substantial owner of the foreign entity. Withholding agents are to report this information to the U.S. Treasury Department. The Act exempts publicly-held and certain other foreign corporations from these reporting requirements and provides the Treasury Department with the regulatory authority to exclude other recipients that pose a low risk of tax evasion. Any withholding agent making a withholdable payment to a foreign entity that does not comply with these disclosure and reporting requirements is required to withhold tax at a rate of 30%. These provisions are effective generally for payments made after 2012.


Extending bearer bond tax sanction to bearer bonds designed for foreign markets. Bearer bonds (i.e., bonds that do not have an official record of ownership) allow individuals seeking to evade taxes with the ability to invest anonymously. Recognizing the potential for U.S. individuals to take advantage of bearer bonds to avoid U.S. taxes, Congress took a number of steps in the 1980's to eliminate bearer bonds in the U.S. First, they prevented the U.S. government from issuing bearer bonds that would be marketed to U.S. investors. Second, they imposed sanctions on issuers of bearer bonds that could be purchased by U.S. investors. The Act extends many of these sanctions to bearer bonds that are marketed to foreign investors and prevents the U.S. government from issuing any bearer bonds. These provisions apply to debt obligations issued after Mar. 18, 2012.


Foreign financial asset reporting


Disclosure of information with respect to foreign financial assets. The new law requires individuals to report offshore accounts and other foreign financial assets with values of $50,000 or more on their tax returns. Individuals who fail to make the required disclosures are subject to a penalty of $10,000 for the tax year; an additional penalty can apply if Treasury notifies an individual by mail of the failure to disclose and the failure to disclose continues. These provisions apply for tax years beginning after Mar. 18, 2010. The act give the IRS a lot of discretion to define what exactly a "financial asset" might be. It is very possible their definition may be very broad and includes many assets not previously thought of as financial assets.


Penalties for underpayments attributable to undisclosed foreign financial assets. For tax years beginning after Mar. 18, 2010, the Act imposes a penalty equal to 40% of the amount of any understatement that is attributable to an undisclosed foreign financial asset (i.e., any foreign financial asset that a taxpayer is required to disclose and fails to disclose on an information return).


New 6-year limitations period. For returns filed after Mar. 18, 2010, as well as for any other return for which the assessment period has not yet expired as of Mar. 18, 2010, the Act imposes a new six-year limitations period for omissions of items from a tax return that exceed $5,000 and are attributable to one or more reportable foreign assets. The Act also clarifies that the statute of limitations does not begin to run until the taxpayer files the information return disclosing the taxpayer's reportable foreign assets.


Other disclosure provisions


New reporting rule for PFICs. Effective on Mar. 18, 2010, activities with respect to passive foreign investment companies (PFICs) are subject to a new reporting rule. Unless otherwise provided by IRS, each U.S. person who is a shareholder of a PFIC must file an annual information return containing such information as IRS may require. A person that meets this new reporting requirement could, however, also have to meet the new reporting rule requiring disclosure of information with respect to foreign financial assets (see above). It is anticipated that IRS will exercise its regulatory authority to avoid duplicative reporting. 

More on IRS Commissioners Position on Offshore Disclosure and International Enforcement

The Journal of Accountancy has just interviewed the IRS Commissioner. The following two questions addressed the IRS on the recent Offhsore Voluntary Disclosure Program and US tax enforcement abroad:

JofA: What can you tell us about processing the estimated 14,700 voluntary disclosures last fall under the reduced-penalty program for foreign financial transaction reporting?

Shulman: For several years, we have been very focused on offshore compliance. When he was a senator, President Obama emphasized offshore compliance and then came in and immediately gave us tremendous new resources for it. [Treasury] Secretary [Timothy] Geithner made this an agenda item at the G8 [Group of Eight summit].

The U.S. government is getting very serious about rooting out offshore tax evasion. And while we’re increasing the risk that you’re going to get caught if you’re hiding assets overseas, we made an offer where people could come in and pay their taxes and interest and a stiff penalty but avoid going to jail. The response was overwhelming. We would have never imagined that 14,700 people would come in.

We are still in the early stages, wading through those returns, looking at information, at patterns of institutions or advisers who help people park money overseas and not pay taxes. Where we don’t have enough information from a taxpayer, we’re digging deeper with further questions and potential audits. This will be a treasure trove of information for us to look for and pursue other wrongdoing.

JofA: Can you say anything about what the government’s next move might be in the UBS case or other foreign financial transaction reporting initiatives?

Shulman: Our offshore compliance effort is a multifaceted and multiyear effort. Probably, the next big thing, I hope, will be passage of FATCA, the Foreign Account Tax Compliance Act. A blueprint was put forward by President Obama in his 2010 budget, and legislation has been introduced by Senate Finance Committee Chairman Max Baucus, [Former] House Ways and Means Committee Chairman Charles Rangel and others. It will require financial institutions doing business as qualified intermediaries to report more information and do more due diligence, so it will give us a lot more and better information. If people don’t sign up to be a QI, there will be withholding at the source.

The president last year gave us funding to hire 800 new people in our international operations. In the 2011 budget that was just put forward, he added funding for another 800 people, so we’re building up expertise. I’m spending a lot of time with my counterparts in foreign governments, comparing notes and sharing information, so international cooperation is being stepped up. We started a high-wealth unit recently, which will look at the web of finances of high-wealth American taxpayers, and that will include their foreign accounts and resources. We are moving on multiple fronts.

Five Facts about the Foreign Earned Income Exclusion

If you are living and working abroad you may be entitled to the Foreign Earned Income Exclusion.  Here are five important facts from the IRS about the exclusion:

1. The Foreign Earned Income Exclusion United States Citizens and resident aliens who live and work abroad may be able to exclude all or part of their foreign salary or wages from their income when filing their U.S. federal tax return. They may also qualify to exclude compensation for their personal services or certain foreign housing costs.
2. The General Rules To qualify for the foreign earned income exclusion, a U.S. citizen or resident alien must have a tax home in a foreign country and income received for working in a foreign country, otherwise known as foreign earned income. The taxpayer must also meet one of two tests: the bona fide residence test or the physical presence test.
3. The Exclusion Amount The foreign earned income exclusion is adjusted annually for inflation. For 2009, the maximum exclusion is up to $91,400 per qualifying person.
4. Claiming the Exclusion The foreign earned income exclusion and the foreign housing exclusion or deductions are claimed using Form 2555, Foreign Earned Income, which should be attached to the taxpayer’s Form 1040. A shorter Form 2555-EZ, Foreign Earned Income Exclusion, is available to certain taxpayers claiming only the foreign income exclusion.
5. Taking Other Credits or Deductions Once the foreign earned income exclusion is chosen, a foreign tax credit or deduction for taxes cannot be claimed on the excluded income. If a foreign tax credit or tax deduction is taken on any of the excluded income, the foreign earned income exclusion will be considered revoked.

New Offshore and International Tax Provisions in just enacted HIRE ACT

To pay for the hiring incentives in the recently enacted “Hiring Incentives to Restore Employment Act” (the 2010 HIRE Act), Congress passed several offsetting revenue raisers, including a comprehensive set of measures to reduce offshore noncompliance by giving IRS new administrative tools to detect, deter and discourage offshore tax abuses. Here is a brief overview of the new offshore anti-abuse provisions.

Increased disclosure of beneficial owners

Reporting on certain foreign bank accounts. The Act imposes a 30% withholding tax on certain income from U.S. financial assets held by a foreign institution unless the foreign financial institution agrees to disclose the identity of any U.S. individual with an account at the institution (or the institution's affiliates) and to annually report on the account balance, gross receipts and gross withdrawals/payments from such account. Foreign financial institutions would also be required to agree to disclose and report on foreign entities that have substantial U.S. owners. Congress expects that foreign financial institutions will comply with these disclosure and reporting requirements in order to avoid paying this withholding tax. These provisions are effective generally for payments made after 2012.

Reporting on owners of foreign corporations, foreign partnerships and foreign trusts. The Act requires foreign entities to provide withholding agents with the name, address and tax identification number of any U.S. individual that is a substantial owner of the foreign entity. Withholding agents are to report this information to the U.S. Treasury Department. The Act exempts publicly-held and certain other foreign corporations from these reporting requirements and provides the Treasury Department with the regulatory authority to exclude other recipients that pose a low risk of tax evasion. Any withholding agent making a withholdable payment to a foreign entity that does not comply with these disclosure and reporting requirements is required to withhold tax at a rate of 30%. These provisions are effective generally for payments made after 2012.

Extending bearer bond tax sanction to bearer bonds designed for foreign markets. Bearer bonds (i.e., bonds that do not have an official record of ownership) allow individuals seeking to evade taxes with the ability to invest anonymously. Recognizing the potential for U.S. individuals to take advantage of bearer bonds to avoid U.S. taxes, Congress took a number of steps in the 1980's to eliminate bearer bonds in the United States. First, they prevented the U.S. government from issuing bearer bonds that would be marketed to U.S. investors. Second, they imposed sanctions on issuers of bearer bonds that could be purchased by U.S. investors. The Act extends many of these sanctions to bearer bonds that are marketed to foreign investors and prevents the U.S. government from issuing any bearer bonds. These provisions apply to debt obligations issued after the date which is two years after the new law's enactment date.

Foreign financial asset reporting

Disclosure of information with respect to foreign financial assets. The new law requires individuals to report offshore accounts and other foreign financial assets with values of $50,000 or more on their tax returns. Individuals who fail to make the required disclosures are subject to a penalty of $10,000 for the tax year; an additional penalty can apply if Treasury notifies an individual by mail of the failure to disclose and the failure to disclose continues. These provisions apply for tax years beginning after the new law's enactment date.

Penalties for underpayments attributable to undisclosed foreign financial assets. For tax years beginning after the new law's enactment date, the Act imposes a penalty equal to 40% of the amount of any understatement that is attributable to an undisclosed foreign financial asset (i.e., any foreign financial asset that a taxpayer is required to disclose and fails to disclose on an information return).

New 6-year limitations period. For returns filed after the new law's enactment date as well as for any other return for which the assessment period has not yet expired as of the new law's enactment date, the Act imposes a new six-year limitations period for omissions of items from a tax return that exceed $5,000 and are attributable to one or more reportable foreign assets. The Act also clarifies that the statute of limitations does not begin to run until the taxpayer files the information return disclosing the taxpayer's reportable foreign assets.

Other disclosure provisions

New reporting rule for PFICs. Effective on the new law's enactment date, activities with respect to passive foreign investment companies (PFICs) are subject to a new reporting rule. Unless otherwise provided by IRS, each U.S. person who is a shareholder of a PFIC must file an annual information return containing such information as IRS may require. A person that meets this new reporting requirement could, however, also have to meet the new reporting rule requiring disclosure of information with respect to foreign financial assets (see above). It is anticipated that IRS will exercise its regulatory authority to avoid duplicative reporting.

Electronic filing. For returns the due date for which (determined without regard to extensions) is after the new law's enactment date, the Act creates an exception to the general annual 250 returns threshold for electronic filing: IRS will be permitted to issue regs requiring filing on magnetic media for any return filed by a financial institution with respect to any taxes withheld by it for which it is personally liable. Thus, IRS will be authorized to require a financial institution to electronically file returns with respect to any taxes withheld by the financial institution even though the financial institution files less than 250 returns during the year.

Provisions related to foreign trusts

Clarifications with respect to foreign trusts. Under present law, a U.S. person is treated as the owner of the property transferred to a foreign trust if the trust has a U.S. beneficiary. Under current Treasury regulations, a foreign trust is treated as having a U.S. beneficiary if any current, future or contingent beneficiary of the trust is a U.S. person. Notwithstanding this requirement, some taxpayers have taken positions that are contrary to this regulation. In order to enhance compliance with this regulation, the Act codifies this regulation into the statute. This provision is effective on the new law's enactment date. The Act also clarifies that a foreign trust will be treated as having a U.S. beneficiary if (1) any person has discretion to determine the beneficiaries of the trust unless the terms of the trust specifically identify the class of beneficiaries and none of those beneficiaries are U.S. persons or (2) any written oral or other agreement could result in a beneficiary of the trust being a U.S. person. As a final clarification, the Act clarifies that the use of any trust property will be treated as a payment from the trust in the amount of the fair market value of such use.

Presumption with respect to transfers to foreign trusts. For transfers of property after the new law's enactment date, the Act provides that if a U.S. person directly or indirectly transfers property to a foreign trust (other than a trust established for deferred compensation or a charitable trust) IRS may treat the trust as having a U.S. beneficiary unless such person can demonstrate to the satisfaction of IRS that under the terms of the trust, (1) no part of the trust may be paid or accumulated during the year for the benefit of a U.S. person, (2) that if the trust were terminated during the year, no part of the trust could be paid to a U.S. person (3) and that such person provides any additional information as IRS may require with respect to such transfer.

Minimum penalty with respect to failure to report on certain foreign trusts. Under pre-Act law, a taxpayer that fails to file an information return with respect to certain transactions involving foreign trusts (e.g., the creation of a foreign trust, the transfer of money or property to a foreign trust, or the death of a U.S. owner of a foreign trust) is subject to a penalty of 35% of the amount required to be disclosed on such return. If IRS uncovers the existence of an undisclosed foreign trust but is unable to determine the amount required to be disclose on such return, it is unable to impose a penalty. The Act strengthens this penalty by imposing a minimum penalty of $10,000 on any such failure to file. This provision applies to notices and returns required to be filed after Dec. 31, 2009. Notwithstanding this minimum penalty, in no event may the penalties imposed on taxpayers for failing to file an information return with respect to a foreign trust exceed the amount required to be disclosed on the return.

Dividend equivalent payments

Dividend equivalents treated as dividends. For payments made on or after the date that is 180 days after the new law's enactment date, the Act treats a dividend equivalent as a dividend from U.S. sources for certain purposes, including the U.S. withholding tax rules applicable to foreign persons. A dividend equivalent is any substitute dividend made pursuant to a securities lending or a sale-repurchase transaction that (directly or indirectly) is contingent upon, or determined by reference to, the payment of a dividend from sources within the U.S. or any payment made under a specified notional principal contract that directly or indirectly is contingent upon, or determined by reference to, the payment of a dividend from sources within the U.S. A dividend equivalent also includes any other payment that IRS determines is substantially similar to a payment described in the preceding sentence. Under this rule, for example, IRS may conclude that payments under certain forward contracts or other financial contracts that reference stock of U.S. corporations are dividend equivalents.

Tax Data Theft Abroad Helps US Tax Evasion Effort

Tax data thefts at HSBC in Switzerland and other offshore banks are leading more whistleblowers to come forward to U.S. tax authorities, a top Department of Justice prosecutor said on March 5, 2010. The whistleblowers -- many former bank employees who worked in information technology -- could help the U.S. government look for the next bank after UBS AG that may be helping clients evade taxes and further deter wealthy individuals from stashing money offshore. "A lot of folks, and they seem to be IT (information technology) people, see what's happening" in Germany and France and are coming to the U.S. with information, Kevin Downing, a top DOJ lawyer said to a group of private and government lawyers at a conference in Washington. "It's a cottage industry right now," Downing said, declining to name specific banks that could be implicated.

UBS agreed last year to pay $780 million and hand over 4,450 client names to settle criminal and civil charges against the bank after it admitted it actively helped U.S. clients evade U.S. tax law. Germany has said it is prepared to pay for data offered by whistleblowers on clients of Swiss banks who may have been evading taxes, even if the information has been obtained illegally. Germany's move came after France, another key market for Swiss private banks, announced it had obtained sensitive data belonging to potential tax evaders, some of which belonged to the Swiss private banking operations of HSBC

Tax enforcement authorities around the world are coordinating activities on a greater basis than ever, lawyers said. "That data got into the hands of the IRS (Internal Revenue Service)," noted George Clarke, an attorney for wealthy clients at Miller Chevalier.

IRS announces limited FBAR reporting relief

Notice 2010-23, 2010-11 IRB

A new notice provides administrative relief to certain persons who may be required to file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR), for calendar year 2009 and earlier calendar years.

Background. Each U.S. person who has a financial interest in or signature or other authority over any foreign financial accounts, including bank, securities, or other types of financial accounts, in a foreign country, if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year, must report that relationship each calendar year by filing TD F 90-22.1, with the Department of the Treasury on or before June 30, of the succeeding year.

On Aug. 31, 2009 (see Federal Taxes Weekly Alert 08/13/2009), IRS published Notice 2009-62, 2009-35 IRB 260, which extended the filing deadline for (i) persons with no financial interest in a foreign financial account but with signature or other authority over that account (“signature authority”); and (ii) persons with a financial interest in, or signature authority over, a foreign financial account in which the assets are held in a commingled fund (“foreign commingled funds”). This extension was provided in order for the Treasury Department to have the time necessary to develop comprehensive FBAR guidance.

Since the issuance of Notice 2009-62, the Treasury Department has published proposed FBAR regs, as well as proposed revisions that clarify instructions for the FBAR (see next article below).

New relief. To provide taxpayers with guidance on who is required to file FBARs due on June 30, 2010, and in particular to provide immediate guidance to taxpayers on how to answer FBAR-related 2009 federal income tax return questions (e.g., Schedule B of Form 1040, the “Other Information” section of Form 1041, Schedule B of Form 1065, and Schedule N of Form 1120), IRS is providing the following administrative relief:

·       Signature authority. Persons with signature authority over, but no financial interest in, a foreign financial account for which a FBAR would otherwise have been due on June 30, 2010, will now have until June 30, 2011, to report those foreign financial accounts. This new deadline applies to FBARs reporting foreign financial accounts over which the person has signature authority, but no financial interest, for the 2010 and prior calendar years.

·       Certain foreign commingled funds. Persons with a financial interest in, or signature authority over, a foreign commingled fund that is a mutual fund are required to file a FBAR unless another filing exception, as provided in the FBAR instructions or other relevant guidance, applies. IRS won't interpret the term “commingled fund” as applying to funds other than mutual funds with respect to FBARs for calendar year 2009 and prior years. Thus, IRS won't apply its enforcement authority adversely to persons with a financial interest in, or signature authority over, any other foreign commingled fund with respect to that account for calendar year 2009 and earlier calendar years. A financial interest in, or signature authority over, a foreign hedge fund or private equity fund is included in this relief.

·       FBAR-related questions on federal tax forms. Provided the taxpayer has no other reportable foreign financial accounts for the year in question, a taxpayer who qualifies for the filing relief provided in Notice 2010-23 should check the “no” box in response to FBAR-related questions found on federal tax forms for 2009 and earlier years that ask about the existence of a financial interest in, or signature authority over, a foreign financial account.

Treasury proposes clarifications to FBAR reporting requirements

FinCEN’s Proposes Clarifications to Foreign Bank Accounts Report (FBAR):  http://www.fincen.gov/news_room/nr/pdf/20100226.pdf

FinCEN's proposed FBAR regs:  http://www.fincen.gov/statutes_regs/frn/pdf/2010-4042.pdf.

The Treasury Department's Financial Crimes Enforcement Network (FinCEN) recently issued a Notice of Proposed Rulemaking (NPRM) proposing to amend the Bank Secrecy Act (BSA) implementing regs regarding the Report of Foreign Bank and Financial Accounts (FBAR).

Background. The FBAR form is used to report a financial interest in, or signature or other authority over, one or more financial accounts in foreign countries. No report is required if the aggregate value of the accounts does not exceed $10,000. When filed, FBARs become part of the BSA database. They are used in combination with Suspicious Activity Reports, Currency Transaction Reports, and other BSA reports to provide law enforcement and regulatory investigators with valuable information to fight fraud, money laundering, terrorist financing, tax evasion and other financial crime.

FinCEN delegated the authority to enforce the FBAR rules and to amend the form to IRS in 2003. However, FinCEN retained the authority to revise the applicable regs.

Overview of proposed changes. The proposed regs would:

·       include provisions to prevent persons from avoiding reporting requirements;

·       define a U.S. person required to file the FBAR and define the types of reportable accounts such as bank, securities, and other financial accounts;

·       exempt certain persons with signature or other authority over, but no financial interest in, foreign financial accounts from filing FBARs;

·       exempt certain low-risk accounts e.g., the accounts of a government entity or instrumentality for which reporting wouldn't be required;

·       exempt participants/beneficiaries in certain types of retirement plans and include a similar exemption for certain trust beneficiaries;

·       clarify what it means for a person to have a financial interest in a foreign account;

·       permit summary filing by persons who have a financial interest in 25 or more foreign financial accounts, or signature or other authority over 25 or more foreign financial accounts; and

·       permits an entity to file a consolidated FBAR on behalf of itself and the subsidiaries of which it owns more than a 50% interest.

Filing requirement. The proposed regs would use a new term U.S. person to indicate persons that would be required to file an FBAR. A U.S. person would be defined as a citizen or resident of the U.S., or an entity, including but not limited to a corporation, partnership, trust or limited liability company, created, organized, or formed under the laws of the U.S., any state, the District of Columbia, the Territories and Insular Possessions of the U.S. or the Indian Tribes.

This definition would apply to an entity regardless of whether an election has been made under Reg. § 301.7701-2 or Reg. § 301.7701-3 to disregard the entity for federal income tax purposes. The determination of whether an individual is a U.S. resident would be made under Code Sec. 7701(b) and its regs except that the definition of the term “United States” provided in the FinCEN regs 31 CFR 103.11(nn) would be used instead of the definition of “United States” in Reg. § 301.7701(b)-1(c)(2)(ii). FinCEN believes that this approach is appropriate because it would provide for uniformity regardless of where in the United States an individual may be. In addition, it believes this approach would take into account that individuals may seek to hide their residency in an effort to obscure the source of their income or location of their assets.

Accounts subject to reporting. The regs would be amended to add definitions of the accounts subject to reporting. Bank account would be defined a savings deposit, demand deposit, checking, or any other account maintained with a person engaged in the business of banking. Securities account would be defined as an account maintained with a person in the business of buying, selling, holding, or trading stock or other securities. The proposed regs would define “other financial account” to mean:

·       An account with a person that is in the business of accepting deposits as a financial agency;

·       An account that is an insurance policy with a cash value or an annuity policy;

·       An account with a person that acts as a broker or dealer for futures or options transactions in any commodity on or subject to the rules of a commodity exchange or association; or

·       An account with 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