Additional Extension of Time for Taxpayers Out of the Country

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, also available en español, 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 extension, you must send the Internal Revenue Service a letter explaining the reasons why you need the additional 2 months. Send the letter by the extended due date (October 15 for calendar year taxpayers) to the following address: Internal Revenue Service Center Austin, TX 73301-0215 USA You will not receive any notification from the Internal Revenue Service unless your request is denied for being untimely. 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).

Mexican Fideicomisos Requirement to File Forms 3520 & 3520A As a Foreign Trust

In Mexico Fideicomisos hold title to  certain real property owned  by non-Mexicans citizens. A Mexican bank is designated as the Trustee and the wording of the Fideicomiso document is clearly that of a trust.  The IRS has never made a written pronouncement or ruling that excludes Fideicomisos from the requirement that they file annually  Forms 3520 and 3520A.  Penalties for not filing these forms or filing them late are huge and can be up to 15% of the value of the property in the trust.

A Texas attorney recently has been widely circulating a  written opinion she wrote and a copy of her  email alleging that Mexican Fideicomisos may not be foreign trusts and  are not required to File Forms 3520 and 3520A. Her email cites a situation where the IRS informally agreed that her client did not have to file Forms 3520/3520A or pay any penalty for not filing.

We have checked with an IRS representative who directly deals with these issues.  They stated it is very unlikely that in the near future the IRS will ever issue any written ruling or opinion that Fideicomisos do not have to file these foreign trust reporting forms or are not foreign trusts.  

Informal decisions made by the IRS by law cannot be cited as authority by other taxpayers by law. The law also states  written private letter rulings in almost every circumstance cannot be cited as authority by other taxpayers.  Therefore reliance on a privae attorney's written opinion or an informal decision by the IRS can be very risky and will offer no protection in the event you fail to comply with currently accepted IRS filing requirements.  Filing the 3520/3520A form also would be significantly cheaper than going to Court to fight the IRS on this issue when you cannot even cite the informal decision as authority.

Until the IRS (if ever) declares in writing that  Fideicomiso's are exempt from the foreign trust filing requirements or are not foreign trusts, all owners of property in Mexico which hold their title through Fideicomiso's  should continue to file Forms 3520 and 3520A each year to avoid being assessed large monetary penalties by the IRS.

Court says government failed to establish that taxpayer "willfully" concealed offshore account

United States v. J. Bryan Williams; No. 1:09-cv-00437

The U.S. District Court for the Eastern District of Virginia, September 1, 2010, found that the government had failed to meet its burden to establish by a preponderance of the evidence that a taxpayer willfully failed to report his interest in a foreign bank accounts that were omitted from the individual's 2000 tax return as the record indicated that the accounts had been frozen in November of the previous year at the behest of the U.S. government.

Facts. In 1993, the defendant, J. Bryan Williams, opened up two Swiss bank accounts in the name of ALQI Holdings, Ltd., and over the course of seven years deposited in excess of $7 million in assets.

On Williams' 2000 tax return, the foreign accounts were not disclosed, nor was a Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts) (FBAR), filed by the June 30, 2001, deadline (for the 2000 tax year).

In January 2002, the defendant disclosed his financial interests in the offshore accounts to an IRS agent, based on advice received from his tax attorneys and accountants. Further disclosures were made:

·       Upon the filing of his 2001 tax return (October 2002);

·       In an application to participate in the Offshore Voluntary Compliance Initiative (February 2003);

·       In amended returns for 1999 and 2000 (filed February 2003);

·       While pleading guilty to tax fraud (May 2003) as well as to conspiracy charges and tax evasion for the offshore funds from 1993 to 2000 (June 2003); and

·       Upon filing his filing of form TD F 90-22.1 for tax years 1993 through 2000 (January 2007).

The facts also indicated that Williams met with Swiss authorities in 2000 and that his Swiss accounts were frozen on November 14, 2000, "at the behest of the U.S. government." Although the government had earlier stipulated to November 14, 2000, as the date the accounts were froze, it appears that government sought to disavow such stipulation and sought to argue that the accounts were not frozen until a later time.

Court's opinion. The government sought to enforce its assessment of two FBAR penalties against the defendant for willfully failing to report his interest in his offshore accounts for the tax year 2000.

The government argued that the defendant's signature on his Form 1040 was prima facieevidence that Williams knew the contents of his tax return.

The court found, however, that while Williams had in fact not disclosed his offshore account on his original 1040 for the 2000 tax year, such actions occurred after he found out that the U.S. and Swiss authorities found out about the ALQI accounts. Thus, in the court's view, Williams was aware that the authorities knew about his offshore accounts by the fall of 2000, long before the FBAR deadline of June 30, 2001.

The court said that such evidence demonstrated that Williams lacked any motivation to willfully conceal his offshore accounts on his 2000 tax return, and thereafter.

"Williams' subsequent disclosures throughout 2002 and 2003 corroborate his lack of intent," the court said. "Though made after the June 30, 2001 deadline, Williams' disclosure of the ALQI accounts to John Manton of the IRS in January 2002 indicates to the Court that Williams continued to believe the assets had already been disclosed. That is, it makes little sense for Williams to disclose the ALQI accounts merely six months after the deadline he supposedly willfully violated."

Treasury Inspector General Finds 10% of Foreign Earned Income Exclusions claimed in 2008 Are Invalid or Erroneous

TIGTA Finds Significant Loss in IRS Revenue Because of Erroneously Claimed Foreign Earned Income Tax Exclusions

WASHINGTON - The Internal Revenue Service (IRS) lost an estimated $90 million in revenue for Tax Year 2008 because of erroneously claimed foreign earned income tax exclusions, according to a report publicly released today by the Treasury Inspector General for Tax Administration (TIGTA).

The foreign earned income tax exclusion allows a taxpayer to exclude up to $91,500 of foreign earned income. A taxpayer qualifies for this exclusion if he or she has foreign income and a home in a foreign country. An eligible taxpayer designates this status by filing Form 2555 (Foreign Earned Income) with the IRS.

TIGTA conducted a performance audit to assess the IRS's ability to ensure the accuracy of these exclusions. TIGTA reviewed 231,277 tax returns from Tax Year 2008 and found that 10 percent (23,334) of taxpayers claiming the exclusion either failed to qualify for the exclusion or inaccurately computed the exclusion. The income erroneously excluded totaled $675 million. The estimated tax avoided totaled $90 million.

"This is very troubling. Over five years, the estimated revenue loss to the IRS could total more than $450 million," said J. Russell George, Treasury Inspector General for Tax Administration. "Improvements must be made to reduce erroneously claimed foreign earned income tax exclusions," he added.

TIGTA made seven recommendations to the IRS in this report, and the IRS agreed with four of the seven recommendations.

To review the report, including the scope and methodology, go to: http:www.treas.gov/tigta/auditreports/2010reports/201040091fr.pdf.

NEW FOREIGN ACCOUNT TAX COMPLIANCE ACT - REPORTING REQUIREMENTS

The new Foreign Account Tax Compliance Act (FATCA) requires that taxpayers report all foreign financial assets if the aggregate current fair market value of all such assets equal $50,000 or more. Foreign financial assets include foreign bank accounts, brokerage accounts, stocks, bonds, and ownership in foreign entities such as foreign corporations, partnerships, trusts, and LLCs.   The IRS has the ability under the new law to define almost any asset located outside the US as a foreign financial assets required to be reported under this law. They will in the future be issuing regulations defining the type of assets they have determined are included under this new law.

These items will either be reported on an attachment to your US tax return or the IRS is most likely to create a new tax form to attach to your return for the reporting. For each such asset you must state full information including account numbers, name and address of financial institution or stock issuer, and the highest value of the foreign asset during the tax year.

If you meet the aggregate $50,000 in value threshold, you will have to report all the information on each asset regardless of the percentage you own or its small value. All other foreign asset reporting forms such as FBARs, Form 5471, 8865, 3520, 3520A, etc must also still be filed if required.

The minimum penalty for failing to report this data begins at $10,000 and can go up from there depending on the circumstances.  This is generally effective for tax years that begin after 3/18/10.

NEW HIRE-FATCA ACT PASSED IN EARLY 2010 HAS SOME CHANGES FOR FOREIGN TRUSTS AND FIDEICOMISOS

A widely distributed article recently published by some attorneys contains some dire warnings about the  adverse income tax  consequences of the new foreign trust provisions in the HIRE-FATCA Act passed early in 2010 with respect to Fideicomisos (which the IRS currently requires file Forms 3520 and 3520A  because the IRS currently holds Fideicomisos  to be foreign trusts).  The conclusions in this article are  most likely not correct if the Fideicomiso has no income and contains property held for investment or held for personal use by the beneficiary (not a rental property). The IRS has not at this time ( nor is it likely to  in the near future)  issued any regulations further explaining the effect of the provisions of the new law on Fideicomisos and foreign trusts.  What the regulations or further guidance may say is pure speculation.  The general principles of trust taxation which are most likely to apply are stated in the next paragraph.

Under general trust tax law involving income and distributions from trusts to beneficiaries, unless the trust generates taxable income, the mere fact that personal use of foreign trust real property by a beneficiary is treated as a distribution to that beneficiary, will not cause the personal use to be taxed to the owner or beneficiary of the Fideicomiso because distributions from trusts are only taxable to the extent of the trusts DNI (Distributable Net Income).

You must keep in mind that  until the IRS issues further guidance and regulations on this new law, you cannot be certain they will not "twist" its interpretation of the new changes in a manner which is not consistent with prior long standing us trust tax principles. Therefore some uncertainty will exist until then.

FIVE TAX SCAMS LISTED BY IRS INCLUDE HIDING ASSETS AND INCOME OFFSHORE

The Internal Revenue Service issues a list of the top 12 tax scams each year – known as the Dirty Dozen. The scams are illegal and can lead to problems for taxpayers including significant penalties, interest and possible criminal prosecution. These scams don’t just happen during the tax filing season, they can happen anytime during the year. Here are five scams from the 2010 Dirty Dozen list every taxpayer should be aware of this summer.

1. Phishing Phishing is a tactic used by scam artists to trick unsuspecting victims into revealing personal or financial information in an electronic communication. Scams can take the form of e-mails, tweets or phony websites and they try to mislead consumers by telling them they are entitled to a tax refund from the IRS and they must reveal personal information to claim it. Regardless of how official this e-mail may look and sound, the IRS never initiates unsolicited e-mail contact with taxpayers about their tax issues. Phishers use the personal information obtained to steal the victim’s identity, access bank accounts, run up credit card charges or apply for loans in the victim’s name. If you receive an e-mail that you suspect is a phishing attempt or directs you to an imitation IRS website, please forward it to the IRS at phishing@irs.gov. You can also visit IRS.gov and enter the keyword phishing for additional information.
2. Return Preparer Fraud Dishonest tax return preparers can cause trouble for taxpayers who fall victim to their ploys. Such preparers are skimming a portion of their clients’ refunds, charging inflated fees for tax preparation or are attracting new clients by promising refunds that are too good to be true. To increase confidence in the tax system, the IRS is requiring all paid return preparers to register with the IRS, pass competency tests and attend continuing education.
3. Hiding Income Offshore Taxpayers have tried to avoid or evade U.S. income tax by hiding income in offshore banks and brokerage accounts. IRS agents continue to develop their investigations of these offshore tax avoidance transactions using information gained from more than 14,700 voluntary disclosures received last year. Taxpayers also evade taxes by using offshore debit cards, credit cards, wire transfers, foreign trusts, employee-leasing schemes, private annuities or life insurance plans.
4. Abuse of Charitable Organizations and Deductions The IRS continues to observe the misuse of tax-exempt organizations. This includes arrangements to improperly shield income or assets from taxation and attempts by donors to maintain control over donated assets. The IRS also continues to investigate various schemes where donations are highly overvalued or the organization receiving the donation promises that the donor can purchase the items back at a later date at a price the donor sets.
5. Frivolous Arguments Promoters of frivolous schemes encourage people to make unreasonable and outlandish claims to avoid paying the taxes they owe. If a scheme seems too good to be true, it probably is. The IRS has a list of frivolous legal positions that taxpayers should avoid on IRS.gov. These arguments are false and have been thrown out of court.

For the full list of 2010 Dirty Dozen tax scams or to find out how to report suspected tax fraud, visit IRS.gov.

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

 ------------------------------

 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.