FOREIGN INSURANCE EXCISE TAX - SECTION 4371/FORM 720

Very few taxpayers are aware of the US Foreign Insurance Excise Tax.  That excise tax is in general paid on premiums paid for foreign insurance on US insured risks (the individual insured or the insured items is located in the USA) including US Citizens and residents.  The types of insurance this excise insurance applies to includes life insurance, accident insurance, casualty insurance, and annuities.  The US has in its tax treaties an exemption from this tax with only a few countries.

This tax is paid  with form 720 which is normally filed quarterly.  Read more about this Foreign Insurance Excise Tax

Governments Press U.S. to Ease Overseas Tax-Cheat Law

The foreign banks are protesting that the steps they may have to take to comply with the IRS program to catch tax cheats abroad will be too expensive and burdensome.  This Bloomberg article states the whole story.

New US Estate Tax Laws - for US Citizens Living Abroad or Who Own Assets Abroad

A US Citizen is subject to US estate taxes no matter where he lives in the world. The tax is calculated on the fair market value of his worldwide assets.  That tax can usually be offset by any estate taxes paid foreign countries on properties located there. 

We are writing this  to apprise you of the estate and gift tax changes in the recently enacted 2010 Tax Relief Act. Before the new law, there was no estate tax for 2010, but some beneficiaries could have faced higher taxes because there were less favorable income tax basis rules. Also, under the prior law, estate and other transfer taxes were scheduled to rise substantially for post-2010 transfers.

Overview of the new law. The 2010 Tax Relief Act provides temporary relief. Among other changes, it reduces estate, gift and generation-skipping transfer (GST) taxes for 2011 and 2012. It preserves estate tax repeal for 2010, but in a roundabout way: estates wanting zero estate tax for 2010 must elect that option, along with the less favorable modified carryover basis rules that were set to apply for 2010. Otherwise, by default, the estate tax is revived for 2010, with a $5 million exemption, a top tax rate of 35%, and a step-up in basis. Also, for estates of decedents dying after Dec. 31, 2010, a deceased spouse's unused exemption may be shifted to the surviving spouse. However, these generous rules are temporary—much harsher rules are slated to return after 2012.

Lower rate and higher exemption for 2011 and 2012. For estates of individuals dying in 2009, the top estate tax rate was 45% and there was a $3.5 million exemption. The top rate was to rise to 55% for estates of individuals dying after 2010, and the exemption was to be $1 million. For 2011 and 2012, the 2010 Tax Relief Act reduces the top rate to 35%. It also increases the exemption to $5 million for 2011 with a further increase for inflation in 2012. But these changes are temporary. After 2012, the top rate will be 55%, and the exemption will be $1 million.

Special tax saving choice for 2010. The 2010 Tax Relief Act allows estates of decedents who died in 2010 to choose between (1) estate tax (based on a $5 million exemption and 35% top rate) and a step-up in basis, or (2) no estate tax and modified carryover basis. Basis is the yardstick for measuring income tax gain or loss when an asset is sold. With a step-up in basis, pre-death gain is eliminated because the basis in the heir's hands is increased to the date of death value of the asset. On the other hand, with a modified carryover basis, an heir gets the decedent's original basis, plus certain increases, which can be substantial. Even so, if the decedent had a relatively low basis and significant assets, some pre-death gain may be taxed when the heir sells the property. These concerns factor into the special choice for 2010. The executor should make whichever choice would produce the lowest combined estate and income taxes for the estate and its beneficiaries. This would depend, among other factors, on the decedent's basis in the assets immediately before death and how soon the estate beneficiaries may sell the assets.

Gift tax changes. Years ago, the gift tax and the estate tax were unified—they shared a single exemption and were subject to the same rates. This was not the case in recent years. For example, in 2010, the top gift tax rate was 35% and the exemption was $1 million. For gifts made after Dec. 31, 2010, the gift tax and estate tax are reunified and an overall $5 million exemption applies.

GST tax changes. The GST tax is an additional tax on gifts and bequests to grandchildren when their parents are still alive. The 2010 Tax Relief Act lowers GST taxes for 2011 and 2012 by increasing the exemption amount from $1 million to $5 million (as indexed after 2011) and reducing the rate from 55% to 35%.

New portability feature. Under the 2010 Tax Relief Act, any exemption that remains unused as of the death of a spouse who dies after Dec. 31, 2010 and before Jan. 1, 2013 is generally available for use by the surviving spouse in addition to his or her own $5 million exemption for taxable transfers made during life or at death. Under prior law, the exemption of the first spouse to die would be lost if not used. This could happen where the spouse with resources below the exemption amount died before the richer spouse. One way to address that was to set up a trust for the poorer spouse. Now, the portability rule may make setting up a trust unnecessary in some cases. But there still may be other reasons to employ credit shelter trusts. For example, a credit shelter trust may protect appreciation occurring between the death of the first spouse and the death of the second spouse from being subject to estate tax. Such a trust also can protect against creditors. Plus, the transferred exemption may be lost if the surviving spouse remarries and is again widowed.

Conclusion. The estate tax relief in the new law is substantial, but it is temporary. Estate planning to reduce taxes remains an important consideration. Even if taxes are not a concern because an estate is below the exemption level, it is important to have a proper estate plan to ensure that the needs of intended beneficiaries are met. Please schedule an appointment with us to discuss how you and your family can make the best use of the new estate and gift tax rules.

Self Employed Expatriates Must Set Up 401K Pension Plan by End of Year

As a self employed US Expatriate you have until 12/31 to set up a Keogh 401K self employed pension plan to use for  the 2010 tax year if you have not previously established one. You do not have to make the contribution until the extended due date of your personal tax return for 2010.  You can only make a deductible contribution (or any contribution) if the net profit from your self employed business exceeds the foreign earned income exclusion which is $91,500 for 2010.

Best places to set up a 401K plan in short time remaining is on line with Fidelity,  Charles Schwab, Etrade or  other on line broker.

The same rule holds true if you have a US corporation or LLC operating your business but you work for it abroad. Any corporate pension plan must be set up by 12/31, though the contributions need not be made until the extended due date of the entities return.

New Tax Reduction Bill Now Passed by Both Houses of Congress - Details Below

The Bush tax cuts were extended for two more years, with some modifications. The new tax law includes the following. 


* Provides a two-year AMT patch
* Provides a one year tax cut on Social Security taxes for individuals
* Increases the estate tax exemption from $3.5 million to $5 million
* Decreases the top estate tax rate from 45% to 35%
* Extends the deduction for school teacher expenses
* Extends the deduction for state and local general sales taxes
* Extends the deduction for qualified tuition and related expenses
* Reinstates the research and development credit
* Extends the credit for energy-efficient appliances
* And more!

Further details about the Tax Relief Act of 2010 is available at the following web sites.


* http://mail.cchtaa.com/t/138601/455109/9443321/0/ 
* http://www.journalofaccountancy.com/Web/20103669.htm
* http://www.csmonitor.com/USA/Politics/2010/1217/House-passes-bipartisan-tax-cut-deal-first-of-Obama-administration
* http://www.bloomberg.com/news/2010-12-17/house-votes-to-debate-obama-s-858-billion-tax-cut-deal-with-republicans.html 

IRS COMMISSIONER ANNOUNCES POSSIBLE NEW OFFSHORE DISCLOSURE PROGRAM

The IRS Commissioner has announced the IRS is considering  instituting a new Offshore Disclosure Program which will allow taxpayers with offshore assets, etc. to come forward and not risk criminal prosecution and impose lower penalties for their previous failure to report or disclose foreign assets, or file certain required forms for foreign corporations, bank and financial accounts, foreign trusts, partnerships, etc.  He did state that the terms of that possible new program would not be as favorable as the previous six month program which expired October 15, 2009, in which approximately 15,000 taxpayers came forward and entered the program.

Current Status of IRS Offshore Voluntary Disclosure Program and Possible Future Program

The IRS has told the Wall Street Journal about the current  status of their initial Offshore Voluntary Disclosure Program.  The IRS has  also stated there may be a future program with  higher penalties than the original program which expired of October 15, 2009. Click here to read the Wall Street Journal Article 

2010 Year End US Income Tax Planning

Its time to try to reduce your taxes for 2010 by doing year end tax planning.  Our year end tax planning letter is on our website. Click Here to Get Year End Tax Planning Ideas

IRS PRESSURES FOREIGN BANKS TO DISCLOSE DATA ON US TAXPAYERS

The Financial Times reports that the IRS and the US Justice Department are aggressively pushing Foreign Banks to disclose information on US Citizens who have accounts and may be evading taxes. Read More Here

See How Your IRS Income Tax Payments Are Spent by Federal Government

The House of Tax and Spend

Fidelity Investment has done a great job of showing how your US income tax payments are spent by the Federal Government.   Fidelity Investments - How Your Tax Dollars are Spent.   It is easy to see where many items could be cut back.

Remember, at the Internal Revenue Service, the Revenue comes before the Service

YOU MUST NOTIFY THE IRS OF YOUR ADDRESS CHANGE WHEN YOU MOVE ABROAD TO AVOID PROBLEMS

When you move to Mexico or other foreign countries you MUST notify the IRS of your new address. The IRS is not responsible to keeping its records up to date with your new address, you are!  You should notify them using Form 8822.  If you fail to notify them of the address change, any notices they send to your previous address are deemed received under the law, and various time limitations, assessments, etc. , may expire even though you are not receiving the IRS notices.

One client who failed to notify the IRS of her new address  was erroneously assessed a large sum of money and only learned about it many years later when the IRS took levied and took all of the money out of her bank account.  It was very expensive and time consuming to finally convince the IRS of their error and get her money refunded.  The problem would have never happened if a Form 8822 had been filed.  The error could have been corrected immediately when the initial erroneous assessment was made.

Due to poor mail delivery in many countries, it is wise in some situations to keep using a US mailing address of a friend or relative, so your IRS notices will be delivered to a competent person who can then forward the mail by fax, email or a private delivery service.

US EXPATRIATE OFFSHORE ESTATE PLANNING

If you have assets or live outside of the USA you need to plan your estate carefully. You most likely need to do a will or,  if applicable, a trust in the country in which you live (or own the asset) which provides for the disposition of your asset in the event of your death. You also need to determine what type of taxes (inheritance or transfer tax) your heirs may incur upon your death.  In some foreign countries failure to do a will or trust could result in your offshore assets being distributed under that country's laws and could result in people inheriting the property other than those you would prefer.  Some countries may honor your US will or trust and others may not.  It is easier often have specific instruments drawn up in each country you own assets that comply with local law by a local attorney to avoid potential problems and expense later if that country does not or has difficulties honoring a US will or trust.

Remember, if you have executed a power of attorney appointing someone to handle your affairs, in most countries that document will expire upon your death. Therefore do not rely on that document to handle the disposition of your foreign assets after your death.

Of course, you must also prepare to US will or  living trust (which avoids probates and a lot of expense and time) to cover the disposition of your US assets and which also states the disposition of your foreign assets the same as a foreign trust or will you have had prepared.

The US will impose its estate tax on your worldwide assets, though it will allow a credit in most situations for any foreign inheritance tax you had to pay on assets located outside of the US.  Until Congress amends the law, starting in 2011 all estates in excess of $1 million will be subject to US estate tax which are high.  If you are married special provisions can be inserted in your US will or trust to secure estate tax savings.

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.