Taxpayers outside the U.S. face a June 15 deadline

  Taxpayers outside the U.S. who qualify for an automatic two-month extension must file their 2010 federal income tax returns by June 15, IRS said in a reminder. This deadline applies to U.S. citizens and resident aliens who both live and work outside the country, and to members of the military serving outside the U.S. Taxpayers utilizing this extension must attach a statement to their return specifying which of these conditions applies, IRS stressed. Most taxpayers abroad now qualify to use IRS Free File to prepare and electronically file their returns, IRS said. According to the agency, higher-income taxpayers should explore this option due to the foreign earned income exclusion. The $58,000 income limit applies after the exclusion of up to $91,500 is subtracted. Consequently, this makes Free File available to many higher-income taxpayers. Taxpayers who cannot meet the June 15 deadline can receive an automatic extension until Oct. 17. This is an extension of time to file, not an extension of time to pay,

IRS FAILS INTERNATIONAL TAX QUESTION TEST

The IRS recently announced a new email form on their website, www.irs.gov  for the sole purpose of allowing tax payers to send them international tax questions with the promise they would respond with an answer from an expert within a reasonable time. We decided to test that question form and see what kind of answer was sent back.

We asked them a question on Form 5471 (foreign corporation tax form) involving a filing issue that was  specifically addressed and answered on page 1 or 2 of the IRS instructions to Form 5471.  We then waited for the email answer which came in about a week.

Their answer thanked us for our question and then state it was a complex question and we should consult a CPA or other tax professional for an answer because they were not able to answer it. The IRS response showed us:

• One more time that a taxpayer cannot rely on the IRS who writes and administers the International Tax system to answer questions even if they indicate they will do so and  should know the answer.
• A question that was answered on page 2 of the instructions for Form 5471 was too difficult for the IRS to handle....then how do they expect taxpayers to handle it.
• The IRS creates a lot of business for tax professionals like us.

IRS REVISES FREQUENTLY ASKED QUESTIONS ON 2011 VOLUNTARY OFFSHORE DISCLOSURE PROGRAM

The IRS on June 2, 2011, changed certain questions and answers on its Frequently Asked Questions page  which contains the rules to its 2011 Voluntary Offshore Disclosure Program. The new information provides some significant further guidance for those taxpayers trying to personally decide if they wish to enter the program.  Some of the additional information which is useful includes.

• Procedures to get an extension of time beyond the original 8/31/11 deadline
• Additional Questions and Answers (51.1 to 51.3) indicating factual situations when a taxpayer may elect to  Opt out of participating in the program because the civil penalties imposed outside of the program may be less than those imposed if the taxpayer chose to enter the program.

Look at the revised FAQ ..... note at the top of the page the Questions and Answers that have been changed or added as of June 2,2011   Contact us if you wish to discuss your individual situation or these new changes.

IRS ISSUES NEW DRAFT OF FORM 8938 TO BE USED IN 2011 TO REPORT FOREIGN FINANCIAL ASSETS

The IRS has issued a new draft of Form 8938, Statement of Specified Foreign Financial Assets which must be filed for 2011with returns to report foreign financial assets. The form is now more complex than the prior draft. This is not the final version  so there could be further changes before it is finalize. Download a pdf version of the draft form here.

FBAR Filing Deadline Extended for Certain Financial Professionals

WASHINGTON — The Internal Revenue Service and the Financial Crimes Enforcement Network (FinCEN) today announced that a small subset of individuals with only signature authority required to file the Report of Foreign Bank and Financial Accounts (FBARs) will receive a one-year extension beyond the upcoming filing date of June 30, 2011.

FinCen today issued Notice 2011-1 that extends the deadline until June 30, 2012, for the following individuals:

• An employee or officer of a covered entity who has signature or other authority over and no financial interest in a foreign financial account of another entity more than 50 percent owned, directly or indirectly, by the entity (a “controlled person”).
• An employee or officer of a controlled person of a covered entity who has signature or other authority over and no financial interest in a foreign financial account of the entity or another controlled person of the entity.

All other U.S. persons required to file an FBAR this year are required to meet the June 30, 2011, filing date. Unlike with federal income tax returns, extensions of time to file are not available.

Today’s notice was issued to facilitate more accurate compliance of FBAR filings in the wake of recent finalization of regulations. The FBAR filing requirements, authorized under one of the original provisions of the Bank Secrecy Act, have been in place since 1972.

On Feb. 24, 2011, FinCEN published a final rule that amended the Bank Secrecy Act regarding FBARs.

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.

U.S. persons are required to file FBARs Form TD F 90-22.1 annually if they have a financial interest in or signature authority over 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.

US Expatriate Tax Return Extension

US Expats get an automatic extension to file their IRS Form 1040 returns until 6/15/11 for 2010 if they live abroad on 4/15.  You can get a further extension until 10/15/11 if you file for one prior to 6/15 using form 4868.  We will electronically file that form for you without charge providing you ask us to prepare your expat return.  That form also extends the due date of Forms 5471, 8865, 3520 and form 5500EZ.

Though not officially confirmed by the IR S, many articles have appeared in the media stating extending your tax returns does reduce your chances of IRS Audit.  We have found that true in our 30 years of experience.  Therefore, extending your return even though it might be completed might be an excellent idea.

Keep in mind an extension does not extend the time you must pay any taxes due from the regular 4/15 date.  If you do not any taxes due, penalties and interest will accrue until any tax due for 2010 is paid in full.

US Tax Ramifications of Forming a Foreign Corporation to Do Business Abroad

There are significant consequences (on your US tax return) when you form a foreign corporation in a country outside of the USA to operate your business or make investments in any other country in the world. Most offshore accountants and attorneys do not know enough about US international taxation to advise you of the consequences which should be considered in advanced.  It is much harder to correct the US tax problems which WILL occur later if you do not do your US tax planning in advance.

You need to consider the following US IRS reporting and election consequences:

• Controlled foreign corporation rules
• Subpart F income possibilities
• Passive foreign investment company rules.
• Possible Flow Through Election for US tax purposes.
• Subpart F personal holding company rules
• The need to file FBAR forms to report foreign bank accounts
• Transfer Pricing
• Possible Tax on Transferring intangible property and tangible property to a foreign corporation

We can help you plan your foreign corporation structure to avoid unpleasant and possibly expensive consequences for failing to consider the rules set forth above.  Many of these items are difficult to deal with after you have already formed your foreign corporation.

Keep in mind their are also special rules which apply to foreign partnerships, foreign LLCs and foreign trusts which must also be considered.

IRS NOW LOOKING AT COUNTY RECORDER RECORDS TO LOCATE REAL ESTATE GIFT TRANSFERS WHICH ARE NOT REPORTED ON FORM 709

The Wall Street Journal reports the IRS is now investigating real estate transfers to determine if proper Gift Tax Returns (form 709) are reported.  The IRS is getting real estate transfer records in many states. This new procedure could naturally be extended at any time to discover real estate sales which have not been reported on personal tax returns.

Gift tax returns must be filed when the value of the gift exceeds $13,000. Real estate sales must be reported if there is any gain or loss.

This new procedure will result in many additional audits.  If you need help filing a Form 709 for any gift exceeding $13,000 let us know. This rule applies to gifts made by US Citizens and Permanent Residences whether living in the US or abroad. It also applies regardless of the location of the property gifted or to whom it is gifted.

Possible Consequences of "Silent Disclosure" of Undisclosed Foreign Bank Accounts - And Failing to Enter IRS Offshore Voluntary Disclosure Program

A Boston venture capitalist and director at Boston Private Bank and Trust Company was charged with failing to report his foreign bank account and income to the Department of the Treasury. Principal Deputy Assistant Attorney General of the Department of Justice’s Tax Division John A. DiCicco, U.S. Attorney for the District of Massachusetts Carmen M. Ortiz and William P. Offord, Special Agent in Charge of the Internal Revenue Service (IRS) Criminal Investigation, Boston Division made the announcement today.

According to the criminal information and plea agreement filed today, from 2003 to 2008, Michael Schiavo, 53, of Westford, Mass., held an account in his name at HSBC Bank Bermuda (formerly the Bank of Bermuda). In 2006, with the assistance of his business partner Peter Schober, Schiavo arranged to have income from a venture capital investment directed to Schober’s secret account at UBS AG in Switzerland. From there, Schiavo’s share of the investment, $99,273, was wired to his HSBC Bank Bermuda account. Schiavo knew that this payment was taxable income in the United States, but deliberately chose not to report it, or the interest income that accrued in the HSBC Bank Bermuda account, to the IRS. In so doing, Schiavo deprived the IRS out of $40,624 in taxes.

U.S. citizens and resident aliens have an obligation to report to the IRS on the Schedule B of a U.S. Individual Income Tax Return, Form 1040, whether that individual has a financial interest in, or signature authority over, a financial account in a foreign country in a particular year by checking “Yes” or “No” in the appropriate box and identifying the country where the account was maintained. U.S. citizens and resident aliens have an obligation to report all income earned from foreign bank accounts on the tax return and to pay the taxes due on that income. These same taxpayers who have a financial interest in, or signature authority over, one or more financial accounts in a foreign country with an aggregate value of more than $10,000 at any time during a particular year are required to file with the Department of the Treasury a Report of Foreign Bank and Financial Accounts, Form TD F 90-22.1 (the FBAR). The FBAR for the applicable year is due by June 30 of the following year.

According to the criminal information and plea agreement, on Oct. 6, 2009, following widespread media coverage of UBS’s disclosure to the IRS of account records for undeclared accounts held by U.S. taxpayers and the IRS’s Voluntary Disclosure Program, Schiavo made a “silent disclosure” by preparing and filing FBARs and amended Forms 1040 for tax years 2003 to 2008, in which he reported the existence of his previously undeclared account at HSBC Bank Bermuda. He made such filings notwithstanding the availability of the IRS’s Offshore Voluntary Disclosure Program. The Offshore Voluntary Disclosure Program was a program administered by the IRS that was intended to serve as a vehicle for U.S. taxpayers to attempt to avoid criminal prosecution by disclosing their previously undeclared offshore accounts and paying tax on the income earned in those accounts. On its website, the IRS strongly encourages taxpayers to come forward under the Offshore Voluntary Disclosure Program and warns them that taxpayers who instead make silent disclosures risk being criminally prosecuted for all applicable years.

According to the criminal information and plea agreement, Schiavo also admitted that for tax years 2003 through 2008, he willfully failed to file FBARs with the Department of the Treasury and failed to disclose that he had an interest in a financial account in HSBC Bank Bermuda. He further admitted that for tax years 2003 through 2008, he prepared, signed under penalties of perjury, and filed false individual income tax returns with the IRS that falsely represented that he did not have an interest in any foreign financial accounts. According to the plea agreement, Schiavo agreed to pay a civil money penalty of $76,283, half the value of high balance of the HSBC Bank of Bermuda account, for failing to file the FBAR.

Schiavo faces up to five years in prison, followed by three years of supervised release and a $250,000 fine. Schober was charged separately with failing to disclose his secret UBS AG bank account and is awaiting sentencing.

US Expatriate Tax Return Due Dates

• Your US expatriate tax return is due 6/15/11 if you lived and worked abroad on 4/15/11 for tax year 2010.  It can be extended until 10/15/11 if an extension is filed before that date. Please contact us if you wish assistance filing that extension or wish to determine how much needs to be paid in (if any tax is due) at that time to stop interest and penalties from accruing.
• Your FBAR Form - TDF 90-22.1  (foreign bank account and financial account reporting form) must be received by the IRS by 6/30/11 for the tax year 2010 and cannot be extended for any reason. There is a $10,000 penalty that may be imposed for late filing.
• Your required forms for foreign corporations, foreign partnerships and LLCs,  and disregarded foreign entities must be filed by the regular or extended due date for your personal tax return.
• Your Form 3520 for foreign trusts must be filed separately from your personal tax return, but is due by the extended due date of your personal tax return.

We have done over 5,000 expat and international tax forms for clients in over 50 countries around the world. We have the expertise, experience and professional expertise which is difficult to find. Please call or email us if you need assistance at ddntax@gmail.com 

See How Your Tax Dollars Are Spent

In his State of the Union Address, President Obama promised that this year, for the first time ever, American taxpayers would be able to go online and see exactly how their federal tax dollars are spent. Just enter a few pieces of information about your taxes, and the taxpayer receipt will give you a breakdown of how your tax dollars are spent on priorities like education, veterans benefits, or health care.

Amercian Bar Association - Comments on IRS 2011 Voluntary Offshore Disclosure Program by Panelists

A panel of practitioners from the American Bar Association Tax Section on  May 8, grappled with the "one-size-fits-all" IRS's voluntary offshore disclosure program, finding that it is often ill-suited for some of their clients who may not have willfully evaded their tax obligations.

Speaking at the May meeting of the American Bar Association Section of Taxation, John McDougal, special trial attorney in the IRS Office of Chief Counsel explained that where taxpayers opted out of the IRS's voluntary offshore disclosure program in favor of a regular audit, the examiners were expected to look at all applicable tax years. Absent fraud, the statute of limitations is generally six years, although McDougal said that if there was an entity involved, and the entity failed to file information returns, "all bets were off" and the IRS could go as far back as it liked.

Background. On February 8, 2011, the IRS announced a new 2011 Voluntary Disclosure Initiative (OVDI) for taxpayers to disclose their unreported offshore accounts. To participate in the OVDI, taxpayers must file or amend their tax returns and Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts (FBAR)) and pay all delinquent taxes, interest and penalties by August 31, 2011. The initiative covers tax years 2003 through 2010.

In exchange for participating in the OVDI, taxpayers with undisclosed offshore accounts can avoid criminal prosecution for their unpaid taxes and may be subject to significantly reduced penalties.

Under the OVDI, taxpayers will be subject to a 25 percent penalty on the highest aggregate account balance on their undisclosed account(s) between the 2003 and 2010. If the value of the undisclosed account(s) was less than $75,000 at all times during the tax years in question, the penalty is reduced to 12.5 percent. Moreover, in limited situations, a penalty of 5% may be imposed. Additionally, participants in the OVDI are required to pay an accuracy-related penalty equal to 20 percent of the underpayment of tax with interest for the tax years at issue and, if applicable, the failure to file and failure to pay penalties.

McDougal noted that the 2011 OVDI covers eight years instead of six under the 2009 initiative. "The Commissioner decided that it would be unfair to give people that didn't come in last time a walk on the two other years (2003/2004) that were included in the first initiative," he said. Also mentioned was the fact that the penalty under the 2011 OVDI was 25 percent as opposed to 20 percent under the 2009 OVDI.

With respect to the 5 percent penalty, McDougal said that taxpayers that did not open up the foreign account would be generally eligible for the reduced penalty, although if the bank required the taxpayer to open up the account to get it in their name, the IRS wouldn't hold that against taxpayers.

Voluntary disclosure vs. examination. McDougal said that agents were not to make any factual determinations with respect to disclosures on matters pertaining to willfulness and reasonable cause. Taxpayers seeking to have the IRS consider their arguments on willfulness or reasonable cause are required to opt out of OVDI and ask for an examination. The caveat, however, is that all penalties and all tax years are on the table in a regular examination.

Mark Matthews of Morgan Lewis & Bockius LLP, said that practitioners felt that the IRS viewed that everybody coming into the program has significant criminal exposure. In his view, the problem lies with clients that are in a gray area, where there may be no criminal exposure. The opportunity presented through the OVDI must be balanced against other civil penalties that may be faced if the taxpayer is detected on audit or otherwise. "The perception is that the agent's are leaning very hard to keep you in the program," he said, finding that agents pressure taxpayers by telling them that they will look back at several tax years if they opt-out of the OVDI.

Larry Campagna of Chamberlain Hrdlicka said that he believed that the OVDI makes a presumption of willfulness. "The FBAR penalty in particular, is the government's burden to prove willfulness," he said. "They can assess the penalty if they want to but they have to go to court and prove willfulness to collect the penalty." In his practice, Campagna said he sees many clients that don't fit the program very well because they are in some sort of gray area with respect to willfulness, but the client is also not willing to take a penalty hit of 25 percent. Quiet disclosures are also very problematic, he said.

Once taxpayers participate in the OVDI, agents do not have the flexibility to to mitigate the 25 percent penalty for reasons associated with reasonable cause or willfulness, McDougal said.

Criminal Prosecutions of Taxpayers Who Failed to Disclose Foreign Bank Accounts and Interest

Read about the Justice Departments Criminal Prosecution of Taxpayers who have failed to report foreign bank and financial accounts and report the income from those accounts on their US tax returns.

Read about the results of one of these criminal  cases a year later (from the original charge) on April 25, 2011.

 We recommend if you are in this situation that you consider entering the 2011 IRS Offshore Voluntary Disclosure Program to try avoid these consequences.  We have helped many clients who wish to participate in the program.  The IRS does not limit their activity to the pursuit of wealthy individuals. Their actions and plans include individuals of all income levels and wealth.

IRS Announces Fraudulent Tax Returns Surge in 2011 Filing Season

Money Magazine say the IRS identified 335,341 tax returns claiming $1.9 billion in fraudulent refunds as of March 4, 2011, according to the findings of an audit conducted by the Treasury Inspector General for Tax Administration. That's a whopping 181% increase from the same period last year. Read More Here

The 75% Fraud Penalty (Plus Possible Prison Time)

If you get audited, and the IRS decides your tax return fraudulently understates your tax bill, you are in really big trouble. You will be hit with a penalty equal to 75% of the understatement. Plus you will be charged interest. And you could face criminal charges and possible prison time. In the next few years audits of expatriates and form 2555 (foreign earned income exclusion) will increase substantially due to recent discoveries about how many such forms were incorrect and were being filed by expats not eligible for the exclusion.

Committing tax fraud takes some work, because it goes beyond simple ignorance of the tax rules and regulations. You have to do really bad things like keep two sets of books, alter or destroy documents, hide unreported income overseas, or fail to report income from illegal activities (this is not a complete list by any stretch). Bottom line: You can't commit tax fraud without knowing it.

Anyone accused of tax fraud should hire an attorney who specializes in big-time IRS problems. A CPA or Enrolled Agent can't provide the equivalent of the attorney-client privilege, and those accused of tax fraud will need that privilege. Also, non-attorneys are not competent to deal with the criminal charges that will often go along for the ride with tax fraud cases.

WHITE HOUSE HAS ON LINE CALCULATOR TO SHOW WHERE YOUR INCOME TAX AND SOCIAL SECURITY TAXES GO

The President has released an on line calculator on the White House Website showing where your taxes go. Just type in your income level or actual figures from your tax return and you can see what you are paying for. Click here to learn why you pay taxes.

US Expatriate Tax Return and related Foreign Tax Forms Due Dates

If you live and work abroad your personal 2010 tax return is automatically extended until 6/15/11, but if you wish to avoid penalties and interest on any underpayments you should pay in the amount due (or estimate) by 4/18/11.  Your first quarter estimated tax for 2011 is also due to be made on 4/18/11 using form 1040 ES. You can extend until 10/15/11 your expatriate tax return on or before 6/15/11 by filing Form 4868 with the appropriate box checked.  If you need to extend your expatriate return beyond that date in order to qualify for the foreign earned income exclusion you need to file Form 2350. 


If you do not file the necessary form to extend your personal return and end up owing taxes, failure to properly extend the form will result in the large penalty of 5% per month of the tax due up to a maximum penalty of 25% of the tax due plus interest. Best to not miss filing that extension due to this high penalty.


Your TDF 90 -22.1 Form reporting foreign financial, bank accounts, etc., must be received by 6/30/11 at the Detroit address on that form. No extensions can be obtain. Late filing can result in penalties of $10,000 or more.


Your Form 5471 for Foreign Corporations, 8865 for foreign partnerships and LLCs, 3520 for foreign trusts and Mexican Fideicomisos,  and Form 8858 for disregarded entities  are all on the  due dae of  your personal return  or  its extended due date if that is later and you have filed an extension.

General Electrics Zero Tax Bill Involves Utilization of Legal US Tax Code Provisions Available to Expats with their own Businesses Located Abroad

The New York Times has an excellent article describing how General Electric has managed to reduce its tax bill by legally locating its business in low tax countries and utilizing provisions of the US tax code that apply to Foreign Corporations.  If you have your own small to medium business abroad, you too can take advantage of this type of tax planning even though you are not as big as GE.  We can help.


As the company expanded abroad, the portion of its profits booked in low-tax countries such as Ireland and Singapore grew far faster. From 1996 through 1998, its profits and revenue in the United States were in sync — 73 percent of the company’s total. Over the last three years, though, 46 percent of the company’s revenue was in the United States, but just 18 percent of its profits.

Passport Information May Be Used by the IRS to Collect Unpaid Taxes

  The State Department issued passports to 16 million individuals during fiscal year 2008 and some 224,000 of these individuals owed more than $5.8 billion in unpaid federal taxes as of Sept. 30, 2008, according to a report released on April 11 by the Government Accountability Office (GAO).


 The State Department cannot restrict the issuance of passports to delinquent taxpayers, and federal law bars IRS from disclosing any taxpayer information to the State Department without a taxpayer's consent. However, federal law does permit certain restrictions on the issuance of passports to individuals, such as individuals owing child support debts over $2,500, the report noted.


The  GAO selected 25 passport recipients to investigate for abuse related to the federal tax system or criminal activity. “These case studies were chosen, among other things, by the more egregious amount of federal taxes owed and cannot be generalized beyond the cases presented,” GAO said. Of these cases, at least 10 passport recipients had been indicted or convicted of federal laws. In addition, IRS assessed trust fund recovery penalties on several passport recipients when the individual did not remit payroll taxes to the federal government. At least 16 passport recipients traveled outside the country while owing federal taxes, and at least 4 resided in another country at the time of GAO's investigation.


 Two individuals used the identities of deceased individuals to fraudulently obtain passports and then used these passports to travel to Mexico, France, and Africa. In one case, the unpaid tax debt belonged to a deceased individual, and in the other case, the debt was incurred by the imposter. “If Congress is interested in pursuing a policy of linking federal tax debt collection to passport issuance, it may consider taking steps to enable State to screen and prevent individuals who owe federal taxes from receiving passports,” GAO said. “This could include asking State and IRS to jointly study policy and practical issues and develop options with appropriate criteria and privacy safeguards.” The report is available athttp://www.gao.gov/new.items/d11272.pdf.

No 1 Item on IRS List of Tax Scams is Taxpayers Hiding Assets Abroad

The IRS has released their list of the 12 most common tax cheating and scam methods. Hiding income and assets offshore is the first item on the list. The IRS aggressively pursues taxpayers involved in abusive offshore transactions as well as the promoters, professionals and others who facilitate or enable these schemes. Taxpayers have tried to avoid or evade U.S. income tax by hiding income in offshore banks, brokerage accounts or through the use of nominee entities. Taxpayers also evade taxes by using offshore debit cards, credit cards, wire transfers, foreign trusts, employee-leasing schemes, private annuities or insurance plans.


The 2011 IRS Voluntary Offshore Disclosure Program ends 8/31/11.  As both an Attorney and CPA we can advise you on the program, and represent you should you enter it.