US IRS to go easy on American residents in Canada Per the Globe & Mail

The U.S. Internal Revenue Service is poised to waive potentially massive penalties for Americans who agree to come clean and don't owe any taxes, The Globe and Mail has learned.

The new rules will be announced within weeks by the IRS, according to David Jacobson, the U.S. Ambassador to Canada, who has been swamped with complaints from anxious Canadians.

"What the IRS is saying here is that if ... you don't owe taxes to the U.S., and you file your return and they show you don't owe taxes, there aren't going to be any penalties for having filed late," Mr. Jacobson said in an interview Thursday.

Fears of a looming U.S. tax crackdown has caused a wave of angst among the roughly one million Americans living in Canada. Many of them long ago stopped filing, assuming they owed no tax.

READ MORE IN  THE GLOBE & MAIL ARTICLE HERE

Retirement Plans That May Be Available to Expats Abroad

As a US expatriate, you may be eligible to create a tax deductible  (for US tax purposes) retirement plan if you operate your own business abroad through your own sole proprietorship or by utilizing a US corporation or LLC.  The funds contributed are tax deductible and the earnings grow tax free until you withdraw the funds when you retire.  AN IRS EXPLANATION OF THE AVAILABLE PLANS IS HERE

It is important to keep in mind, that if you operate abroad through a sole proprietorship, in most situations you can only make a contribution to an IRA or self employed retirement plan if the net taxable profit from your business exceeds your foreign earned income exclusion (if you are taking it).  We can help you put together a US tax deductible retirement plan that will work for you.

Unless provided otherwise by a US tax treaty with the country in which you work (and there are only a few treaties that have favorable provisions) if a contribution is made to a foreign pension plan by your employer in your behalf, you must report that contribution as income on your US tax return and any earnings made on the funds in your foreign pension plan may also be immediately taxable to you.  If you have a separate account in that foreign pension plan you may also be obligated to file Forms 3520 and 3520A each year to report information on that separate account which the IRS deems a foreign trust.  Failure to file these two forms can result in extremely large penalties.

New FBAR form with Revised Instructions Just Released by IRS

The IRS just release in November a new FBAR (TDF 90-22.1) form with revised instructions which clarify some of the filing requirements and resolve some of the  open issues concerning when to file that form.

If you are filing it late (after June 30th following the end of a calendar year) the instructions still advise you to attach a reasonable late filing excuse, but fail to state whether or not  attaching that excuse will reduce the potential late filing penalty of up to $10,000 for "unwillfully" filing the form late.

SEE THE FORM AND  READ THE NEW INSTRUCTIONS HERE

How Many Wealthy People are there in the US and the World?

Private Wealth Magazine has published an article that sets worth the number of individuals in the US and the world that are worth $30 million US or more.  Surprisingly there are not as many (if there figures are correct) as you might think.  There are 62,950 in the US with 10,390 are those located in California.  That's not a lot considering there are over 300 Million residents in the USA.  There are 42,525 in Asia.

READ THE ARTICLE AND STATISTICS HERE

Ex-UBS banker sentenced for aiding U.S. tax evasion

A former senior UBS banker who helped the U.S. government expand its crackdown on offshore tax evasion was sentenced to five years probation on Friday for advising wealthy Americans on ways to hide their money from U.S. tax authorities. Renzo Gadola, who worked at Swiss bank UBS AG from 1995 to 2008, pleaded guilty in December to charges of conspiracy to defraud the United States. Almost immediately after his arrest on Nov. 8, 2010, Gadola started cooperating with U.S. officials, providing key insight into other bankers and Swiss financial institutions offering offshore banking services, according to prosecutors. He is currently out on bail.

U.S. authorities, who suspect tens of thousands of Americans are using Swiss banks to avoid paying billions of dollars in taxes, are conducting a widening criminal investigation into scores of Swiss banks and international banks with Swiss operations. Banks under investigation include Credit Suisse, HSBC Holdings Plc and Basler Kantonalbank, a large Swiss cantonal, or regional, bank, according to U.S. judicial sources. Cantonal banks are largely government-owned in Switzerland.

Gadola turned over the names of bankers and participated in recorded conversations with clients, according to an unsealed government document filed last week requesting leniency in his sentencing. 

The case against Gadola, an investment adviser based in Switzerland, highlighted how some bankers continued to help wealthy Americans conceal money from the Internal Revenue Service (IRS) even amid a U.S. probe into UBS that mushroomed into a major international judicial and diplomatic affair. In 2009, UBS paid $780 million to settle criminal charges from the U.S. Department of Justice that it helped thousands of wealthy Americans evade taxes. UBS ultimately agreed to disclose 4,450 client names and ended its U.S. cross-border banking business. The bank was accused by federal prosecutors of helping some 17,000 American clients with $20 billion in assets hide their accounts from the IRS.

Gadola's case involved a Mississippi client who kept $445,000 in a safe deposit box before transferring it first to UBS and then to a Basler Kantonalbank account. The unidentified client said he wanted to declare the money under a voluntary disclosure program launched by the IRS, but Gadola advised against it, arguing the money would go undetected by officials. 

Martin Lack, a former senior UBS banker, was indicted in August for selling offshore tax evasion services. Lack, a Swiss national, is a fugitive. Lack was Gadola's business partner after Gadola left UBS, and the two worked to help American clients hide money in Swiss cantonal banks following the crackdown on UBS, according to people briefed on the matter.

INVESTMENTS IN FOREIGN MUTUAL FUNDS AND OTHER INVESTMENTS REQUIRE MANY SPECIAL IRS FORMS

Investments in foreign stocks, investment companies, foreign corporations that hold investements, etc.  from a U.S. tax point of view a could be for a U.S. individual, pension fund, or trust a paperwork nightmare .  If you are thinking of investing in Foreign stocks, please remember your friends at the IRS.  Any investment gains you make will be offset by IRS penalties if you do not do the proper paperwork.  To comply with the rules and keep the the US taxes down you should be filing form 8621 each year with your tax return.

Do not buy foreign mutual funds (funds not sold in the US).  These are PFICs (“Passive Foreign Investment Companies”) and they create a metric ton of complexity and accounting expense for your U.S. income tax returns.  (This, by the way, is one of the U.S. government’s little non-tariff trade barriers, designed to discourage U.S. capital being deployed into foreign capital markets).
Remember your FBAR.  The account you open that will buy the stock will need to be reported on Form TD F 90-22.1.

Remember Form 8938.  This is the new reporting form for foreign financial assets, largely duplicating the FBAR reporting requirements.

Foreign tax credit.  Undoubtedly a tax of some kind will be imposed for the foreign country where the investment is located. This will end up on an individual return on Form 1116.   This form will allow you to take a foreign tax  credit against your US income tax paid on the investment income.

What if you die while owning foreign investments? Be sure you have a plan for simple transfer of your accounts to your heirs if you die.  The cost of probate procedures in many foreign countries  could eliminate any stock market profits you make.  If you set up a foreign trust to try to reduce those foreign estate costs, you will then have to file forms 3520 and 3520A each year to report that trust.

Expats Guide to Surviving and IRS Audit

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

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

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

US Flow Through Tax Election for Your Foreign Corporation or LLC

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

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

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

SWISS GOVERNMENT OFFERS TO MAKE DEAL WITH IRS

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

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

Form 8938 proposed instructions analyzed

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

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

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

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

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

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

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

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

Tax Rules for Contractors in Afghanistan, Iraq and Middle East

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

Costa Rica Banks Will Report US Taxpayers Holdings to IRS

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

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

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

Transferring You Taxable Profits Offshore to Reduce Taxes

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

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

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

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

Swiss Bankers Charged with Helping 180 US clients hide assets abroad

Two Julius Baer Group Ltd. (BAER) client advisers were charged with helping U.S. customers of the Zurich- based bank evade taxes, according to an indictment and a person with knowledge of the matter.

Daniela Casadei and Fabio Frazzetto conspired with more than 180 U.S. clients and others at the bank to hide at least $600 million in assets from the Internal Revenue Service, according to the indictment in federal court in New York and the person, who wasn’t authorized to speak about the matter. The indictment refers to the bank as Swiss Bank No. 1. Read more in Bloomberg

If You Failed to Enter the IRS Offshore Disclosure Program (At Risk Taxpayers)

You should immediately seek competent legal and tax advice on how best to proceed  with filing your past tax returns and IRS foreign asset reporting forms now that the September 9, 2011 deadline has passed, if you failed to enter the Program.

Most delinquent t taxpayers  that have not disclose their foreign assets, filed the special IRS Offshore Forms, or have not filed their tax returns for past years probably do not face criminal action, but may incur horrendous penalties which grow worse the longer they wait to come forward.  You alternatives are now fewer than they used to be but there are still steps you can take.

There are no clear preferable courses of action but if you talk with a professional and learn your alternatives, it will help you make a decision on planning your future course of action.  Best to talk with an  experienced  tax attorney in any event to give yourself the privacy and confidentiality of attorney-client privilege. Contact us to make an appointment for a phone or skype consultation to discuss your individual situation and create a strategy to proceed.  Offshore Disclosure Email.

To read more about the IRS General Disclosure Program click 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 intentionally 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.

IRS Releases Draft of Instructions to Form 8938- 2011 Required Tax Form to Report Foreign Financial Assets

The IRS has released draft instructions to Form 8938. Form 8938 must be filed with your 2011 income tax return to report  Foreign Financial Assets if the total value of those assets exceed a reporting thresholds. Read the draft instructions here.    What ever happened to the IRS Paperwork Reduction Act which to our knowledge was never repealed. See the current IRS draft of Form 8938.  

It is interesting to note you do not have to report your ownership of foreign real estate unless it is held in a foreign trust, corporation, etc.   At this point in time, it also appears you do not have to report any gold or other assets buried in your back yard (abroad) or held in your personal safe in your offshore villa.

These drafts are still subject to revision before the end of 2011.