Quick Guide to 2011 Tax Rates and Other Rules

The AICPA has published a quick guide to tax rates and other specific numbers for tax year 2011.  It is a useful quick guide to calculate your potential tax liability and other specific rules.  It includes long term capital gain rates, self employment tax rates, exemptions, standard deductions, dependent deductions, etc.   Click here to view it.

IRS Uses John Does Summons to Catch Taxpayers Not Paying Taxes

 With anormal summons, the IRS seeks information about a specific taxpayer whose identity it knows. A John Doe summons allows the IRS to get the names of all taxpayers in a certain group. The IRS needs a judge to approve it, but recent IRS success may to lead to more.


A federal judge recently gave the IRS permission to serve a John Doe summons on California’s State Board of Equalization. The IRS wants names of Californians who gifted real property to their children or grandchildren between 2005 and 2010. The IRS believes many failed to file federal gift tax returns reporting family transfers. It’s not just Californians in the crosshairs. The IRS has already received information about intra-family property transfers from county and state officials in other states.


The IRS is using the  John Does summons to force foreign banks doing business in the US to reveal information on their US depositors with accounts outside the US.  Its use in the future may include other businesses doing business in the US which can provide the IRS with information about US taxpayers assets abroad.

Final Form 8938- Statement of Foreign Financial Assets Released

US Taxpayers including US Citizens, US Permanent Residents, and US Expatriates  may have to file Form 8938 with their US Income tax returns for 2012 to report their foreign financial assets.  The estimated time to complete this form is 1 to 3 hours.

Every taxpayer with assets located outside the US should review the instructions to this form to determine if they must file it. Read the Instructions to Form 8938 here.   Failure to file the Form 8938 when required can result in severe monetary penalties and criminal prosecution.


View the 2012 tax  year Form 8938  here.

FATCA Produces Fear Among US Expatriates and Foreign Banks

US Expatriates living Abroad and Foreign Financial Institutions are all in fear of the "sledge hammer" rules they must comply with in order to satisfy the IRS reporting rules on accounts owned by US taxpayers.  Some foreign banks are refusing to open bank accounts for US taxpayers in order to avoid having to comply with the extensive FATCA report rules.

 US taxpayers with sufficient foreign assets will have to start filing form 8938 with their 2012 tax returns which could take up to three hours to complete. That new form is in addition to the existing foreign assets reporting forms which must be filed which include Forms TDF 90-22.1, 5471, 8865, 3520, etc.

Taxpayers and financial institutions that fail to comply with the foreign assets tax reporting rules face severe monetary penalties and possible criminal prosecution.  We can help you avoid these dire consequences.

Read more  in  this New York Times Article

Many Expats may be able to Reduce the Taxes Owed the IRS

Many taxpayers who owe back taxes, or are now filing a lot of past year tax returns want to know how to "make a deal" with the IRS for a lower amount than the taxes, interest and penalties the IRS shows due. Essentially this can only be done by filing an "Offer in Compromise."  Most recently the IRS is only accepting less than 20 % of the Offers in Compromises filed with it.  Essentially to qualify you must show due to age, illness, etc. that you have limited prospects of making enough money to pay your past unpaid tax bills and in that event pay the IRS the current value of most of your assets.

If IRS does not accept your offer in compromise, you can enter into a payment plan to pay your tax bill over time.  If you cannot make any payments at this time, they may put their collection action on hold for a while in hopes that you will have sufficient funds to make payments later.  They will file a tax lien which does mess up your credit. The good news is most tax liens expire in ten year and the IRS has in the past not taken any action to extend that time.  Let us know if you need help dealing with the the IRS collection department or trying for an offer in compromise.

Be aware that most of the Companies on TV that advertise they can reduce the amount owed the IRS will take an advance payment of $4,000 to $10,000 (non-refundable) and more often than not fail to get your offer in compromise accepted.  You should deal with reputable CPAs or Attorneys if you hire someone to file one for your.

Read more about Offers in Compromise on the IRS website.

Video on how to file for an IRS Offer in Compromise 

IRS Releases Guidance on Foreign Financial Asset Reporting

The Internal Revenue Service in coming days will release a new information reporting form that taxpayers will use  starting this coming tax filing season to report specified foreign financial assets for tax year 2011.

Form 8938 (Statement of Specified Foreign Financial Assets) will be filed by taxpayers with specific types and amounts of foreign financial assets or foreign accounts. It is important for taxpayers to determine whether they are subject to this new requirement because the law imposes significant penalties for failing to comply.

The Form 8938 filing requirement was enacted in 2010 to improve tax compliance by U.S. taxpayers with offshore financial accounts. Individuals who may have to file Form 8938 are U.S. citizens and residents, nonresidents who elect to file a joint income tax return and certain nonresidents who live in a U.S. territory.

Form 8938 is required when the total value of specified foreign assets exceeds certain thresholds.  For example, a married couple living in the U.S. and filing a joint tax return would not file Form 8938 unless their total specified foreign assets exceed $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year.

The thresholds for taxpayers who reside abroad are higher. For example in this case, a married couple residing abroad and filing a joint return would not file Form 8938 unless the value of specified foreign assets exceeds $400,000 on the last day of the tax year or more than $600,000 at any time during the year.

Instructions for Form 8938 explain the thresholds for reporting, what constitutes a specified foreign financial asset, how to determine the total value of relevant assets, what assets are exempted, and what information must be provided.

Form 8938 is not required of individuals who do not have an income tax return filing requirement.

The new Form 8938 filing requirement does not replace or otherwise affect a taxpayer’s obligation to file an FBAR (Report of Foreign Bank and Financial Accounts).  For more go to the FBAR page on this website.

Failing to file Form 8938 when required could result in a $10,000 penalty, with an additional penalty up to $50,000 for continued failure to file after IRS notification.  A 40 percent penalty on any understatement of tax attributable to non-disclosed assets can also be imposed. Special statute of limitation rules apply to Form 8938, which are also explained in the instructions.

Form 8938, the form’s instructions, regulations implementing this new foreign asset reporting, and other information to help taxpayers determine if they are required to file Form 8938 can be found on the FATCA page of irs.gov.

See TD 9567.

IRS announces more information on "reasonable cause" excuse and elimination or reduction of FBAR (TDF 90-22.1) late filing penalties.

The IRS has issued a Fact Sheet for U.S. citizens or dual citizens residing outside the U.S. who may have been unaware of their U.S. tax and information filing obligations and are now seeking to come into compliance. The Fact Sheet outlines information about the delinquent filing of federal income tax returns and Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBARs).

Background. U.S. citizens must file a federal income tax return for any tax year in which their gross income is equal to or greater than the applicable exemption amount and standard deduction. A U.S. citizen is required to report his worldwide income on his federal income tax return—that is, all income, regardless of which country is the source of the income. Generally, a taxpayer only need to file returns going back six years.

Under Code Sec. 6651(a)(1), a taxpayer who fails to timely file their tax return is subject to a penalty equal to 5% of the unpaid tax, plus an additional 5% for each month (or fraction thereof), up to 25%. No penalty is due if no tax is due. Code Sec. 6651(a)(2) generally provides for an addition to tax in the case of any failure to pay the tax shown on any return required to be filed on its due date, unless it is shown that the failure is due to reasonable cause and not willful neglect.

The Code Sec. 6651(a)(2) penalty commences on the due date of the return, determined without regard to filing extensions and is 1/2% of the amount of tax shown on the return, plus an additional 1/2% for each month (or fraction thereof), up to 25%.

Code Sec. 6651(c)(1) provides that the failure to file penalty is reduced by the failure to pay penalty for any month where both apply.

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

Potential penalties for failure to file/pay. The fact sheet provided guidance on reasonable cause with respect to the reasonable cause for the failure to file or pay penalties. Generally, reasonable cause relief is granted when the taxpayer can demonstrate to the IRS that he/she exercised ordinary business care and prudence but nevertheless failed to meet the tax burden. Factors demonstrating whether or not ordinary business care and prudence were exercised include: the reasons provided for failing to meet the tax obligations; the taxpayer's compliance history; the length of time between the taxpayer's failure to meet the tax obligation and the subsequent compliance; circumstances beyond the taxpayer's control.

The facts and circumstances that the IRS considers in determining whether reasonable cause exists are: the taxpayer's education; whether the taxpayer has been previously subject to the tax; whether the taxpayer has been penalized before; whether there were recent changes in the tax forms or law that the taxpayer could not reasonably be expected to know; and the level of complexity of a tax or compliance issue.

Depending on facts and circumstances of a particular case, taxpayers may be able to establish reasonable cause if they can demonstrate that they were not aware of specific obligations to file returns or pay taxes. In addition to the failure to file and failure to pay penalties, the IRS said that other civil penalties may arise, including the accuracy-related penalty, fraud penalty and the other information reporting penalties.

Potential FBAR penalties. A taxpayer that fails to file a FBAR may be subject to either a willful or non-willful civil penalty, in the absence of reasonable cause. Generally, the civil penalty for willfully failing to file an FBAR can be up to the greater of $100,000 or 50% of the total balance of the foreign account at the time of the violation. Alternatively, non-willful violations that the IRS concludes are not due to reasonable cause are subject to a penalty of up to $10,000 per violation. No penalties are imposed if the IRS determines the violation was due to reasonable cause.

Factors weighing in favor of a determination that an FBAR violation was due to reasonable cause include reliance upon the advice of a professional tax advisor who was informed of the existence of the foreign financial account, that the unreported account was established for a legitimate purpose and there were no indications of efforts taken to intentionally conceal the reporting of income or assets, and that there was no tax deficiency (or there was a tax deficiency but the amount was de minimis) related to the unreported foreign account. Factors weighing against such a determination include whether the taxpayer's background and education indicate that he should have known of the FBAR reporting requirements, whether there was a tax deficiency related to the unreported foreign account, and whether the taxpayer failed to disclose the existence of the account to the person preparing his tax return. No single factor is determinative, the Fact Sheet said.

Although the IRS has established penalty mitigation guidelines, examiners may nevertheless determine that a penalty is not appropriate or that a lesser (or greater) penalty amount than the guidelines would otherwise provide is appropriate. In some instances, examiners may issue a warning letter rather than impose a penalty.

The Fact Sheet advises that if a taxpayer learns that he was required to file FBARs for earlier years, he should file the delinquent FBARs and attach a statement explaining why they were filed late. A taxpayer need not file FBARs that were due more than six years ago, since the statute of limitations for assessing FBAR penalties is six years from the due date of the FBAR. No penalty will be asserted if the IRS determines that the late filings were due to reasonable cause.

In addition, the Fact Sheet notes that beginning in 2012, U.S. taxpayers who have an interest in certain specified foreign financial assets with an aggregate value exceeding $50,000 must report those assets to the IRS on Form 8938 (Statement of Specified Foreign Financial Assets) with their tax return.

The Fact Sheet can be viewed on the IRS website athttp://www.irs.gov/newsroom/article/0,,id=250788,00.html.

Surrender of your US Citizenship or Loss of Citizenship Can Eliminate Need to File US Tax Returns

We have assisted hundreds of  US expats with the surrender of their US Citizenship or Permanent Residency. If you go through the process you will never have to file a US Tax Return again.  The State Department does require that you have Citizenship in another country before they will allow you to surrender your US Citizenship.  It is a two part process.  The legal surrender at the US Embassy or consulate and the second part is filing the proper forms with the IRS.   You must file at least the last five years US Tax returns and other foreign reporting forms and pay any taxes, interest and penalties that might be due along with a Form 8854.

Read the State Department rules on citizenship surrender or loss HERE.   For assistance email us at ddnelson@gmail.com or visit our website at www.TaxMeLess.com 

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      .