2011 Foreign Earned Income Exclusion Increases

For 2011, the foreign earned income exclusion for wages earned while working  and living abroad will be $92,900.  That is a $1,400 increase from that allowed for 2010.  If both spouses work abroad, each can exclude their earned income from US taxes up to that amount.  One spouse cannot use the other spouses unused portion of that exclusion.

If your are married and live abroad with your spouse, consider making her an employee or starting her own business since she will also receive a foreign earned income exclusion for 2011 of of $92,900 to be applied against her taxable income on her US income tax return.

You can also claim a deduction for foreign rental expenses, utilities and maintenance above a certain amount up to a maximum amount which varies per the country you in which you are living and working.

Quiet or Silent Disclosure May Not be Best Way to Go With Respect to Foreign Financial Accounts, Foreign corps, trusts, and partnerships

Forbes Magazine Article Does not recommend that taxpayers try "silent or quiet" disclosure to reveal their offshore bank accounts, financial accounts, foreign corporations, foreign partnerships or foreign trusts. The IRS says they are looking for individuals who are attempting to file past special foreign asset reporting forms and will hit them with the maximum penalties and possible criminal prosecution. Click Here to Read Article.

The IRS has extended the deadline for entering the 2011 Voluntary Offshore Disclosure Program to 9/9/11 from the original deadline of 8/31/11.   This will avoid the possible huge penalties which can be incurred if a taxpayer attempts to silently or quietly disclose.

IRS Extends 2011 Voluntary Offshore Disclosure Filing Deadline to September 9, 2011

Note: Though you may have missed the program which ended 9/9/11, you still can file all past unfiled tax returns including forms 5471, 8865, 3520, FBAR, etc., under the regular  IRS disclosure program which has always existed. Coming forward and entering this program in most situations will avoid any possible criminal prosecution and you can negotiate with the IRS to attempt to reduce the penalties they might try to impose for filing late offshore reporting tax forms.  See our website at www.taxmeless.com  to learn more about this procedure.


  If you have entered the 2011 Program, and are representing yourself, our firm can provide you with guidance and advice if you wish to continue  your self representation, or we can step in and act as your representative before the IRS.  We can also help you if you are not satisfied with your current representative. If you tax representative is an Attorney, they can provide you with the privacy and confidentiality of Attorney-Client privilege which is not available from a CPA or EA.




IRS Statement: OVDI Deadline Extension(Aug. 26, 2011)

Due to the potential impact of Hurricane Irene, the IRS has extended the due date for offshore voluntary disclosure initiative requests untilSeptember 9, 2011.  For those taxpayers who have not yet submitted their request and any documents, the following actions are necessary by September 9, 2011:

• Identifying information must be submitted to the Criminal Investigation office.  This includes name, address, date of birth, and social security number and as much of the other information requested in the Offshore Voluntary Disclosures Letter as possible.  This information must be sent to:

Offshore Voluntary Disclosure Coordinator
600 Arch Street, Room 6404
Philadelphia, PA 19106.

• Send a request for a 90-day extension for submitting the complete  voluntary disclosure package of information to the Austin campus.  This request must be sent to:

Internal Revenue Service
3651 S. I H 35 Stop 4301 AUSC
Austin, TX 78741
ATTN:  2011 Offshore Voluntary Disclosure Initiative

WHEN ARE FOREIGN PENSION PLAN CONTRIBUTIONS TAXABLE ON US TAX RETURNS?

US expatriates working for foreign employers may participate in foreign pension plans. These plans normally have beneficial tax treatment under local law. Unfortunately, these foreign arrangements generally do not meet the US "qualification rules". As a result, the beneficial treatment under local law is often not available to US citizens working abroad..

US QUALIFIED DEFERRED COMPENSATION

US employer sponsored pension plans qualify for special tax treatment under the Internal Revenue Code: tax deductible contributions for the employer; earnings in the plan are tax exempt; and the employee is not taxed until the benefits are received upon retirement or withdrawal of those pension funds. These tax benefits are not available unless the plan meets the specific requirements of the Internal Revenue Code.

NON-QUALIFIED DEFERRED COMPENSATION

The determination of when amounts deferred under a non-qualified deferred compensation arrangement are includible in the gross income of the taxpayer depends on the facts and circumstances of the arrangement and which Code section applies to those facts.

IRC § 402(b) Plans

Employer sponsored non-qualified funded deferred compensation plans are generally governed by the provisions of IRC § 402(b). US employees who participate in such a plan are taxed on the amount of the contributions made by the employer (once the benefits are vested or not subject to a substantial risk of forfeiture). If the employee is a "highly compensated" (compensation exceeds $105,000 or part of the top 20% of employees) the employee is taxed on both the contribution and the growth in the plan each year (to the extent the benefits are vested. (Non-Highly compensated employees are not taxed on the growth in the plan, but are taxed when the benefits are distributed.)

IRC § 409A

The provisions of IRC § 409A apply to deferred compensation plans not covered by IRC § 402(b), plans covered by a tax treaty or foreign pension plans that are available on a broad base to the employer's employees (but only to the extent of non-elective deferrals and employer contributions as limited by US rules).

Under IRC § 409A, if the deferred compensation arrangement does not meet the requirements of IRC § 409A, the employee will be subject to normal income tax, a 20% penalty tax and an interest charge. To meet the rules of IRC § 409A, the plan must provide that distributions from the deferred compensation plan are only allowed on separation from service, death, a specified time (or under a fixed schedule), change in control of a corporation, occurrence of an unforeseeable emergency, or if the participant becomes disabled.

The plan may not allow for the acceleration of benefits, except as provided by regulations. The plan must provide that compensation for services performed during a tax year may be deferred at the participant's election only if the election to defer is made no later than the close of the preceding tax year, or at such other time as provided in regulations.

The actual time and manner of distributions must be specified at the time of initial deferral.

INCOME TAX TREATY-PENSIONS

The normal US income tax rules may be altered by applicable treaty provisions; for example, the United States and the United Kingdom Income Tax Treaty. While the treaty does not specifically provide that each country's qualified plans will be treated as qualified plans by the other country, the treaty effectively provides for such a result with tax deferrals and tax reductions, but subject to certain limits.

In the context of a US citizen employed in the UK and participating in a pension plan established by the UK employer, the rules are that the employee may deduct (or exclude) contributions made by or on behalf of the individual to the plan; and benefits accrued under the plan are not taxable income. The Treaty further provides that the deduction (or exclusion) rule only applies to the extent the contributions or benefits qualify for tax relief in the UK and that such relief may not exceed the reliefs that would be allowed in the US under its domestic rules.

With respect to distributions the general rule under the Treaty is that a pension received by a resident of one country is only taxable by the country of residence. For Lump Sum payments, the general rule is that only the country of the situs of the pension plan may tax the distribution. However, as in most US treaties, the US retains the right to tax its citizens as if the treaty were not in force; with the result that the US retains its right to tax its citizens on both periodic distributions as well as lump sum distributions. Double taxation is avoided through the use of the foreign tax credit rules.

HOW TO TREAT CONTRIBUTIONS  TO YOUR FOREIGN PENSION PLAN

Where a US citizen employee participates in a foreign pension plan, it is likely that the plan will not have met the US qualification rules. Thus, the employee will be subject to US tax on the contributions to the plan and the growth in the plan. For employees that live in a jurisdiction that imposes an income tax at rates higher than the US rate, it is likely that the employee will have generated a pool of "excess foreign tax credits". These credits may be used to offset the US tax on foreign sourced income and therefore may be used to reduce (or eliminate) the US tax that may currently arise on the deferred compensation.

If the employee has "excess foreign tax credits", (and provided the deferred compensation is "foreign sourced income"), the current US tax on such income may be partially or fully offset.  Another possibility is for the US taxpayer to make a claim under an applicable treaty (if the country of employment has a Tax Treaty with the US).. If there is a treaty with proper pension provisions, and  the contributions to the plan have not exceeded the US plan limitations, the contributions to the plan and the growth in the plan should not be subject to current US income tax.  If there is no treaty with the country the expat is living in, then there is no deferral of pension contributions by a foreign employer.

An expat taxpayer has the choice of using excess foreign tax credits or invoking an applicable tax treaty to avoid having to pay current US income tax on contributions and the growth in the foreign deferred compensation scheme. Whether to use excess credits or to invoke the treaty will depend on a number of factors such as which may vary each particular situation.

TAX REPORTING:

There are a number of reporting requirements that may apply in addition to the individual's income tax return. This may include certain foreign trust  reporting returns (form 3520 and 3520A), as well as the Treasury report on Foreign Bank and Financial Accounts which is form TD F 90-22.1. This report must be filed when your foreign accounts(when combined together at their highest balances during the year) exceed $10,000 and covers not only bank accounts but arrangements outside the US that are virtually any type of financial account. This form must be filed by June 30 of each year, and there are no extensions. Substantial penalties (including criminal penalties) may apply.

US expatriates working for foreign employers may participate in foreign pension plans. These plans normally have beneficial tax treatment under local law. Unfortunately, these foreign arrangements generally do not meet the US "qualification rules". As a result, the beneficial treatment under local law is often not available to US citizens working abroad..

US QUALIFIED DEFERRED COMPENSATION

US employer sponsored pension plans qualify for special tax treatment under the Internal Revenue Code: tax deductible contributions for the employer; earnings in the plan are tax exempt; and the employee is not taxed until the benefits are received upon retirement or withdrawal of those pension funds. These tax benefits are not available unless the plan meets the specific requirements of the Internal Revenue Code.

NON-QUALIFIED DEFERRED COMPENSATION

The determination of when amounts deferred under a non-qualified deferred compensation arrangement are includible in the gross income of the taxpayer depends on the facts and circumstances of the arrangement and which Code section applies to those facts.

IRC § 402(b) Plans

Employer sponsored non-qualified funded deferred compensation plans are generally governed by the provisions of IRC § 402(b). US employees who participate in such a plan are taxed on the amount of the contributions made by the employer (once the benefits are vested or not subject to a substantial risk of forfeiture). If the employee is a "highly compensated" (compensation exceeds $105,000 or part of the top 20% of employees) the employee is taxed on both the contribution and the growth in the plan each year (to the extent the benefits are vested. (Non-Highly compensated employees are not taxed on the growth in the plan, but are taxed when the benefits are distributed.)

IRC § 409A

The provisions of IRC § 409A apply to deferred compensation plans not covered by IRC § 402(b), plans covered by a tax treaty or foreign pension plans that are available on a broad base to the employer's employees (but only to the extent of non-elective deferrals and employer contributions as limited by US rules).

Under IRC § 409A, if the deferred compensation arrangement does not meet the requirements of IRC § 409A, the employee will be subject to normal income tax, a 20% penalty tax and an interest charge. To meet the rules of IRC § 409A, the plan must provide that distributions from the deferred compensation plan are only allowed on separation from service, death, a specified time (or under a fixed schedule), change in control of a corporation, occurrence of an unforeseeable emergency, or if the participant becomes disabled.

The plan may not allow for the acceleration of benefits, except as provided by regulations. The plan must provide that compensation for services performed during a tax year may be deferred at the participant's election only if the election to defer is made no later than the close of the preceding tax year, or at such other time as provided in regulations.

The actual time and manner of distributions must be specified at the time of initial deferral.

INCOME TAX TREATY-PENSIONS

The normal US income tax rules may be altered by applicable treaty provisions; for example, the United States and the United Kingdom Income Tax Treaty. While the treaty does not specifically provide that each country's qualified plans will be treated as qualified plans by the other country, the treaty effectively provides for such a result with tax deferrals and tax reductions, but subject to certain limits.

In the context of a US citizen employed in the UK and participating in a pension plan established by the UK employer, the rules are that the employee may deduct (or exclude) contributions made by or on behalf of the individual to the plan; and benefits accrued under the plan are not taxable income. The Treaty further provides that the deduction (or exclusion) rule only applies to the extent the contributions or benefits qualify for tax relief in the UK and that such relief may not exceed the reliefs that would be allowed in the US under its domestic rules.

With respect to distributions the general rule under the Treaty is that a pension received by a resident of one country is only taxable by the country of residence. For Lump Sum payments, the general rule is that only the country of the situs of the pension plan may tax the distribution. However, as in most US treaties, the US retains the right to tax its citizens as if the treaty were not in force; with the result that the US retains its right to tax its citizens on both periodic distributions as well as lump sum distributions. Double taxation is avoided through the use of the foreign tax credit rules.

HOW TO TREAT CONTRIBUTIONS  TO YOUR FOREIGN PENSION PLAN

Where a US citizen employee participates in a foreign pension plan, it is likely that the plan will not have met the US qualification rules. Thus, the employee will be subject to US tax on the contributions to the plan and the growth in the plan. For employees that live in a jurisdiction that imposes an income tax at rates higher than the US rate, it is likely that the employee will have generated a pool of "excess foreign tax credits". These credits may be used to offset the US tax on foreign sourced income and therefore may be used to reduce (or eliminate) the US tax that may currently arise on the deferred compensation.

If the employee has "excess foreign tax credits", (and provided the deferred compensation is "foreign sourced income"), the current US tax on such income may be partially or fully offset.  Another possibility is for the US taxpayer to make a claim under an applicable treaty (if the country of employment has a Tax Treaty with the US).. If there is a treaty with proper pension provisions, and  the contributions to the plan have not exceeded the US plan limitations, the contributions to the plan and the growth in the plan should not be subject to current US income tax.  If there is no treaty with the country the expat is living in, then there is no deferral of pension contributions by a foreign employer.

An expat taxpayer has the choice of using excess foreign tax credits or invoking an applicable tax treaty to avoid having to pay current US income tax on contributions and the growth in the foreign deferred compensation scheme. Whether to use excess credits or to invoke the treaty will depend on a number of factors such as which may vary each particular situation.

TAX REPORTING:

There are a number of reporting requirements that may apply in addition to the individual's income tax return. This may include certain foreign trust  reporting returns (form 3520 and 3520A), as well as the Treasury report on Foreign Bank and Financial Accounts which is form TD F 90-22.1. This report must be filed when your foreign accounts(when combined together at their highest balances during the year) exceed $10,000 and covers not only bank accounts but arrangements outside the US that are virtually any type of financial account. This form must be filed by June 30 of each year, and there are no extensions. Substantial penalties (including criminal penalties) may apply.

Will Canada Revenue Agency Help the IRS Collect the Penalties for Various Unfiled Foreign Reporting Forms?

Click here to visit the link to recent article in the Vancouver Sun about Canada Revenue Agency Opinion. on enforcing IRS penalties for not filing FBARS, Foreign corporation and partnership forms, etc. It appears they will not help the IRS collect such penalties if assessed.

Ninth Circuit finds Fifth Amendment (self incrimination) inapplicable to offshore banking records

M.H. v. United States; No. 11-55712 (8/19/2011)

The Ninth Circuit recently held that the Fifth Amendment privilege against self-incrimination may not be used by a taxpayer under grand jury investigation for the use of his undisclosed Swiss bank accounts.

Facts. An unamed taxpayer was the target of a grand jury investigation to determine whether he used undisclosed Swiss bank accounts to evade paying federal taxes. Records indicating that the taxpayer had transferred assets from an account at UBS AG to an account with UEB Geneva in 2002 was disclosed to the U.S. under a 2009 deferred prosecution agreement between the U.S. Department of Justice and UBS.

District Court. The U.S. District Court for the Southern District of California granted a motion to compel the taxpayer to provide his records pertaining to his foreign bank accounts under the Required Records Doctrine. Under the doctrine, records that are required to be maintained by law fall outside the scope of the Fifth Amendment privilege, when certain conditions are satisfied.

The taxpayer argued that the information requested could conflict with other information he may have provided to the IRS. Thus, production of the requested records would be self incriminating. Moreover, the taxpayer argued that the denial of maintaining such evidence would also be self incriminating because the failure to maintain such documentation is a felony.

Circuit Court. The Ninth Circuit affirmed the lower court's decision, finding that under Grosso v. U.S., 390 U.S. 62 (1968) documents that are regulatory, customarily kept and have some public aspects apply to documents that must maintained under the Bank Secrecy Act.

The decision can be viewed at http://www.ca9.uscourts.gov/datastore/opinions/2011/08/19/11-55712.pdf.

Delinquent U.S. Foreign Information Returns: Is Filing Under the 2011 OVDI Appropriate?

Read more about whether or not you should enter the OVD program in the following article form the AICPA Tax Advisor  publication.  Click here to read the article: .

IRS updates list of treaties qualifying foreign dividends for preferential rates

Notice 2011-64, 2011-37 IRB

A new notice updates the list of U.S. tax treaties that meet requirements for dividends from foreign corporations to qualify for preferential rates. The notice also clarifies the requirements for treatment as a qualified foreign corporation.

Background. A noncorporate taxpayer's adjusted net capital gain is taxed at a maximum rate of 15% or, to the extent it would have been taxed at a rate below 25% if it had been ordinary income, at a maximum rate of 0%. (Code Sec. 1(h))

Adjusted net capital gain is net capital gain for the tax year (i.e., the excess of net long-term capital gains over net short-term capital losses for a tax year):

• less the sum of specified types of long-term capital gain that are taxed at a maximum rate of 28% (gain on the sale of most collectibles and gain on the unexcluded part of Code Sec. 1202 small business stock) or 25% (unrecaptured section 1250 gain, i.e., gain attributable to real estate depreciation),
• plus qualified dividend income.

Qualified dividend income—generally, dividends received during the tax year from domestic corporations and “qualified foreign corporations,” subject to holding period requirements and specified exceptions—is effectively treated as adjusted net capital gain, and therefore taxed at the same rates that apply to adjusted net capital gain. (Code Sec. 1(h)(11))

Subject to certain exceptions, a qualified foreign corporation is any foreign corporation that is either (i) incorporated in a U.S. possession (Code Sec. 1(h)(11)(C)(i)(I)), or (ii) eligible for benefits of a comprehensive income tax treaty with the U.S. that IRS determines is satisfactory for purposes of this provision and that includes an exchange of information program (the “treaty test”). (Code Sec. 1(h)(11)(C)(i)(II)) A foreign corporation that does not satisfy either of these two tests is treated as a qualified foreign corporation with respect to any dividend paid by it if the stock on which the dividend is paid is readily tradable on an established securities market in the U.S. (Code Sec. 1(h)(11)(C)(ii))

A qualified foreign corporation does not include any foreign corporation that for its tax year in which the dividend was paid, or the preceding tax year, is a Code Sec. 1297 passive foreign investment company. (Code Sec. 1(h)(11)(C)(iii)) A dividend from a qualified foreign corporation is also subject to the other limitations in Code Sec. 1(h)(11). For example, a shareholder receiving a dividend from a qualified foreign corporation must satisfy the Code Sec. 1(h)(11)(B)(iii) holding period requirements.

Updated list. Notice 2011-64 updates the list to add two U.S. income tax treaties that entered into force after the publication of Notice 2006-101: the U.S. income tax treaties with Bulgaria (which entered into force on Dec. 15, 2008) and Malta (which entered into force on Nov. 23, 2010). (Notice 2011-64, Sec. 2)

Other requirements. Notice 2011-64 also clarifies that a foreign corporation must be eligible for benefits of one of the U.S. income tax treaties listed in the Appendix in order to be treated as a qualified foreign corporation under Code Sec. 1(h)(11)(C)(i) 's treaty test. Accordingly, the foreign corporation must be a resident under the relevant treaty and satisfy any other requirements of that treaty, including the requirements under any applicable limitation on benefits provision. For purposes of determining whether it satisfies these requirements, a foreign corporation is treated as though it were claiming treaty benefits, even if it does not derive income from sources within the U.S. (Notice 2011-64, Sec. 3)

Effective date. Notice 2011-64 is effective with respect to: (1) Bulgaria for dividends paid on or after Dec. 15, 2008; (2) Malta for dividends paid on or after Nov. 23, 2010; (3) Bangladesh for dividends paid on or after Aug. 7, 2006; (4) Barbados for dividends paid after Dec. 19, 2004; (5) Sri Lanka for dividends paid on or after July 12, 2004; and (6) all other U.S. income tax treaties listed in the appendix for tax years beginning after Dec. 31, 2002. (Notice 2011-64, Sec. 4)

Tax Havens in Zug Switzerland and Ireland

The popular news show 60 MINUTES has done an excellent piece on the tax havens being used by large US Corporations to shelter untold amounts of income from US high tax rates. The two places mentioned are Zug, Switzerland and Ireland.  Read the article here.

The tax rates they are paying in these two locations are about 16-18 percent.

Individual entrepreneurs  may be able to do the same (assuming they structure their business correctly) if they have an operating business that sells goods or services and those sales are to international customers. It will not work with respect to some types of income if the foreign corporation put in place has certain types of income call Subpart F income.

FBAR filing rules and Chart of Potential Civil and Criminal Penalties for non filing or late filing

Possible Civil and Criminal Penalties that can be imposed by the IRS for failure to file FBAR (TDF 90-22.1) forms or filing those forms late as well as other rules concerning that form are can read at the link to the following IRS webpage:  FBAR Rules, Civil and Criminal Penalties

The penalties may be reduced if you enter the 2011 IRS Offshore Voluntary Disclosure Program prior to its deadline of 8/31/11. 

1,470 Millionaires Didn’t Pay Income Taxes in 2009

The IRS data showed there were 235,413 taxpayers making $1 million or more in 2009, of whom 1,470 paid no federal income taxes. Among the possible reasons, according to ABC News, could be write-offs for charitable deductions, investments in tax-exempt state and municipal bonds, or foreign tax credits.

In contrast, the average income for taxpayers fell that year in the wake of the financial crisis by $3,516 to $54,283, a drop of approximately 6.1 percent, according to the Huffington Post.

IRS Reminds Taxpayers that the Aug. 31 Deadline Is Fast Approaching for the Second Special Voluntary Disclosure Initiative of Offshore Accounts

WASHINGTON — U.S. taxpayers hiding income in undisclosed offshore accounts are running out of time to take advantage of a soon-to-expire opportunity to come forward and get their taxes current with the Internal Revenue Service.

The IRS today reminded taxpayers that the 2011 Offshore Voluntary Disclosure Initiative (OVDI) will expire on Aug. 31, 2011. Taxpayers who come forward voluntarily get a better deal than those who wait for the IRS to find their undisclosed accounts and income. New foreign account reporting requirements are being phased in over the next few years, making it ever tougher to hide income offshore. As importantly, the IRS continues its focus on banks and bankers worldwide that assist U.S. taxpayers with hiding assets overseas. 

“The time has come to get back into compliance with the U.S. tax system, because the risks of hiding money offshore keeps going up,” said IRS Commissioner Doug Shulman. “Our goal is to get people back into the system. The second voluntary initiative gives people a fair way to resolve their tax problems.”

The 2011 OVDI was announced on Feb. 8, 2011, and follows the 2009 Offshore Disclosure Program (OVDP).  The 2011 initiative offers clear benefits to encourage taxpayers to come forward rather than risk detection by the IRS. Taxpayers hiding assets offshore who do not come forward will face far higher penalties along with potential criminal charges.

For the 2011 initiative, there is a new penalty framework that requires individuals to pay a penalty of 25 percent of the amount in the foreign bank accounts in the year with the highest aggregate account balance covering the 2003 to 2010 time period. Some taxpayers will be eligible for 5 or 12.5 percent penalties in certain narrow circumstances.

Participants also must pay back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties. All original and amended tax returns must be filed by the deadline.

The IRS has made available the 2011 OVDI information in eight foreign languages for those taxpayers with undisclosed offshore accounts. The agency took this step to reach taxpayers whose primary language may not be English. These translations include the following languages: Chinese (Traditional andSimplified), Farsi, German, Hindi, Korean, Russian, Spanish and Vietnamese. 

The IRS decision to open a second special disclosure initiative was based on the success of the first program and many more taxpayers coming forward after the program closed on Oct. 15, 2009. The first special disclosure initiative program closed with about 15,000 voluntary disclosures regarding accounts at banks in more than 60 countries. Many taxpayers came in after the first program closed.  These taxpayers were deemed eligible to take advantage of the special provisions of the second initiative.

Further details about this initiative are provided in a series of questions and answers.

Tax Frauds You Should Be Wary About

Here are five year-round scams every taxpayer should know about.

1. Hiding Income Offshore The IRS aggressively pursues taxpayers involved in abusive offshore transactions and the promoters who facilitate or enable these schemes. Taxpayers have tried to avoid or evade U.S. income tax by hiding income in offshore banks and brokerage accounts, or by using offshore debit cards, credit cards, wire transfers, foreign trusts, employee-leasing schemes, private annuities or life insurance plans.

In February, the IRS announced a second voluntary disclosure initiative to bring offshore money back into the U.S. tax system. The new voluntary disclosure initiative will be available through Aug. 31, 2011.
2. Phishing Scam artists use phishing to trick unsuspecting victims into revealing personal or financial information. Scams take the form of e-mails, phony websites or phone calls that offer a fictitious refund or threaten an audit or investigation to lure victims into revealing personal information. The IRS never initiates unsolicited e-mail contact with taxpayers about their tax issues. Phishers use the information to steal the victim’s identity, access their bank accounts and credit cards or apply for loans. Please forward suspicious scams to the IRS at phishing@irs.gov. You can also visitwww.irs.gov, keyword phishing, for additional information.
3. Return Preparer Fraud Dishonest tax return preparers cause trouble for taxpayers by skimming a portion of the client’s refund or charging inflated fees for tax preparation. They attract new clients by promising refunds that are too good to be true. To increase confidence in the tax system, the IRS now requires all paid return preparers to register with the IRS, pass competency tests and attend continuing education. Taxpayers can report suspected return preparer fraud to the IRS on Form 3949-A, Information Referral.
4. Filing False or Misleading Forms The IRS continues to see false or fraudulent tax returns filed to obtain improper tax refunds.
Scammers often use information from family or friends to file false or fraudulent returns, so beware of requests for such data. Don’t claim deductions or credits you are not entitled to and never willingly allow others to use your information to file false returns. If you participate in such schemes, you could be liable for financial penalties or even face criminal prosecution. The IRS takes refund fraud seriously, has programs to aggressively combat it and stops the vast majority of incorrect refunds.
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 www.irs.gov. These arguments are false and have been thrown out of court repeatedly.

For the full list of 2011 Dirty Dozen tax scams or to find out how to report suspected tax fraud, visit www.irs.gov.

California's New Voluntary Compliance Initiative Includes Unreported Foreign Income

California's Voluntary Compliance Initiative 2 will run from August 1, 2011 through October 31, 2011. It provides (for those who file amended returns and participate) for reduced penalties and can avoid criminal action by California for those who have participated in abusive tax avoidance transactions or offshore financial arrangements.

What is an offshore financial arrangement? 

An offshore financial arrangement (OFA) is any transaction designed to avoid or evade California income or  franchise tax through the use of: (a) offshore payment cards, including credit, debit, or charge cards issued  by banks in foreign jurisdictions, or (b) foreign banks, financial institutions, corporations, partnerships, trusts, or other entity.  This would include interest, dividends, capital gains, rental income, etc. that were not reported on your California tax return solely because those items were located or occurred in a offshore countries.

What is an abusive tax avoidance transaction?

Abusive tax avoidance transaction (ATAT) means a:  

• Tax shelter as defined under Internal Revenue Code (IRC) Section 6662(d)(2)(C)

• Reportable transaction as defined under IRC Section 6707A(c)(1) that is not adequately disclosed in

accordance with IRC Section 6664(d)(2)(A),

• Listed transaction as defined under IRC Section 6707A(c)(2),

• Gross misstatement within the meaning of IRC Section 6404(g)(2)(D), or

• Transaction to which the noneconomic substance transaction (NEST) penalty applies under Revenue and

Taxation Code (RTC) Section 19774.

Read More Here.  Let us help you amend your current and past returns and enter the program while there is still time to take advantage of its benefits.  

Attorney-Client Privilege - CPAs, Enrolled Agents, and Tax Preparers Do Not Have It

When you are discussing your personal tax situation (and problems) with your CPA, Enrolled Agent or tax preparer, everything you say to them and all of their files and notes on your conversations with them, must be revealed to the IRS if subpoenaed or requested in a legal action.  They can also be forced to testify on everything you said during meetings with the preparer or on the phone.

When you consult with a licensed attorney, everything you tell them, including notes in their files, and in most situations the tax research and their advice and recommendations to you is privileged and private. The attorney cannot be forced to reveal any of those items if subpoenaed or questioned by the IRS or in a legal matter.

You need to keep this Attorney-client privilege in mind when consulting a tax professional concerning entering any of the IRS Voluntary Disclosure Programs and seeking counsel on past unfiled tax returns or tax problems (both civil and criminal). Discussing the situation with anyone other than an attorney could later be used against you.

It is often best when their are potential tax problems or possible criminal consequences to have an Attorney actually hire the accountant to prepare any required returns in order to keep as much as information as legally possible from being subject to discovery.  Documents that are connected with the actual preparation or information which is on your tax return (or information which should be on your return)  cannot be kept confidential.

IRS Issues another draft version of Form 8938 for foreign financial asset holders

 Form 8938, “Statement of Specified Foreign Financial Assets”

The IRS has issued another new draft Form 8938, “Statement of Specified Foreign Financial Assets,” which is available on IRS's website. Form 8938 will be used by individuals to report an interest in one or more specified foreign financial assets.

Background. For tax years beginning after Mar. 18, 2010, taxpayers with an interest in a “specified foreign financial asset” during the tax year must attach a disclosure statement to their income tax return for any year in which the aggregate value of all such assets is greater than $50,000. 

“Specified foreign financial assets” are: (1) depository or custodial accounts at foreign financial institutions, and (2) to the extent not held in an account at a financial institution, (a) stocks or securities issued by foreign persons, (b) any other financial instrument or contract held for investment that is issued by or has a counterparty that is not a U.S. person, and (c) any interest in a foreign entity. 

For most taxpayers on a Calendar year basis, this form will be due with their 2011 tax return.

The draft Form 8938 was released on June 22nd without instructions. However, the draft form references the instructions throughout, which indicates that they will likely be issued soon.

Part I of the draft form requires information about foreign deposit and custodial accounts, including the maximum value of any such account during the tax year. Part II has similar entries for “other foreign assets,” but notes that specified foreign financial assets that have been otherwise reported on Forms 3520, 3520-A, 5471, 8621, or 8865, do not have to be included on Form 8938. Part III asks for a summary of tax items attributable to the accounts and assets reported in Parts I and II, including associated items such as interest, dividends, and royalties. Part IV requires disclosure of the number of the filed forms referenced in Part II on which any foreign financial assets that were excepted from Part II were reported.

You  can be view the new draft  form on the IRS website at http://www.irs.gov/pub/irs-dft/f8938--dft.pdf. 

Foreign Bank and Financial Account Report (FBAR)(TDF 90-22.1) is due 6/30/11 and cannot be extended.

Form TDF 90-22.1 to report your foreign financial and bank accounts is due 6/30/11 and cannot be extended. There is a penalty of $10,000 or more for not filing this form or filing it late.  It is filed separately from your US tax return.

• The FBAR form and instructions can be downloaded here.
• The FBAR must be filed if the combined highest balances in your foreign bank accounts, pension accounts, stock brokerage accounts, etc. equal or exceed $10,000 at any time during 2010.
• If you have not filed this form in past years but are required to, the IRS can busject you to much greater penalties and criminal prosecution unless you enter the 2011 IRS Voluntary Offshore Disclosure Program which may reduce your penalties and stop possible criminal prosecution by its deadline 8/31/11.
• The IRS is currently securing lists of US depositors from foreign banks and financial institutions and will be checking in the future and imposing penalties if they discover you should have filed this form and did not do so.
• Failing to file this form has much more serious monetary and criminal consequences in most situations than failing to file your personal tax returns late.

Please contact us for a mini consultation if you wish a consultation protected by Attorney client privilege on your personal situation.  We have helped hundreds of expatriates catch up with their past unfiled returns and FBAR forms.

RS Extends Voluntary Disclosure Deadline

The Internal Revenue Service has given taxpayers an extra 90 days to provide a voluntary disclosure of their offshore bank accounts, foreign corporations, foreign partnerships and LLCs,  and Passive Foreign Investment Companies,  if they have made a “good faith” attempt to gather the necessary materials.

In an update  made on  June 2, 2011 to the 2011 Offshore Voluntary Disclosure Initiative, a new question asks about what happens if the taxpayer cannot comply by the August 31, 2011, deadline for the latest voluntary disclosure program.

The update expands upon an earlier answer, FAQ 25, describing all of the materials that must be sent to the IRS, including copies of previously filed tax returns and foreign account statements. The update noted, “A taxpayer may request an extension of the deadline to complete his or her submission if the taxpayer can demonstrate a good faith attempt to fully comply with FAQ 25 on or before August 31, 2011. The good faith attempt to fully comply must include the properly completed and signed agreements to extend the period of time to assess tax (including tax penalties) and to assess FBAR penalties.

“Requests for up to a 90 day extension must include a statement of those items that are missing, the reasons why they are not included, and the steps taken to secure them.  Requests for extensions must be made in writing and sent to the Austin Service Center on or before August 31, 2011.

Internal Revenue Service
3651 S. I H 35 Stop 4301 AUSC
Austin, TX 78741”

Extension of Time fo File FBAR Form - if you only sign but have no financial interest

The IRS has extended the time you have to file the FBAR (TDF 90-22.1form) to report Foreign Bank and Financial Accounts if you only sign on the account (signature authority) but have NO financial interest in the account for tax years 2009 and earlier. If this is your situation, you now have until November 1, 2011 to file all applicable FBAR forms with respect to such accounts.  This extension of time does not apply to the 2010 FBAR forms which are still due on 6/30/11 even if you only sign, but have no financial interest.

This extension of time does not affect the date requirement to file FBARs for the IRS 2009 or 2011 Offshore Voluntary Disclosure Programs.

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,