IRS Launches High-Wealth Task Force and Prepares Audits

On Oct. 26, 2009, IRS Commissioner Douglas Shulman announced the creation of a new specialized industry group to target high-wealth individuals. Surprisingly, this Global High Wealth Industry Group will be housed within the Large and Mid-Size Business (LMSB) Division, and the IRS is planning a number of examinations to test the program. According to Shulman, many other countries already employ specialized task forces to pursue their wealthiest taxpayers. The idea is to centralize IRS compliance efforts for high-wealth individuals because the IRS has to look at sophisticated financial, business, and investment arrangements with complicated legal structures and tax consequences. The task force will take a unified approach to its audits by focusing on the entire web of business entities controlled by a wealthy individual, including issues involving offshore structures, income sources and tax residency.

The IRS has ostensibly been targeting high-income taxpayers all along, but Shulman seemed to indicate in his comments that current IRS efforts typically involve identifying single returns for audit based on the usual scoring systems for audit selection. The new program would instead look at everything that may be connected to a single taxpayer, including trusts, private foundations, partnerships, equity-sharing arrangements, royalty and licensing agreements, and privately held and related entities where the taxpayer may have actual or beneficial ownership. The IRS has already hired flowthrough specialists and international examiners for the team and is considering adding economists, appraisal experts and industry specialists.

The IRS has not yet settled on a formal definition of high-wealth individuals, but Shulman specifically noted that other countries have often drawn the line at $30 million. He said the IRS will initially focus on individuals with “tens of millions of dollars” in assets or income.

US and Chile Sign New Income Tax Treaty on 2/4/10

WASHINGTON – In a ceremony at the U.S. Department of the Treasury today, Treasury Secretary Tim Geithner and Chilean Finance Minister Andrés Velasco signed a new income tax treaty between the United States and Chile that would provide certainty and stability of tax treatment for U.S. and Chilean cross-border investors.

If approved by the U.S. Senate, this treaty would be the first bilateral income tax treaty between the United States and Chile and would be only the second U.S. tax treaty with a South American country.

Provisions of the new tax treaty with Chile include:

Reductions in source-country withholding taxes on certain cross-border payments of dividends, interest and royalties;
Rules to determine when an enterprise or an individual of one country is subject to tax on business activities in the other country; and

Rules to enhance the mobility of labor by coordinating the tax aspects of the U.S. and Chilean pension systems.

The new tax treaty also contains other important provisions, including mechanisms through which the U.S. and Chilean tax authorities may collaborate to resolve tax disputes and relieve double taxation; provisions to ensure the full exchange between the U.S. and Chilean tax authorities of information for tax purposes; protections against discriminatory tax treatment; and provisions to ensure that only residents of the two countries enjoy the benefits of the treaty.

Tax Rules for International Flight Crews Working and Living Abroad

The IRS has recently released guidance for international flight crews working and living abroad. Click on the following link to our website to review those rules.  http://www.expatattorneycpa.com/id69.html  If you need help with your individual situation, return preparation or planning, do not hesitate to contact Don.

14,700 Total Offshore US Taxpayers Enter Voluntary Disclosure Program

The IRS has announced that 14,700 individual taxpayers filed by 10/15/09 to enter the Voluntary Offshore Disclosure Program. The filings disclosed bank accounts and other assets hidden in over 70 countries. The taxpayers entered the program in an attempt to reduce their penalties for failure to file certain forms with their tax returns to disclose their foreign bank accounts, foreign corporations, foreign trusts, etc.

New Tax Law Increases Penalties for Late Filing Partnership (1065) and Subchapter S Corporation Returns (1120S)

New High Cost Penalty  for Failure to File Partnership or S Corporation Returns on time!

Civil penalties apply for failure to file a partnership and S corporation returns. The penalty is $89 times the number of partners or shareholders for each month (or fraction of a month) that the failure continues, up to a maximum of 12 months for returns required to be filed after Dec. 31, 2008.

New law. Under the just enacted law, the base amount on which a penalty is computed for a failure with respect to filing either a partnership or S corporation return for a tax year beginning after Dec. 31, 2009, is increased to $195 per partner or shareholder. (Code Sec. 6698(b)(1) and Code Sec. 6699(b)(1), as amended by Act Sec. 16)
RIA observation: Over the fiscal period 2011 to 2019, this provision is projected to raise $642 million (partnership penalties) and $587 million (S corporation penalties).

Forbes Magazines 10 Best Places in World to Retire

Forbes has determined the 10 best places in the world to retire outside of the USA.  Factors they consider were not limited to taxes. They considered quality of life, health care, and other factors.  Some of the countries include France, Australia, Austria, Italy, Thailand, Malaysia,  Canada and Panama. Click here to read the article and more about their favorite countries.

Individual Income Tax Rates Around the World

We often are asked where is the best country to live and work in to reduce foreign taxes.  Wikepedia has a chart showing the various income tax rates for individuals and corporations in various countries. Check it out here.   Of course you can always consider Dubai which has no taxes.

Remember, so long as you are a US Citizen or permanent resident you still must file your US form 1040 with the IRS each year and report your worldwide income. Failure to file  timely special forms required for foreign financial accounts, foreign corporations, partnerships and trusts, and other related forms can also result in substantial penalties.

Mr. Schulman is pictured.  He is the Commissioner in charge at the INTERNAL REVENUE SERVICE and is primarily responsible for the dramatic  increase in international tax regulation at that agency.

RS Commissioner Doug Shulman's remarks before the AICPA's National Conference on Federal Taxation in Washington, D.C., on Oct. 26, 2009

In prepared remarks before the AICPA's National Conference on Federal Taxation on Oct. 26, IRS Commissioner Doug Shulman touched on a wide array of topics but the comments that will most likely attract the most interest involve what he called “the globa liz ation of tax administration.” Specifically, Shulman spoke of the dividends to be rea liz ed from the recently closed offshore settlement offer, and of the formation of a new Global High Wealth Industry group housed within its Large and Mid-Size Business (LMSB) operating division.

New IRS focus on global high wealth industry. Shulman announced that IRS was in the process of forming a Global High Wealth Industry group housed within its Large and Mid-Size Business (LMSB) operating division. This new unit will centra liz e and focus IRS compliance expertise involving high-wealth individuals and their related entities, which can often have an international component. Initially at least, IRS will be looking at individuals with “tens of millions of dollars of assets or income.”

A new unit was necessary, Shulman said, to properly deal with high wealth individuals' use of sophisticated financial, business, and investment arrangements with complicated legal structures and tax consequences. These may include trusts, real estate investments, royalty and licensing agreements, revenue-based or equity-sharing arrangements, private foundations, privately-held companies, and partnerships and other flow-through entities that require looking at the entire, and often huge, spectrum of transactions and entities. A single high wealth individual may have actual or ben eficial ownership of numerous related entities, sometimes alone and sometimes along with other family members or business associates. Shulman added that there are “other tax considerations regarding high wealth individuals, including international sourcing of income and tax residency, and offshore structures and bank accounts, to name just a few.”

IRS's game plan will be to take a unified look at the entire web of business entities controlled by a high wealth individual, to better understand the entire economic picture of the enterprise controlled by him or her and to assess the tax compliance of that overall enterprise (transfer tax as well as income tax issues). Shulman revealed that IRS has already begun hiring some agents and specialists, such as flow-through specialists and international examiners, and will add over time individuals with specia liz ed skills and expertise, such as economists to identify economic trends, appraisal experts to advise on valuation issues, and technical advisors to provide industry or specia liz ed tax expertise. Shulman said IRS “will also build new risk assessment techniques to identify high-income and high-wealth individuals and their related enterprises that should be reviewed holistically.”

Offshore income settlement offer. Over 7,500 people came forward under IRS's special offshore voluntary compliance program that ended on Oct. 15 (see Federal Taxes Weekly Alert 09/24/2009 and 04/02/2009). Shulman wouldn't speculate on how much tax money would be salvaged from the initiative but stressed that the effort will continue to pay off as taxpayers who are now back in the U.S. tax system will continue to pay taxes on their offshore income in the years to come.

Shulman also revealed that IRS will be mining the voluntary disclosure information from people who have come forward to identify financial institutions, advisors, and others who promoted or otherwise helped U.S. taxpayers hide assets and income offshore and skirt their tax responsibilities at home. In addition, IRS will increase its scrutiny of annual FBARs (Report of Foreign Bank and Financial Accounts) or foreign bank and financial account reports. Current law requires that U.S. taxpayers file an FBAR if their foreign financial accounts total more than $10,000, but current rules make it difficult to catch all of those who do not, Shulman said. Aside from the President's proposal for legislation that would toughen the reporting rules, there is an active project at IRS working to update definitions and instructions under the current FBAR rules. Shulman also revealed that future offshore efforts would be focused on multiple points around the globe, and that IRS is opening international Criminal Investigation offices in several new locations around the world ( Beijing , Panama City and Sydney ).