US Merchants and Others Using Offshore Credit Card Accounts - Department of Justice is Gunning for You.

The Justice Department has filed a “John Doe” summons with a federal court seeking the credit card records of U.S. merchants hiding money in offshore bank accounts.

The DOJ asked a Denver federal court to approve the summons on one of the nation’s largest payment card processors, First Data Corp. U.S. District Court Judge Robert Blackburn approved the request Wednesday. The Internal Revenue Service claims that First Data active marketed and sold the offshore services to U.S. merchants and their financial advisors to help them hide the proceeds of both brick-and-mortar and Internet sales in offshore bank accounts.

"John Doe" summonses allow the IRS to obtain information about U.S. taxpayers whose identities are not yet known. The information expected in response to the summons will be used by the IRS to identify merchants who use offshore accounts to evade their U.S. tax liabilities.

The petition alleges that the merchants have opened bank accounts in offshore jurisdictions and directed their payment card processor, in this instance First Data, to deposit the proceeds from their debit or credit card transactions directly into the offshore accounts.

The courts have previously approved numerous John Doe summonses on credit card companies and third-party credit card processors, allowing the IRS to identify individuals who were using debit and credit cards issued by offshore banks to evade their taxes. The IRS is also using John Doe summonses to get information on tens of thousands of customers of Swiss bank UBS.

SETTLEMENT OFFER FOR THOSE YOU VOLUNTARILY DISCLOSE PAST OFFSHORE INCOME

IRS Commissioner Doug Shulman has announced what is in effect a settlement offer for those that voluntarily and timely disclose unreported offshore income. Those meeting the terms of the offer will have to pay back-taxes and interest for six years, and pay either an accuracy or delinquency penalty on all six years. They will also pay a penalty of 20% of the amount in the foreign bank accounts in the year with the highest aggregate account or asset value. In other words, 20% of the highest asset value of an account anytime in the past six years. However, those who come forward on a timely basis will not face criminal prosecution.

Highlights of the offer. As explained in a memorandum written by Linda E. Stiff, Deputy Commissioner for Services and Enforcement and addressed to the Commissioners for the Large and Mid-Size (LMSB) and Small Business/Self-Employed (SBSE) Divisions, the tax liabilities related to offshore issues of taxpayers that make “voluntary disclosure requests'” will be settled as follows:

... Taxes and interest due going back 6 years will be assessed. The taxpayer must file or amend all returns, including information returns, and Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts (FBAR)).

... IRS will assess either an accuracy or delinquency penalty for all years (no reasonable cause exception will be applied).

... In lieu of all other penalties that may apply (including FBAR and information return penalties), IRS well assess a penalty equal to 20% of the amount in foreign bank accounts/entities in the year with the highest aggregate account/asset value. The penalty is reduced to 5% if, with respect to the accounts or entities formed: (a) the taxpayer did not open them or cause them to be opened or formed; (b) there has been no activity during the period the accounts/entities were controlled by the taxpayer; and (c) all applicable U.S. taxes have been paid on the funds in the accounts/entities (where only the earnings have escaped U.S. taxes).
The above terms will apply only to taxpayers that “fully cooperate with the IRS both civilly and criminally,” for all voluntary disclosure requests that are submitted to IRS, and are not yet resolved. The terms will remain in effect only for six months from Mar. 23, 2009 (the date that the Deputy Commissioner for Services and Enforcement released the memorandum on voluntary disclosure requests). IRS Commissioner Doug Shulman says that after that time, IRS will reevaluate all of its options, and warned that for those “who continue to hide their heads in the sand, the situation will only become more dire.”

Related memoranda to the SBSE and LMSB Directors describe various penalties that may apply in offshore cases, revoke the “Last Chance Compliance Initiative” as of Mar. 23, 2009, and explain how voluntary disclosure cases are to be routed within IRS.

Those coming forward will avoid criminal prosecution. IRS Commissioner Doug Shulman's Statement on Offshore Income says that those taxpayers who hid money offshore can avoid criminal prosecution by timely complying with the terms of the offer.

BAD NEWS FOR CIVILIANS WORKING FOR PRIVATE CONTRACTORS IN COMBAT ZONES

The IRS office of chief counsel has held that private citizens working for contractors in a Combat Zone must pay taxes on all of their income. The income tax exclusion for combat pay only applies to members of the Armed Forces and not to civilian contractors and employees.

They can qualify for the physical presence foreign earned income exclusion of $91,400 (for 2009) if the live and work in the foreign country for a full 12 month fiscal year and are present in that foreign country for 330 days out of that 12 month fiscal year period. This is called the "physical presence test." It is almost impossible for a private employee or contractor working in a combat zone such as Iraq or Afghanistan to qualify as a bonafide resident in order to secure the foreign earned income exclusion. AM2009-003

NEW 2009 US INCOME TAX LAW FOR INDIVIDUAL TAXPAYERS

The recently enacted “American Recovery and Reinvestment Act of 2009” (the 2009 economic stimulus act) contains a wide-ranging tax package that includes tax relief for low and moderate-income wage earners, individuals and families with college expenses, and home and car purchasers. Some of the provisions concerning individuals include:
“Making Work Pay” credit. The new law provides an individual tax credit in the amount of 6.2 percent of earned income not to exceed $400 for single returns and $800 for joint returns in 2009 and 2010. The credit is phased out at adjusted gross income (AGI) in excess of $75,000 ($150,000 for married couples filing jointly). The credit can be claimed as a reduction in the amount of income tax that is withheld from a paycheck, or through a credit on a tax return. Under the credit, workers can expect to see perhaps $13 a week less withheld from their paychecks starting around June. Next year, the extra take-home pay will go down to around $9 per week.
Economic recovery payment. The new law provides for a one-time payment of $250 to retirees, disabled individuals and Social Security beneficiaries and SSI recipients receiving benefits from the Social Security Administration and Railroad Retirement beneficiaries, and to veterans receiving disability compensation and pension benefits from the U.S.Department of Veterans' Affairs. The one-time payment is a reduction to any allowable Making Work Pay credit.
Refundable credit for certain federal and state pensioners. The new law provides a one-time refundable tax credit of $250 in 2009 to certain government retirees who are not eligible for Social Security benefits. This one-time credit is a reduction to any allowable Making Work Pay credit.
Unemployment compensation exclusion. A provision temporarily suspends federal income tax on the first $2,400 of unemployment benefits received by a recipient in 2009.
Expanded earned income tax credit. The new law provides tax relief to families with three or more children and increases marriage penalty relief. The changes apply for 2009 and 2010.
Expanded child tax credit. A measure increases the eligibility for the refundable child tax credit in 2009 and 2010 by lowering the threshold to $3,000 (from $8,500 in 2008).
Expanded and revised higher education tax credit. The new law creates a $2,500 higher education tax credit that is available for the first four years of college. The credit is based on 100% of the first $2,000 of tuition and related expenses (including books) paid during the tax year and 25% of the next $2,000 of tuition and related expenses paid during the tax year, subject to a phase-out for AGI in excess of $80,000 ($160,000 for married couples filing jointly). Forty percent of the credit is refundable. The new credit temporarily replaces the Hope credit.
Computers as an education expense. A provision permits computers and computer technology to qualify as qualified education expenses in 529 education plans for tax years beginning in 2009 and 2010.
Expanded first-time credit for first-time home buyers. Last year, Congress provided taxpayers with a refundable tax credit that was equivalent to an interest-free loan equal to 10% of the purchase of a home (up to $75,000) by first-time home buyers. The provision applied to homes purchased on or after April 9, 2008 and before July 1, 2009. Taxpayers receiving this tax credit were required to repay any amount received under this provision back to the government over 15 years in equal installments (or earlier if the home was sold). The credit phases out for taxpayers with adjusted gross income in excess of $75,000 ($150,000 in the case of a joint return). The new law enhances the credit by eliminating the repayment obligation for taxpayers that purchase homes on or after January 1, 2009. It also extends the credit through the end of November 2009, and bumps up the maximum value of the credit from $7,500 to $8,000.
Tax break for new car purchasers. The new law allows taxpayers to deduct State and local sales taxes paid on the purchase of a new automobile, including light trucks, SUVs, motorcycles, and motor homes. The tax break phases out starting with taxpayers earning $125,000 per year ($250,000 for joint returns). The deduction is allowed to both those who itemize their deductions as well as to nonitemizers. However, the deduction cannot be taken by a taxpayer who elects to deduct State and local sales taxes in lieu of State and local income taxes.
Alternative minimum tax (AMT) patch. To hold the number of taxpayers subject to the AMT at bay, the new law increases the AMT exemption amounts for 2009 to $46,700 for individuals and $70,950 for joint returns, and allows the personal credits against the AMT.

Don D. Nelson is an Attorney and CPA who has assisted US Citizens with real estate, businesses, and residences in Los Cabos for the last 20 years. He is an expert on expatriate and international taxation. He assists hundreds of clients in Mexico with tax planning, and return preparation. He can be reached at (949) 481-4094 or emailed at ustax@hotmail.com. His website is located www.TaxMeLess.com and contains a lot of valuable tax planning information.

US Tax Filing Requirements for a Mexican or Foreign Corporation

If you, a US Citizen, own your Mexican real estate or small business through a Mexican corporation you have a U.S. Tax filing obligation with the IRS each year. This form is generally required if you own 10% or more of the stock or equitable interest in the foreign corporation.

• The form is due yearly on the extended due date of your US. Income tax return. It is filed with your personal return and includes information on the foreign corporation's ownership, formation, income and expenses, and assets and liabilities. Usually it will not result in any additional tax due with your personal return, but that is possible if it has Subpart F income.

• In most situations (unless the flow through election is made as explained below) the form 5471 does not result in any additional tax on your US tax return. However, if the foreign corporation has a sufficient amount of investment income, income from the sole owners personal services, or income from reselling goods made by an affiliate in the US, its income may become immediately taxable to you the shareholder. Subpart F income is complex which means a careful analysis of the sources of the corporations income must be made to determine if it is immediately taxable to its shareholder. If another owner of the foreign corporation files the form, you just need to identify data on that owner in an attachment to your tax return.

• If the corporation owns real estate, and possible for other reasons, it is advisable that it is formed a a Sociedad de Responsibilidad Limitada (SRL). You as the owner of the SRL can make an election for US income tax purposes to treat it as a flow through entity on the US return of its owner. (This is the same as the treatment of an LLC or partnership for US tax purposes.) This means all of its income or losses flow through to you on your personal tax return and becomes a part of your US taxable income each year. It also allows you to take a foreign tax credit on your personal return for any taxes the foreign corporation pays in Mexico on its income. This election also stops any possibility of double taxation or converting capitals gains into ordinary income on your US income tax return.

• If the IRS discovers you filed late or you should have been filing this form and did not the penalty is $10,000 per year for each unfiled form. There is a tax treaty between Mexico and the U.S which allows both countries access to the other countries records. Your US passport is included with other documents in the bureau where your Mexican corporation is is registered in Mexico.

• We recommend to you that you file this form each year if you have the requisite stock ownership in a Mexican Corporation. Failure to file could result in extreme IRS penalties if they discovered you failed to file.