Congressional report focuses on international tax avoidance and evasion:

  The annual cost to the federal government of offshore tax abuses may reach as high as $100 billion per year, according to a Congressional Research Service (CRS) report released on Sept. 18. (R40623 - Tax Havens: International Tax Avoidance and Evasion) The government loses income tax revenue from individuals and corporations when profits and income are shifted into low-tax countries known as tax havens. Multinational firms are adept at artificially shifting profits from high-tax to low-tax jurisdictions, the report noted. One such method is to shift debt to high-tax jurisdictions. “Since tax on the income of foreign subsidiaries (except for certain passive income) is deferred until repatriated, this income can avoid current U.S. taxes and perhaps do so indefinitely,” CRS said. Individuals can evade taxes on passive income, such as interest, dividends, and capital gains, by not reporting income earned outside the U.S. There are several legislative proposals that address the problem of tax havens and associated evasion issues, including the Stop Tax Haven Abuse Act (S. 506, H.R. 1265; draft proposals by the Senate Finance Committee; two other related measures, S. 386 and S. 569; and an Obama administration proposal. “Most provisions to address profit shifting by multinational firms would involve changing the tax law by repealing or limiting deferral, limiting the ability of foreign tax credit to offset income, addressing check-the-box [a regulation introduced in the late '90s with provisions that were originally intended to simplify questions of whether a firm was a corporation or a partnership and that had unintended consequences for foreign firms], or even formula apportionment,” the report said. The administration's proposals include one to disallow overall deductions and foreign tax credits for deferred income and restrictions on the use of hybrid entities. Individual evasion could be reduced by proposals to increase information reporting and expand enforcement by shifting the burden of proof to the taxpayer and increasing penalties.

IR-2009-84 - IRS ANNOUNCES EXTENSION OF OFFSHORE VOLUNTARY DISCLOSURE PROGRAM DEADLINE TO 10/15/09

IR-2009-84, Sept. 21, 2009

WASHINGTON ─ The Internal Revenue Service today announced a one-time extension of the deadline for special voluntary disclosures by taxpayers with unreported income from hidden offshore accounts. These taxpayers now have until Oct. 15, 2009.

 

Under special provisions issued in March, taxpayers with these hidden accounts originally had until Sept. 23, 2009 to come forward. Those taxpayers who do not voluntarily disclose their hidden accounts by the new deadline face much harsher civil penalties, where applicable, and possible criminal prosecution.

IRS officials decided to extend this deadline after receiving repeated requests from tax practitioners and attorneys around the country following an influx of taxpayer requests. By extending the deadline for a short period of time, the IRS is providing relief for those taxpayers who had intended to come forward prior to the deadline, but faced logistical and administrative challenges in meeting it. The extension will allow tax preparers and attorneys the necessary time to interview and advise their backlog of taxpayers with these hidden accounts, and prepare the necessary paperwork to qualify for the special penalty provisions.

The IRS also announced that there will be no further extensions.

BLOOMBERG, AP AND NY TIMES CLAIM IRS HAS EXTENDED OFFSHORE VOLUNTARY DISCLOSURE PROGRAM UNTIL 10/15/09

Though not yet confirmed in writing by the IRS, Bloomberg, the NY Times and AP have all released stories that the IRS has extended the IRS Voluntary Offshore Disclosure Program deadline for apply to October 15, 2009. The final application date was previously September 23, 2009.  The IRS stated that it has already received 3,000 applications whereas in all of 2008 it only received 80 disclosure filings.

TAX AGENCIES TRACING TAX DODGERS ON LINE

It has been released that many State tax agencies are using social media and other on line social sites to successfully track down individuals who owe taxes and have failed to pay or file their returns.  Though the IRS may not be doing this yet (they are often slow), the success various States have had with this technique will no doubt result in the IRS doing the same in the future.  The Wall Street Journal Article on the techniques used can be found here.

Taxpayers Struggle to Come Clean After IRS To Get Secret accounts of UBS

Taxpayers are starting to pay attention to the existing IRS Offshore Voluntary Disclosure Program described in earlier postings on this blog. The program expires on 9/23/09. Click on title to this piece and go to the most current article on Yahoo. Even if your undisclosed accounts are not with UBS, it is predicted many other offshore and foreign banks will start revealing their US account holders to the IRS soon. Failure to disclose your offshore activities, accounts, etc. can result in huge monetary and criminal penalties. One individual on the list from Malibu California just pleaded guilty for a Swiss account he slowly built up over the years without showing it on his tax return for FBAR annual report of only $ 1 million.

Swiss Reach Deal with IRS - How Many Accounts will be Revealed is Unknown

The Swiss Government reached a deal today with the IRS to reveal an unknown number of the secret bank accounts with UBS AG which are owned by US Citizens. Click on the title to this article to read further information. It is said they have approximately 52,000 Americans with Secret accounts held in that Swiss Bank. The IRS Offshore Voluntary Disclosure Amnesty Program ends 9/23/09.

IRS ANNOUNCES FURTHER CHANGES IN TDF 90-22.1 FILING REQUIREMENTS

On August 7, 2009, the IRS announced as follows:

1. Persons (individuals and entities) with signature authority over, but no financial interest in, a foreign account will have until June 30, 2010, to file IRS Form TD F 90-22.1 for 2008, 2009, and earlier years, with respect to those accounts.

2. Persons (individuals and entities) with a financial interest in, or signature authority over, a foreign commingled fund (e.g. a mutual fund) will have until June 30, 2010, to file IRS Form TD F 90-22.1 for 2008, 2009, and earlier years, with respect to those accounts.

(See IRS Notice 2009-62).

For these two categories of persons, the June 30, 2010 filing deadline supplements the September 23, 2009 deadline for penalty free disclosure of foreign financial accounts established by the Internal Revenue Service for taxpayers who were unaware of the FBAR filing obligation and who did not have sufficient time to gather the information necessary to file by the annual June 30 deadline. All persons with an interest in a foreign financial account who are not covered by Notice 2009-62 must report such account by September 23, 2009.

The Treasury Department intends to issue regulations clarifying the FBAR filing requirements. The administrative relief granted by Notice 2009-62 provides time for the Treasury Department to consider comments, that are solicited in the Notice, on specific issues related to such filing requirements. Please access a copy of Notice 2009-62

OUR OBSERVATION: This would leave one to assume after that date if you have not filed your TDF forms for earlier years, the IRS may no longer accept a reasonable excuse and start imposing the $10,000 or more penalty per year for non-filing if they discover you have not filed. Therefore everyone has a short grace period to file all past unfiled TDF 90-22.1 forms.

IRS OFFSORE VOLUNTARY DISLCOSURE DEAL ENDS 9/23/09

More on the offshore disclosure program

A lot of Gringos living and working in Mexico have not been filing their US Income Tax Returns as required by U.S. Tax law. The Brits, Canadians and many those from many other countries in world, the U.S. Requires you file returns yearly no mater where you live or work in the world so long as you are a U.S. Citizen.

Some have put off their returns so long, that they are now afraid to surface and file them. Often that is an unfounded concern since due to the US foreign earned income exclusion and foreign tax credits, when many years past due returns are filed, no tax is found to be due anyway.

To try to bring U.S. Expatriates out of the closet, in March the IRS announced the Offshore Voluntary Disclosure Program which allows those who have not filed returns or who have filed returns and not included their foreign source income to correct these errors and have some certainty of what might happen when they do file those returns. Entering this program will avoid criminal action and will also set a predetermined limit on the amount of penalties which may be imposed.

Though the IRS envisions the program will mostly be used by wealthy taxpayers hiding assets and income abroad, unfortunately due to the its requirements it does immediately affect the average American working or operating a small business in Mexico.

The program is extremely complex and therefore cannot be fully explained with this article, but we will try to cover some of the major points. More details are available using the internet links set forth later below.

The general requirements:

 File last six years previously unfiled tax returns or amend your last six years tax returns to include all foreign source income.

 These returns should include all previously unfiled foreign tax forms required under us tax law such as those for foreign bank and financial accounts (TDF 90-22.1), foreign corporations (Form 5471), foreign partnerships, foreign LLCS, foreign investment companies, and foreign trusts or fideicomisos (Form 3520 and 3520A)(Mexican real estate trusts required by Mexican law). There are other US foreign tax forms too numerous to mention which also have high penalties for non filing.

 Pay all taxes, penalties and interest due on unpaid taxes

 Follow certain filing procedures requiring an anouncement you plan to participate in the program.

 In lieu of paying the extremely high penalties for failure to file the special foreign tax forms mentioned above, pay a penalty of 20% of the highest balance in all foreign bank and financial accounts during the year with the highest combined balances during that 6 year period. This is often much less than the year penalty for failing to file the form. For example the penalty for failure to file the foreign bank and financial account form (TDF 90-22.1) is $10,000 per year or more.

If you have reported all foreign income (including interest, dividends, corporate income, rents, etc) in your previously filed your tax returns for the past six years, but failed to include all of the special foreign forms (some of which are mentioned above) you are required to now file those forms with an amended return, and also include a reasonable excuse for your failure to file those forms and in most situations no penalties or additional taxes will be imposed. The IRS has failed to define what an acceptable reasonable excuse would be.

If your foreign activities have produced no taxable income during the past six years and you now file all required foreign forms that were previously omitted with amended returns for those years, no additional tax or penalties will be charged if you attach a reasonable excuse for failing to file the required foreign bank account report, foreign corporation report, foreign trust form (fideicomiso), etc.

Also if you failed to file your tax returns, but need to file returns for the period you lived and or worked abroad, and due to the nature of your income and activities have none of the special foreign income tax forms previously mentioned or on the the complete list are required to be filed, you can now file without any fear of the 20% penalty. All that would be owed is any tax due plus normal penalties and interest on that tax due. Form 2555 (to claim the foreign earned income exclusion) and form 1116 (Foreign tax credits) do not trigger the 20% penalty if filed late. However, in certain situations, the IRS can disallow the foreign earned income exclusion if a tax return is filed more than 18 months late and taxes are due with that return.

The IRS has indicated that it is possible after the 9/23/09 deadline for the Program, it will impose all civil, monetary and full criminal penalties against those who have not filed the required foreign income forms or who have failed to report their foreign source income by that deadline. Anyone who thinks they might have problems with nonreported foreign source income, unfiled returns, or unfiled special foreign tax forms should immediately consult with their legal and tax advisors to determine whether they should be participating in the Voluntary Disclosure Program or to file all past unfiled returns.

It should be noted that the IRS has currently been very successful with their program to force foreign banks and other financial institutions to disclose the names, etc. and all US citizens who have accounts. It is presumed they will be matching that data against the tax returns filed by those citizens.

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Relevant Web Links:

Wall Street Journal Article:http://online.wsj.com/article/SB124804796387763807.html

IRS Information:http://www.irs.gov/newsroom/article/0,,id=105689,00.html

Frequently Asked Questions: http://www.taxmeless.com/IRS%20Disclosure.htm

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Don D. Nelson, Attorney, C.P.A has been assisting US Citizens living abroad with their U.S. Income taxes for the past 20 years. His email is donnelsonattycpa@yahoo.com. His website includes a lot more information on the Offshore Disclosure Program and is located at www.TaxMeLess.com . His blog which includes the most current expat developments is at www.usexpatriate.blogspot.com. US phone number is 949-481-4094.

IRS VOLUNTARY OFFSHORE DISCLOSURE PROGRAM - ADDITIONAL QUESTIONS ANSWERED ON 6/24/09

The IRS in late June released additional guidance and explanations of its Voluntary Offshore Disclosure Program for Taxpayers who have not reported offshore income or filed the proper offshore forms with their tax returns (or failed to file returns at all). For the FAQ on this program click here.

NEW IRS OFFSHORE VOLUNTARY DISCLOSURE PROGRAM

In late March, 2009 the IRS instituted an offshore voluntary disclosure program and procedures limiting penalties that may be imposed if you have failed to report your offshore corporation, bank accounts, financial accounts, offshore trusts, or other offshore activities that require the filing of special IRS forms. This program will only remain in effect until September 23, 2009 which gives expatriates and others who have not reported foreign income, or filed the necessary IRS forms, a chance to come out into daylight and pay their taxes. If taxpayer fails to follow this procedure they may be liable for much higher penalties, and potential criminal prosecution.

Further descriptions of this program and how to comply are included in the recently released IRS "Frequently asked questions". You must file the last six years tax returns or amend the existing past six years returns if you have failed to report any foreign income on the returns you did file. You must also file the applicable forms including 5471 (foreign corporation), TDF 90-22.1 (foreign financial accounts), Forms 3520 and 3520A (foreign trusts), 926 ( Transfers to foreign corporations) and other forms involved in foreign income.

When you file the amendments, unfiled tax returns and forms you must pay all taxes and penalties on the unreported income as well as a 20% penalty based on the highest value you had in your foreign bank accounts or assets in your foreign corporation.

IRS Determines Countries In Which Early Departure Will Not Cause Disallowance of Foreign Earned Income Exclusion

In Rev Proc. 2008-22, the IRS has determined that Chad, Serbia and Yemen have such dangerous conditions that if you are required to leave before your fully qualify for the foreign earned income exclusion, you may still take the exclusion since your departure is justified under tax law due to the perilous country in which you were living and working. Interesting to note that if you are in North Korea or  Somalia you will have to stay the required time or meet qualification standards or you will lose the expatriation earned income exclusion.

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.