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,

IRS FAILS INTERNATIONAL TAX QUESTION TEST

The IRS recently announced a new email form on their website, www.irs.gov  for the sole purpose of allowing tax payers to send them international tax questions with the promise they would respond with an answer from an expert within a reasonable time. We decided to test that question form and see what kind of answer was sent back.

We asked them a question on Form 5471 (foreign corporation tax form) involving a filing issue that was  specifically addressed and answered on page 1 or 2 of the IRS instructions to Form 5471.  We then waited for the email answer which came in about a week.

Their answer thanked us for our question and then state it was a complex question and we should consult a CPA or other tax professional for an answer because they were not able to answer it. The IRS response showed us:

• One more time that a taxpayer cannot rely on the IRS who writes and administers the International Tax system to answer questions even if they indicate they will do so and  should know the answer.
• A question that was answered on page 2 of the instructions for Form 5471 was too difficult for the IRS to handle....then how do they expect taxpayers to handle it.
• The IRS creates a lot of business for tax professionals like us.

IRS REVISES FREQUENTLY ASKED QUESTIONS ON 2011 VOLUNTARY OFFSHORE DISCLOSURE PROGRAM

The IRS on June 2, 2011, changed certain questions and answers on its Frequently Asked Questions page  which contains the rules to its 2011 Voluntary Offshore Disclosure Program. The new information provides some significant further guidance for those taxpayers trying to personally decide if they wish to enter the program.  Some of the additional information which is useful includes.

• Procedures to get an extension of time beyond the original 8/31/11 deadline
• Additional Questions and Answers (51.1 to 51.3) indicating factual situations when a taxpayer may elect to  Opt out of participating in the program because the civil penalties imposed outside of the program may be less than those imposed if the taxpayer chose to enter the program.

Look at the revised FAQ ..... note at the top of the page the Questions and Answers that have been changed or added as of June 2,2011   Contact us if you wish to discuss your individual situation or these new changes.

IRS ISSUES NEW DRAFT OF FORM 8938 TO BE USED IN 2011 TO REPORT FOREIGN FINANCIAL ASSETS

The IRS has issued a new draft of Form 8938, Statement of Specified Foreign Financial Assets which must be filed for 2011with returns to report foreign financial assets. The form is now more complex than the prior draft. This is not the final version  so there could be further changes before it is finalize. Download a pdf version of the draft form here.

FBAR Filing Deadline Extended for Certain Financial Professionals

WASHINGTON — The Internal Revenue Service and the Financial Crimes Enforcement Network (FinCEN) today announced that a small subset of individuals with only signature authority required to file the Report of Foreign Bank and Financial Accounts (FBARs) will receive a one-year extension beyond the upcoming filing date of June 30, 2011.

FinCen today issued Notice 2011-1 that extends the deadline until June 30, 2012, for the following individuals:

• An employee or officer of a covered entity who has signature or other authority over and no financial interest in a foreign financial account of another entity more than 50 percent owned, directly or indirectly, by the entity (a “controlled person”).
• An employee or officer of a controlled person of a covered entity who has signature or other authority over and no financial interest in a foreign financial account of the entity or another controlled person of the entity.

All other U.S. persons required to file an FBAR this year are required to meet the June 30, 2011, filing date. Unlike with federal income tax returns, extensions of time to file are not available.

Today’s notice was issued to facilitate more accurate compliance of FBAR filings in the wake of recent finalization of regulations. The FBAR filing requirements, authorized under one of the original provisions of the Bank Secrecy Act, have been in place since 1972.

On Feb. 24, 2011, FinCEN published a final rule that amended the Bank Secrecy Act regarding FBARs.

The FBAR form is used to report a financial interest in, or signature or other authority over, one or more financial accounts in foreign countries.

U.S. persons are required to file FBARs Form TD F 90-22.1 annually if they have a financial interest in or signature authority over 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.

US Expatriate Tax Return Extension

US Expats get an automatic extension to file their IRS Form 1040 returns until 6/15/11 for 2010 if they live abroad on 4/15.  You can get a further extension until 10/15/11 if you file for one prior to 6/15 using form 4868.  We will electronically file that form for you without charge providing you ask us to prepare your expat return.  That form also extends the due date of Forms 5471, 8865, 3520 and form 5500EZ.

Though not officially confirmed by the IR S, many articles have appeared in the media stating extending your tax returns does reduce your chances of IRS Audit.  We have found that true in our 30 years of experience.  Therefore, extending your return even though it might be completed might be an excellent idea.

Keep in mind an extension does not extend the time you must pay any taxes due from the regular 4/15 date.  If you do not any taxes due, penalties and interest will accrue until any tax due for 2010 is paid in full.

US Tax Ramifications of Forming a Foreign Corporation to Do Business Abroad

There are significant consequences (on your US tax return) when you form a foreign corporation in a country outside of the USA to operate your business or make investments in any other country in the world. Most offshore accountants and attorneys do not know enough about US international taxation to advise you of the consequences which should be considered in advanced.  It is much harder to correct the US tax problems which WILL occur later if you do not do your US tax planning in advance.

You need to consider the following US IRS reporting and election consequences:

• Controlled foreign corporation rules
• Subpart F income possibilities
• Passive foreign investment company rules.
• Possible Flow Through Election for US tax purposes.
• Subpart F personal holding company rules
• The need to file FBAR forms to report foreign bank accounts
• Transfer Pricing
• Possible Tax on Transferring intangible property and tangible property to a foreign corporation

We can help you plan your foreign corporation structure to avoid unpleasant and possibly expensive consequences for failing to consider the rules set forth above.  Many of these items are difficult to deal with after you have already formed your foreign corporation.

Keep in mind their are also special rules which apply to foreign partnerships, foreign LLCs and foreign trusts which must also be considered.

IRS NOW LOOKING AT COUNTY RECORDER RECORDS TO LOCATE REAL ESTATE GIFT TRANSFERS WHICH ARE NOT REPORTED ON FORM 709

The Wall Street Journal reports the IRS is now investigating real estate transfers to determine if proper Gift Tax Returns (form 709) are reported.  The IRS is getting real estate transfer records in many states. This new procedure could naturally be extended at any time to discover real estate sales which have not been reported on personal tax returns.

Gift tax returns must be filed when the value of the gift exceeds $13,000. Real estate sales must be reported if there is any gain or loss.

This new procedure will result in many additional audits.  If you need help filing a Form 709 for any gift exceeding $13,000 let us know. This rule applies to gifts made by US Citizens and Permanent Residences whether living in the US or abroad. It also applies regardless of the location of the property gifted or to whom it is gifted.

Possible Consequences of "Silent Disclosure" of Undisclosed Foreign Bank Accounts - And Failing to Enter IRS Offshore Voluntary Disclosure Program

A Boston venture capitalist and director at Boston Private Bank and Trust Company was charged with failing to report his foreign bank account and income to the Department of the Treasury. Principal Deputy Assistant Attorney General of the Department of Justice’s Tax Division John A. DiCicco, U.S. Attorney for the District of Massachusetts Carmen M. Ortiz and William P. Offord, Special Agent in Charge of the Internal Revenue Service (IRS) Criminal Investigation, Boston Division made the announcement today.

According to the criminal information and plea agreement filed today, from 2003 to 2008, Michael Schiavo, 53, of Westford, Mass., held an account in his name at HSBC Bank Bermuda (formerly the Bank of Bermuda). In 2006, with the assistance of his business partner Peter Schober, Schiavo arranged to have income from a venture capital investment directed to Schober’s secret account at UBS AG in Switzerland. From there, Schiavo’s share of the investment, $99,273, was wired to his HSBC Bank Bermuda account. Schiavo knew that this payment was taxable income in the United States, but deliberately chose not to report it, or the interest income that accrued in the HSBC Bank Bermuda account, to the IRS. In so doing, Schiavo deprived the IRS out of $40,624 in taxes.

U.S. citizens and resident aliens have an obligation to report to the IRS on the Schedule B of a U.S. Individual Income Tax Return, Form 1040, whether that individual has a financial interest in, or signature authority over, a financial account in a foreign country in a particular year by checking “Yes” or “No” in the appropriate box and identifying the country where the account was maintained. U.S. citizens and resident aliens have an obligation to report all income earned from foreign bank accounts on the tax return and to pay the taxes due on that income. These same taxpayers who have a financial interest in, or signature authority over, one or more financial accounts in a foreign country with an aggregate value of more than $10,000 at any time during a particular year are required to file with the Department of the Treasury a Report of Foreign Bank and Financial Accounts, Form TD F 90-22.1 (the FBAR). The FBAR for the applicable year is due by June 30 of the following year.

According to the criminal information and plea agreement, on Oct. 6, 2009, following widespread media coverage of UBS’s disclosure to the IRS of account records for undeclared accounts held by U.S. taxpayers and the IRS’s Voluntary Disclosure Program, Schiavo made a “silent disclosure” by preparing and filing FBARs and amended Forms 1040 for tax years 2003 to 2008, in which he reported the existence of his previously undeclared account at HSBC Bank Bermuda. He made such filings notwithstanding the availability of the IRS’s Offshore Voluntary Disclosure Program. The Offshore Voluntary Disclosure Program was a program administered by the IRS that was intended to serve as a vehicle for U.S. taxpayers to attempt to avoid criminal prosecution by disclosing their previously undeclared offshore accounts and paying tax on the income earned in those accounts. On its website, the IRS strongly encourages taxpayers to come forward under the Offshore Voluntary Disclosure Program and warns them that taxpayers who instead make silent disclosures risk being criminally prosecuted for all applicable years.

According to the criminal information and plea agreement, Schiavo also admitted that for tax years 2003 through 2008, he willfully failed to file FBARs with the Department of the Treasury and failed to disclose that he had an interest in a financial account in HSBC Bank Bermuda. He further admitted that for tax years 2003 through 2008, he prepared, signed under penalties of perjury, and filed false individual income tax returns with the IRS that falsely represented that he did not have an interest in any foreign financial accounts. According to the plea agreement, Schiavo agreed to pay a civil money penalty of $76,283, half the value of high balance of the HSBC Bank of Bermuda account, for failing to file the FBAR.

Schiavo faces up to five years in prison, followed by three years of supervised release and a $250,000 fine. Schober was charged separately with failing to disclose his secret UBS AG bank account and is awaiting sentencing.

US Expatriate Tax Return Due Dates

• Your US expatriate tax return is due 6/15/11 if you lived and worked abroad on 4/15/11 for tax year 2010.  It can be extended until 10/15/11 if an extension is filed before that date. Please contact us if you wish assistance filing that extension or wish to determine how much needs to be paid in (if any tax is due) at that time to stop interest and penalties from accruing.
• Your FBAR Form - TDF 90-22.1  (foreign bank account and financial account reporting form) must be received by the IRS by 6/30/11 for the tax year 2010 and cannot be extended for any reason. There is a $10,000 penalty that may be imposed for late filing.
• Your required forms for foreign corporations, foreign partnerships and LLCs,  and disregarded foreign entities must be filed by the regular or extended due date for your personal tax return.
• Your Form 3520 for foreign trusts must be filed separately from your personal tax return, but is due by the extended due date of your personal tax return.

We have done over 5,000 expat and international tax forms for clients in over 50 countries around the world. We have the expertise, experience and professional expertise which is difficult to find. Please call or email us if you need assistance at ddntax@gmail.com 

See How Your Tax Dollars Are Spent

In his State of the Union Address, President Obama promised that this year, for the first time ever, American taxpayers would be able to go online and see exactly how their federal tax dollars are spent. Just enter a few pieces of information about your taxes, and the taxpayer receipt will give you a breakdown of how your tax dollars are spent on priorities like education, veterans benefits, or health care.

Amercian Bar Association - Comments on IRS 2011 Voluntary Offshore Disclosure Program by Panelists

A panel of practitioners from the American Bar Association Tax Section on  May 8, grappled with the "one-size-fits-all" IRS's voluntary offshore disclosure program, finding that it is often ill-suited for some of their clients who may not have willfully evaded their tax obligations.

Speaking at the May meeting of the American Bar Association Section of Taxation, John McDougal, special trial attorney in the IRS Office of Chief Counsel explained that where taxpayers opted out of the IRS's voluntary offshore disclosure program in favor of a regular audit, the examiners were expected to look at all applicable tax years. Absent fraud, the statute of limitations is generally six years, although McDougal said that if there was an entity involved, and the entity failed to file information returns, "all bets were off" and the IRS could go as far back as it liked.

Background. On February 8, 2011, the IRS announced a new 2011 Voluntary Disclosure Initiative (OVDI) for taxpayers to disclose their unreported offshore accounts. To participate in the OVDI, taxpayers must file or amend their tax returns and Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts (FBAR)) and pay all delinquent taxes, interest and penalties by August 31, 2011. The initiative covers tax years 2003 through 2010.

In exchange for participating in the OVDI, taxpayers with undisclosed offshore accounts can avoid criminal prosecution for their unpaid taxes and may be subject to significantly reduced penalties.

Under the OVDI, taxpayers will be subject to a 25 percent penalty on the highest aggregate account balance on their undisclosed account(s) between the 2003 and 2010. If the value of the undisclosed account(s) was less than $75,000 at all times during the tax years in question, the penalty is reduced to 12.5 percent. Moreover, in limited situations, a penalty of 5% may be imposed. Additionally, participants in the OVDI are required to pay an accuracy-related penalty equal to 20 percent of the underpayment of tax with interest for the tax years at issue and, if applicable, the failure to file and failure to pay penalties.

McDougal noted that the 2011 OVDI covers eight years instead of six under the 2009 initiative. "The Commissioner decided that it would be unfair to give people that didn't come in last time a walk on the two other years (2003/2004) that were included in the first initiative," he said. Also mentioned was the fact that the penalty under the 2011 OVDI was 25 percent as opposed to 20 percent under the 2009 OVDI.

With respect to the 5 percent penalty, McDougal said that taxpayers that did not open up the foreign account would be generally eligible for the reduced penalty, although if the bank required the taxpayer to open up the account to get it in their name, the IRS wouldn't hold that against taxpayers.

Voluntary disclosure vs. examination. McDougal said that agents were not to make any factual determinations with respect to disclosures on matters pertaining to willfulness and reasonable cause. Taxpayers seeking to have the IRS consider their arguments on willfulness or reasonable cause are required to opt out of OVDI and ask for an examination. The caveat, however, is that all penalties and all tax years are on the table in a regular examination.

Mark Matthews of Morgan Lewis & Bockius LLP, said that practitioners felt that the IRS viewed that everybody coming into the program has significant criminal exposure. In his view, the problem lies with clients that are in a gray area, where there may be no criminal exposure. The opportunity presented through the OVDI must be balanced against other civil penalties that may be faced if the taxpayer is detected on audit or otherwise. "The perception is that the agent's are leaning very hard to keep you in the program," he said, finding that agents pressure taxpayers by telling them that they will look back at several tax years if they opt-out of the OVDI.

Larry Campagna of Chamberlain Hrdlicka said that he believed that the OVDI makes a presumption of willfulness. "The FBAR penalty in particular, is the government's burden to prove willfulness," he said. "They can assess the penalty if they want to but they have to go to court and prove willfulness to collect the penalty." In his practice, Campagna said he sees many clients that don't fit the program very well because they are in some sort of gray area with respect to willfulness, but the client is also not willing to take a penalty hit of 25 percent. Quiet disclosures are also very problematic, he said.

Once taxpayers participate in the OVDI, agents do not have the flexibility to to mitigate the 25 percent penalty for reasons associated with reasonable cause or willfulness, McDougal said.

Criminal Prosecutions of Taxpayers Who Failed to Disclose Foreign Bank Accounts and Interest

Read about the Justice Departments Criminal Prosecution of Taxpayers who have failed to report foreign bank and financial accounts and report the income from those accounts on their US tax returns.

Read about the results of one of these criminal  cases a year later (from the original charge) on April 25, 2011.

 We recommend if you are in this situation that you consider entering the 2011 IRS Offshore Voluntary Disclosure Program to try avoid these consequences.  We have helped many clients who wish to participate in the program.  The IRS does not limit their activity to the pursuit of wealthy individuals. Their actions and plans include individuals of all income levels and wealth.

IRS Announces Fraudulent Tax Returns Surge in 2011 Filing Season

Money Magazine say the IRS identified 335,341 tax returns claiming $1.9 billion in fraudulent refunds as of March 4, 2011, according to the findings of an audit conducted by the Treasury Inspector General for Tax Administration. That's a whopping 181% increase from the same period last year. Read More Here

The 75% Fraud Penalty (Plus Possible Prison Time)

If you get audited, and the IRS decides your tax return fraudulently understates your tax bill, you are in really big trouble. You will be hit with a penalty equal to 75% of the understatement. Plus you will be charged interest. And you could face criminal charges and possible prison time. In the next few years audits of expatriates and form 2555 (foreign earned income exclusion) will increase substantially due to recent discoveries about how many such forms were incorrect and were being filed by expats not eligible for the exclusion.

Committing tax fraud takes some work, because it goes beyond simple ignorance of the tax rules and regulations. You have to do really bad things like keep two sets of books, alter or destroy documents, hide unreported income overseas, or fail to report income from illegal activities (this is not a complete list by any stretch). Bottom line: You can't commit tax fraud without knowing it.

Anyone accused of tax fraud should hire an attorney who specializes in big-time IRS problems. A CPA or Enrolled Agent can't provide the equivalent of the attorney-client privilege, and those accused of tax fraud will need that privilege. Also, non-attorneys are not competent to deal with the criminal charges that will often go along for the ride with tax fraud cases.

WHITE HOUSE HAS ON LINE CALCULATOR TO SHOW WHERE YOUR INCOME TAX AND SOCIAL SECURITY TAXES GO

The President has released an on line calculator on the White House Website showing where your taxes go. Just type in your income level or actual figures from your tax return and you can see what you are paying for. Click here to learn why you pay taxes.

US Expatriate Tax Return and related Foreign Tax Forms Due Dates

If you live and work abroad your personal 2010 tax return is automatically extended until 6/15/11, but if you wish to avoid penalties and interest on any underpayments you should pay in the amount due (or estimate) by 4/18/11.  Your first quarter estimated tax for 2011 is also due to be made on 4/18/11 using form 1040 ES. You can extend until 10/15/11 your expatriate tax return on or before 6/15/11 by filing Form 4868 with the appropriate box checked.  If you need to extend your expatriate return beyond that date in order to qualify for the foreign earned income exclusion you need to file Form 2350. 


If you do not file the necessary form to extend your personal return and end up owing taxes, failure to properly extend the form will result in the large penalty of 5% per month of the tax due up to a maximum penalty of 25% of the tax due plus interest. Best to not miss filing that extension due to this high penalty.


Your TDF 90 -22.1 Form reporting foreign financial, bank accounts, etc., must be received by 6/30/11 at the Detroit address on that form. No extensions can be obtain. Late filing can result in penalties of $10,000 or more.


Your Form 5471 for Foreign Corporations, 8865 for foreign partnerships and LLCs, 3520 for foreign trusts and Mexican Fideicomisos,  and Form 8858 for disregarded entities  are all on the  due dae of  your personal return  or  its extended due date if that is later and you have filed an extension.

General Electrics Zero Tax Bill Involves Utilization of Legal US Tax Code Provisions Available to Expats with their own Businesses Located Abroad

The New York Times has an excellent article describing how General Electric has managed to reduce its tax bill by legally locating its business in low tax countries and utilizing provisions of the US tax code that apply to Foreign Corporations.  If you have your own small to medium business abroad, you too can take advantage of this type of tax planning even though you are not as big as GE.  We can help.


As the company expanded abroad, the portion of its profits booked in low-tax countries such as Ireland and Singapore grew far faster. From 1996 through 1998, its profits and revenue in the United States were in sync — 73 percent of the company’s total. Over the last three years, though, 46 percent of the company’s revenue was in the United States, but just 18 percent of its profits.

Passport Information May Be Used by the IRS to Collect Unpaid Taxes

  The State Department issued passports to 16 million individuals during fiscal year 2008 and some 224,000 of these individuals owed more than $5.8 billion in unpaid federal taxes as of Sept. 30, 2008, according to a report released on April 11 by the Government Accountability Office (GAO).


 The State Department cannot restrict the issuance of passports to delinquent taxpayers, and federal law bars IRS from disclosing any taxpayer information to the State Department without a taxpayer's consent. However, federal law does permit certain restrictions on the issuance of passports to individuals, such as individuals owing child support debts over $2,500, the report noted.


The  GAO selected 25 passport recipients to investigate for abuse related to the federal tax system or criminal activity. “These case studies were chosen, among other things, by the more egregious amount of federal taxes owed and cannot be generalized beyond the cases presented,” GAO said. Of these cases, at least 10 passport recipients had been indicted or convicted of federal laws. In addition, IRS assessed trust fund recovery penalties on several passport recipients when the individual did not remit payroll taxes to the federal government. At least 16 passport recipients traveled outside the country while owing federal taxes, and at least 4 resided in another country at the time of GAO's investigation.


 Two individuals used the identities of deceased individuals to fraudulently obtain passports and then used these passports to travel to Mexico, France, and Africa. In one case, the unpaid tax debt belonged to a deceased individual, and in the other case, the debt was incurred by the imposter. “If Congress is interested in pursuing a policy of linking federal tax debt collection to passport issuance, it may consider taking steps to enable State to screen and prevent individuals who owe federal taxes from receiving passports,” GAO said. “This could include asking State and IRS to jointly study policy and practical issues and develop options with appropriate criteria and privacy safeguards.” The report is available athttp://www.gao.gov/new.items/d11272.pdf.

No 1 Item on IRS List of Tax Scams is Taxpayers Hiding Assets Abroad

The IRS has released their list of the 12 most common tax cheating and scam methods. Hiding income and assets offshore is the first item on the list. The IRS aggressively pursues taxpayers involved in abusive offshore transactions as well as the promoters, professionals and others who facilitate or enable these schemes. Taxpayers have tried to avoid or evade U.S. income tax by hiding income in offshore banks, brokerage accounts or through the use of nominee entities. Taxpayers also evade taxes by using offshore debit cards, credit cards, wire transfers, foreign trusts, employee-leasing schemes, private annuities or insurance plans.


The 2011 IRS Voluntary Offshore Disclosure Program ends 8/31/11.  As both an Attorney and CPA we can advise you on the program, and represent you should you enter it.