Global Tax Chiefs Meet To Tackle International Tax Evasion

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Global Tax Chiefs Meet To Tackle International Tax Evasion

The Joint Chiefs of Global Tax Enforcement, known as the J5, which was formed in mid-2018 to lead the fight against international tax crime and money laundering met this week. This group brings together leaders of tax enforcement authorities from Australia, Canada, the United Kingdom, the United States and the Netherlands.

These tax authorities believe that people may be using a sophisticated system to conceal and transfer wealth anonymously to evade their tax obligations and launder the proceeds of crime.

The IRS announced that significant information was obtained as a result and investigations are ongoing. It is expected that further criminal, civil and regulatory action will arise from these actions in each country.

For the United States: Don Fort, U.S. Chief, Internal Revenue Service Criminal Investigation, stated:

“This is the first coordinated set of enforcement actions undertaken on a global scale by the J5 – the first of many. Working with the J5 countries who all have the same goal, we are able to broaden our reach, speed up our investigations and have an exponentially larger impact on global tax administration. Tax cheats in the US and abroad should be on notice that their days of non-compliance are over.”

Penalties for Non-Compliance.

Federal tax law requires U.S. taxpayers to pay taxes on all income earned worldwide. U.S. taxpayers must also report foreign financial accounts if the total value of the accounts exceeds $10,000 at any time during the calendar year. Willful failure to report a foreign account can result in a fine of up to 50% of the amount in the account at the time of the violation and may even result in the IRS filing criminal charges.

Civil Fraud – If your failure to file is due to fraud, the penalty is 15% for each month or part of a month that your return is late, up to a maximum of 75%.

Criminal Fraud – Any person who willfully attempts in any manner to evade or defeat any tax under the Internal Revenue Code or the payment thereof is, in addition to other penalties provided by law, guilty of a felony and, upon conviction thereof, can be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than five years, or both, together with the costs of prosecution (Code Sec. 7201).

The term “willfully” has been interpreted to require a specific intent to violate the law (U.S. v. Pomponio, 429 U.S. 10 (1976)). The term “willfulness” is defined as the voluntary, intentional violation of a known legal duty (Cheek v. U.S., 498 U.S. 192 (1991)).

Additionally, the penalties for FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR) noncompliance are stiffer than the civil tax penalties ordinarily imposed for delinquent taxes. For non-willful violations, it is $10,000.00 per account per year going back as far as six years. For willful violations, the penalties for noncompliance which the government may impose include a fine of not more than $500,000 and imprisonment of not more than five years, for failure to file a report, supply information, and for filing a false or fraudulent report.

Lastly, failing to file Form 8938 when required could result in a $10,000 penalty, with an additional penalty up to $50,000 for continued failure to file after IRS notification. A 40% penalty on any understatement of tax attributable to non-disclosed assets can also be imposed.

Voluntary Disclosure

Since September 28, 2018, the IRS discontinued the Offshore Voluntary Disclosure Program (OVDP); however, on November 20, 2018 the IRS issued guidelines by which taxpayers with undisclosed foreign bank account and unreported foreign income can still come forward with a voluntary disclosure.   The voluntary disclosure program is specifically designed for taxpayers with exposure to potential criminal liability and/or substantial civil penalties due to a willful failure to report foreign financial assets or foreign in income. In general, voluntary disclosures will include a six-year disclosure period. The disclosure period will require examinations of the most recent six tax years so taxpayers must submit all required returns and reports for the disclosure period. Click here for more information on available Voluntary Disclosure Programs.

What Should You Do?

Recent closure and liquidation of foreign accounts will not remove your exposure for non-disclosure as the IRS will be securing bank information for the last eight years. Additionally, as a result of the account closure and distribution of funds being reported in normal banking channels, this will elevate your chances of being selected for investigation by the IRS. For those taxpayers who have submitted delinquent FBAR’s and amended tax returns without applying for amnesty (referred to as a “quiet disclosure”), the IRS has blocked the processing of these returns and flagged these taxpayers for further investigation. You should also expect that the IRS will use such conduct to show willfulness by the taxpayer to justify the maximum punishment.

We encourage taxpayers who are concerned about their undisclosed offshore accounts to come in voluntarily before learning that the U.S. is investigating the bank or banks where they hold accounts. By then, it will be too late to avoid criminal prosecution or programs with reduced civil penalties. Protect yourself from excessive fines and possible jail time. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), San Francisco Bay Area (including San Jose and Walnut Creek) and elsewhere in California help ensure that you are in compliance with federal tax laws. Additionally, if you are involved in cannabis, check out what a cannabis tax attorney can do for you. And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

U.S. Treasury Publishes Official FBAR Exchange Rates for 2014

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Anyone filing an “FBAR” (Report of Foreign Bank and Financial Accounts – FinCEN Form 114) or IRS Form 8938 (Statement of Foreign Financial Assets) for calendar year 2014 will be pleased to know that the official exchange rates for 2014 have been published. As U.S. law states that no other exchange rate is permitted, it is really helpful to have these exchange rates available so early in January.

The rates for the major foreign currencies are listed below:

Country / Currency

December 31, 2014

Official Exchange Rate To $1.00

Australia – Dollar

1.2190

Canada – Dollar

1.1580

China – Renminbi

6.2050

Europe – Euro

0.8220

Hong Kong – Dollar

7.7560

India – Rupee

63.2000

Israel-Shekel

3.8810

Japan – Yen

119.4500

Korea – Won

1086.8700

Mexico – New Peso

14.7020

New Zealand – Dollar

1.2750

Singapore – Dollar

1.3210

Switzerland – Franc

0.9890

United Kingdom – Pound Sterling

0.6420

Exchange rates for other currencies can be found by clicking here.

What is an FBAR?

Separate from United States income tax returns, many U.S. persons are required to file with the US Treasury a return commonly known as an “FBAR” (or Report of Foreign Bank and Financial Accounts; known as FinCEN Form 114), listing all non-US bank and financial accounts. These forms are required if on any day of any calendar year an individual has ownership of or signature authority over non-US bank and financial accounts with an aggregate (total) balance greater than the equivalent of $10,000.

These are separate to and in addition to United States income tax returns and are due to be filed by June 30th each year in relation to the previous calendar year. This date cannot be extended and putting your 2014 Form 1040 on extension does not change the June 30th filing deadline.  The 2014 FBAR is due no later than June 30, 2015 and can only be filed electronically through the U.S. Financial Crimes Enforcement Network {FinCEN) which is a bureau of the U.S. Treasury Department that collects and analyzes information about financial transactions in order to combat domestic and international money laundering, terrorist financing, and other financial crimes.

How The Government Examines Data From Your FBAR.

The electronic filing system on the FinCEN website is called the BSA E-Filing System (BSA standing for the Bank Secrecy Act) and it allows you to save changes to your form, track progress of the processing of your form and receive electronic notices. Either you or your tax preparer can file this form. By having your foreign account information submitted electronically to the U.S. Treasury, the government will be able to more quickly and effectively match this information to foreign sourced income reported on your current and past Federal income tax returns.

Discrepancies would be identified by the government’s computer and those taxpayers would be referred for examination or investigation by the IRS.

Big Penalties For Non-compliance – Jail-time Is Possible.

The penalties for FBAR noncompliance are stiffer than the civil tax penalties ordinarily imposed for delinquent taxes.

Failing to file an FBAR can carry a civil penalty of $10,000 for each non-willful violation. But if your violation is found to be willful, the penalty is the greater of $100,000 or 50% of the amount in the account for each violation—and each year you didn’t file is a separate violation. By the way the IRS can go back as far as 6 years to charge your with violations.

Go to Jail? Criminal penalties for FBAR violations are even more frightening, including a fine of $250,000 and 5 years of imprisonment. If the FBAR violation occurs while violating another law (such as tax law, which it often will) the penalties are increased to $500,000 in fines and/or 10 years of imprisonment. Many violent felonies are punished less harshly.

In assessing whether penalties are to be applied, especially willfulness, the IRS looks at such issues as inheritance, how other accounts are treated, etc. Although filing prospectively is easy, determining how to address past transgressions isn’t. With the option for taxpayers to include why FinCEN Form 114 for any prior year is being filed late, taxpayers may be tempted to use this option in an attempt to come into compliance for failing to report foreign income on prior year’s income tax returns and/or failing to disclose foreign bank accounts. Beware that such disclosure does not protect you from the heavy fines and possible criminal charges.

What Should You Do?

If you have not reported your foreign income and you have not disclosed your foreign bank accounts, you should seriously consider participating in the IRS’s Offshore Voluntary Disclosure Program (OVDP) which allows taxpayers to come forward to avoid criminal prosecution and not have to bear the full amount of penalties normally imposed by IRS. Once the IRS contacts you, you cannot get into this program and would be subject to the maximum penalties (civil and criminal) under the tax law.  Taxpayers who hire an experienced tax attorney in Offshore Account Voluntary Disclosures should result in avoiding any pitfalls and gaining the maximum benefits conferred by this program.

Protect yourself from excessive fines and possible jail time. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in San Francisco, Los Angeles, San Diego and elsewhere in California qualify you for OVDP.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems, get you in compliance with your FBAR filing obligations, and minimize the chance of any criminal investigation or imposition of civil penalties.

IRS Simplifies Reporting of Canadian Retirement Plans (RRSP’s); Eliminates Form 8891

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A new revenue procedure makes it easier for taxpayers who hold interests in certain Canadian retirement plans to get favorable U.S. tax treatment.

On October 7, 2014, the IRS made it easier for taxpayers who hold interests in certain popular Canadian retirement plans to get favorable U.S. tax treatment. Rev. Proc. 2014-55. As a result of the change, many Americans and Canadians with either registered retirement savings plans (RRSP’s) and registered retirement income funds (RRIF’s) now automatically qualify for tax deferral similar to that available to participants in U.S. individual retirement accounts (IRA’s) and 401(k) plans. In addition, the IRS is eliminating a special annual reporting requirement that has long applied to taxpayers with these retirement plans.

In general, U.S. citizens and resident aliens will qualify for this special treatment as long as they have filed and continue to file U.S. income tax returns for any year they held an interest in an RRSP or RRIF and include any distributions as income on their U.S. returns.

Under a longstanding provision in the U.S.-Canada Tax Treaty, U.S. citizens and resident aliens can defer tax on income accruing in their RRSP or RRIF until it is distributed. Otherwise, U.S. tax is due each year on this income, even if it is not distributed. In the past, however, taxpayers generally were required to elect-in to get tax deferral by attaching Form 8891 to their return and choosing this tax treaty benefit, something many eligible taxpayers failed to do. Before this change, a primary way to correct this omission and retroactively obtain the treaty benefit was to request a private letter ruling from the IRS, a costly and often time-consuming process.

Many taxpayers with an interest in a RRSP or RRIF also failed to comply with a reporting requirement of the yearly filing of Form 8891, U.S. Information Return for Beneficiaries of Certain Canadian Registered Retirement Plans, reporting details about each RRSP and RRIF, including contributions made, income earned and distributions made. This requirement applied regardless of whether the taxpayer chose the special tax treatment. In Rev. Proc. 2014-55, the IRS said it is eliminating Form 8891, and taxpayers are no longer required to file this form for any year, past or present.

Taxpayers Still Subject To FBAR and Form 8938 Reporting

Rev. Proc. 2014-55 does not modify any other U.S. reporting requirements that may apply under Code Sec. 6038D or under any other provision of U.S. law, including the requirement to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), imposed by 31 U.S.C. § 5314 and the regulations thereunder. Failure to comply with these reporting requirements can result in steep penalties to the unwitting taxpayer. Failure to file a Foreign Bank Account Report (“FBAR”) may result in civil penalties for negligence, pattern of negligence, non-willful, and willful violations. These penalties range from a high penalty for willful violations, equal to the greater of $100,000 or 50% of the balance in the account at the time of violation, to a low penalty of $500 for negligent violations. For failing to file a correct Schedule B or Form 8938, the taxpayer could face a failure-to-file penalty of $10,000, criminal penalties, and if the failure to file results in underpayment of tax, an accuracy-related penalty equal to 40% of the underpayment of tax and a fraud penalty equal to 75% of the underpayment of tax.

Federal Relief Does Not Extend To State Income Taxation

Such is the case in California. The State Board of Equalization has previously held that tax treaties between the United States and other countries which expressly limit their application to federal income taxes do not prevent California from taxing persons otherwise covered by such treaties.” Appeal of M. T. de Mey van Streefkerk, 85-SBE-135, Nov. 6, 1985. The United States Supreme Court noted that “the tax treaties into which the United States has entered do not generally cover the taxing activities of subnational governmental units such as States … and if the treaty does apply to the States it will be specified in the treaty itself. Container Corp. v. Franchise Tax Board (1983) 463 U.S. 159, 196. Accordingly, the federal election to defer taxation on earnings of the RRSP is inapplicable for California income tax purposes.

Basically, the Franchise Tax Board considers a RRSP to be similar to a savings account. The Franchise Tax Board will treat a taxpayer’s original contributions to the RRSP, made while a Canadian resident, as a capital investment in the RRSP. A California resident must include any earnings from their RRSP in their taxable income and pay taxes on this income in the year earned. After a taxpayer pays tax on these earnings, the earnings will also be treated as capital invested in the RRSP. Therefore, when a taxpayer receives a distribution from their RRSP, the amount consisting of the contributions and the previously taxed earnings is considered a nontaxable return of capital.

What Should You Do?

California taxpayers who have an interest in a Canadian RRSP would benefit from the experienced tax attorneys of the Law Office Of Jeffrey B. Kahn, P.C. representing you to avoid the pitfalls associated with failure to comply with the reporting requirements associated with having an interest in an RRSP.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems, get you in compliance with your FBAR filing obligations, and minimize the chance of any criminal investigation or imposition of civil penalties.

Why Are Tax Inversions Suddenly So Popular?

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The United States is one of the few large countries that taxes citizens, permanent residents and corporations on income earned anywhere in the world.

U.S. corporations have a nifty way to avoid tax on their foreign income and reduce their U.S. tax without really leaving home. It’s called tax inversion, and due to some recent high profile deals it’s becoming all the rage.

In the past year alone, at least 14 U.S. companies have announced inversion deals with foreign (mostly Irish and British) companies. Left unchecked, these deals will continue to erode the corporate tax base, leaving others like you and me to pick up the slack.

What is tax inversion?

A U.S. company reincorporates overseas by getting acquired by a smaller company in a country where the corporate tax rate is much lower than the top U.S. rate of 35%. Generally, the U.S. firm’s management and operations remain in the United States, but it is no longer taxed on income earned outside the United States. The firm will still pay taxes on income earned inside the U.S., but it gets easier to minimize that tax. For example, the U.S. subsidiary can borrow money from its foreign parent, then deduct the interest it pays on that debt, which reduces its U.S. income and taxes.

An inversion also gives companies ways to avoid U.S. tax on profits that have been piling up overseas, largely in tax havens such as Bermuda. It is estimated that U.S. companies have about $1 trillion sitting in foreign subsidiaries. They would love to bring it home and use it to pay dividends or buy back shares, which would increase their stock price. But they would have to pay U.S. tax on it.

However, if the U.S. company gets acquired by an Irish company, for example, the Irish company can borrow that cash from the Bermuda company. The Irish company can use it to buy back shares or pay dividends without paying U.S. tax. The shareholders of the former U.S. company benefit because they own most of the Irish company.

If the big corporations can do this to avoid U.S. taxes, could you or your little corporation do the same thing?

As an individual you would have to not only leave the country but also renounce your U.S. citizenship – meaning that you now must be a citizen of some other foreign country and you will never be able to attain U.S. citizenship again. You will also need to pay an “exit tax” 15% of the value of all your assets.

For your little corporation, you will not be able to accomplish the tax inversion due to special rules that the IRS has in place. These rules would classify the new foreign corporation as a Controlled Foreign Corporation (“CFC”) because you individually as a U.S. person for tax purposes would be the sole shareholder for the foreign corporation. These rules provide that regardless of whether any distributions are made by the CFC to you, you are required to report on your individual income tax return the income that the CFC earned. Big corporations would not be classified as a CFC because their stock is widely held and not concentrated to one or a few shareholders.

Does it make any sense for the taxes to be based on where the corporate “hub” is anyway? Shouldn’t it be based on WHERE they made the money?

Actually the big corporations still have to pay U.S. taxes despite accomplishing a tax inversion. Profits earned in the U.S. would still be subject to U.S. taxes; however, the U.S. federal income tax bill on repatriated profits is reduced by the amount of income taxes paid to foreign governments on the same U.S. profit reported to IRS. So, profits earned outside the U.S. would not be subject to U.S. income taxes until those profits are repatriated back to the U.S. at which time they are subject to the full U.S. statutory corporate income tax rate of 35% upon repatriation.

So as an individual or little corporation, how do you fight back?

You would be surprised of the many tax saving opportunities that are available to U.S. persons and U.S. businesses without the need to go offshore. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles, San Diego, San Francisco and elsewhere in California are highly skilled in making sure that you are getting all the tax saving benefits that are legally possible.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. evaluate your tax exposure and legally minimize the amount you need to pay.

June 16 Tax Deadline Nears for Taxpayers Living Abroad

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U.S. taxpayers living abroad qualifying for an automatic two-month extension must file their 2013 Federal individual income tax returns by Monday, June 16, 2014.

The June 16th deadline applies in the following two situations: (1) U.S. citizens and resident aliens living overseas, or (2) U.S. taxpayers serving in the military outside the U.S. on the regular April 15th due date. Eligible taxpayers get one additional day because the normal June 15th extended due date falls on Sunday this year. To use the two-month extension, taxpayers must attach a statement to their tax return explaining which of these two situations applies.

Many taxpayers living abroad are still not aware that the Internal Revenue Code requires U.S. citizens and resident aliens to report all worldwide income, including income from foreign trusts and foreign bank and securities accounts on their federal income tax return. Not surprisingly, there are many taxpayers based here in the U.S. who are also not aware of this law requiring the reporting of all worldwide income.

The Internal Revenue Code also requires U.S. persons with foreign accounts whose aggregate value exceeded $10,000 at any time during 2013 must file electronically with the Treasury Department a Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts (FBAR). Form 114 replaces TD F 90-22.1, the FBAR form used in the past. It is due to the U.S. Treasury Department by Monday, June 30th and can only be filed electronically through the U.S. Treasury’s BSA E-Filing System website. This due date cannot be extended and Federal income tax extensions do not extend the FBAR filing due date. The civil penalty for willful failure to file an FBAR equals the greater of $100,000 or 50% of the total balance of the foreign account per violation. The government may also look to file criminal charges for will failure to file. Non-willful violations that are not due to reasonable cause incur a penalty of $10,000 per violation.

Taxpayers who cannot meet the June 16th deadline to file their 2013 Federal individual income tax return can get an automatic extension until October 15, 2014. But remember, this is an extension of time to file, not an extension of time to pay. Interest, currently at the rate of three percent per year compounded daily, applies to any payment made after April 15, 2014. In some cases, a late payment penalty, usually 0.5 percent per month, applies to payments made after June 16, 2014.

Now for some taxpayers, an additional extension beyond October 15th may be available. For example, members of the military and others serving in Afghanistan and other combat zone localities normally have until at least 180 days after they leave the combat zone to file their returns and pay any taxes due.

If you have never reported your foreign investments on your U.S. Tax Returns or even if you have already quietly disclosed, you should seriously consider participating in the IRS’s 2012 Offshore Voluntary Disclosure Initiative (“OVDI”). Once the IRS contacts you, you cannot get into this program and would be subject to the maximum penalties (civil and criminal) under the tax law. Taxpayers who hire an experienced tax attorney in Offshore Account Voluntary Disclosures should result in avoiding any pitfalls and gaining the maximum benefits conferred by this program.

Protect yourself from excessive fines and possible jail time. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles, San Francisco, San Diego and elsewhere in California qualify you for OVDI.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems, get you in compliance with your FBAR filing obligations, and minimize the chance of any criminal investigation or imposition of civil penalties.

U.S. Citizens And Permanent Residents Living Abroad Have No Where To Hide From IRS

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It is quite easy for U.S. Citizens and permanent residents (green card holders) who reside in a country other than the U.S. to either forget or not be aware of their U.S. tax obligations. The rules for filing income, estate and gift tax returns and for paying estimated tax are generally the same even if you do not live in the U.S. Citizens and permanent residents of the U.S. like U.S. Citizens are taxed on their worldwide income. Your income is reportable even if you did not receive a form W-2 or Form 1099.

The increased attention by the U.S. government on its overseas citizens might have caught your attention especially with the introduction of the Foreign Account Tax Compliance Act (FATCA). FATCA, enacted as part of the Hiring Incentives to Restore Employment Act of 2010, P.L. 111-147, requires U.S. withholding agents to withhold tax on certain payments to foreign financial institutions (FFIs) that do not agree to report certain information to the IRS regarding their U.S. accounts and on certain payments to certain nonfinancial foreign entities (NFFEs) that do not provide information on their substantial U.S. owners to withholding agents. FATCA withholding goes into effect July 1, 2014.

You may be thinking that you are already paying taxes in the country where you are now living and therefore not obligated to pay taxes to the U.S. as well. But U.S. tax law requires U.S. Citizens and permanent residents (green card holders) to pay taxes on all income earned worldwide. U.S. taxpayers must also report foreign financial accounts if the total value of the accounts exceeds $10,000 at any time during the calendar year. Willful failure to report a foreign account can result in a fine of up to 50% of the amount in the account at the time of the violation and may even result in the IRS filing criminal charges.

If you have been delinquent with your taxes, living overseas does not provide relief from your obligations. Given the increased efforts on the part of the U.S. government to discover delinquent U.S. taxpayers worldwide and the increased pressures on foreign governments and financial institutions imposed by FATCA, it is in your best interest to comply voluntarily before the IRS discovers your delinquency.

You should seriously consider participating in the IRS’s Offshore Voluntary Disclosure Initiative (OVDI).  Once the IRS contacts you, you cannot get into this program and would be subject to the maximum penalties (civil and criminal) under the tax law.  Taxpayers who hire an experienced tax attorney in Offshore Account Voluntary Disclosures should result in avoiding any pitfalls and gaining the maximum benefits conferred by this program.

Protect yourself from excessive fines and possible jail time. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in San Francisco, Los Angeles, San Diego and elsewhere in California qualify you for OVDI.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems, get you in compliance with your FBAR filing obligations, and minimize the chance of any criminal investigation or imposition of civil penalties.

How To Get Included On The Foreign Earned Income Exclusion

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Ordinarily, the United States taxes U.S. citizens and resident aliens on their worldwide income, even when they live and work abroad for an extended period of time. To provide some relief, a U.S. citizen or resident who meets certain requirements can elect to exclude from U.S. taxation a limited amount of foreign earned income plus a housing cost amount. A double tax benefit is not allowed, however, and a taxpayer cannot claim a credit for foreign income taxes related to excluded income.

1. Exclusion versus Credit

Because the foreign earned income exclusion is elective, an expatriate must decide whether to elect the exclusion or to rely on the foreign tax credit. A key factor in deciding which option is most advantageous is the relative amounts of U.S. and foreign taxes imposed on the foreign earned income before the exclusion or credit. The exclusion completely eliminates the U.S. income tax on the qualifying amount of foreign earned income.

This allows expatriates who work in a low-tax foreign jurisdiction or who qualify for special tax exemptions in the countries in which they work, to benefit from the lower foreign tax rates. In contrast, under the foreign tax credit option, the United States collects any residual U.S. tax on lightly taxed foreign income and the expatriate derives no benefit from the lower foreign rates.

The exclusion also eliminates the U.S. tax on the qualifying amount of foreign earned income derived by an expatriate working in a high-tax foreign jurisdiction. The credit option also achieves this result, since the higher foreign taxes are sufficient to fully offset the U.S. tax on foreign earned income.

In addition, under the credit option, the expatriate receives a potential added benefit in the form of a foreign tax credit carryover. Foreign taxes in excess of the foreign tax credit limitation can be carried back one year and forward up to ten years. Therefore, an expatriate can use these excess credits in a carryover year in which he or she has foreign-source income that attracts little or no foreign tax.

2. Qualified Individuals

The foreign earned income exclusion is available only to U.S. citizens or resident aliens who meet the following requirements:

(a) the individual is physically present in a foreign country for at least 330 full days during a 12-month period or, in the case of a U.S. citizen, is a bona fide resident of a foreign country for an uninterrupted period that includes an entire taxable year, AND

(b) the individual’s tax home is in a foreign country.

Whether a person is a bona fide foreign resident is determined by his intentions with regard to the length and nature of the stay. Factors which suggest that an expatriate is a bona fide resident include: (i) the presence of family, (ii) the acquisition of a foreign home or long-term lease, and (iii) involvement in the social life of the foreign country.

The second requirement is that the individual has a foreign tax home. An individual’s tax home is his principal or regular place of business.

3. Computing the Exclusion

The exclusion is available only for foreign-source income that was earned during the period in which the taxpayer satisfies:

(1) the foreign tax home requirement, and

(2) either (a) the bona fide foreign resident or (b) the 330-day physical presence test.

Therefore, when identifying compensation that qualifies for the exclusion, the determinative factor is whether a paycheck or taxable reimbursement is attributable to services performed during the qualifying period, not whether the expatriate actually received the compensation during that period. A deferred payment, such as a bonus, qualifies for the exclusion only if it is received before the close of the taxable year following the year in which it was earned. Pension income does not qualify for the exclusion.

Employment-related allowances, such as foreign housing and automobile allowances, also qualify for the exclusion. However, the allowance must represent compensation for services performed during the qualifying period. In this regard, any taxable reimbursement received for expenses incurred in moving from the United States to a foreign country are treated as compensation for services performed abroad. On the other hand, any taxable reimbursements received for expenses incurred in moving back to the United States are treated as U.S.-source income.

Any deductions allocable to excluded foreign earned income, such as reimbursed employee business expenses, are disallowed. Certain deductions are considered unrelated to any specific item of gross income and are always deducted in full. These include medical expenses, charitable contributions, alimony payments, IRS contributions, real estate taxes, mortgage interest on a personal residence, and personal exemptions.

4. Housing Cost Allowance

An expatriate that qualifies for the foreign earned income exclusion can also claim an exclusion for the housing cost amount. The housing cost amount equals the excess of eligible expenses incurred for the expatriate’s foreign housing over a stipulated base amount, which is prorated for the number of qualifying days in the year.

Eligible housing expenses normally include rent, utilities (other than telephone charges), real and personal property insurance, certain occupancy taxes, nonrefundable security deposits, rental of furniture and accessories, household repairs, and residential parking. Housing expenses do not include the costs of purchasing or making improvement to a house, mortgage interest and real estate taxes related to a house that the taxpayer owns, purchased furniture, pay television subscriptions, or domestic help.

5. Electing the Exclusion

The election to claim the foreign earned income exclusion and housing cost amount is made by filing Form 2555, Foreign Earned Income Exclusion, and remains in effect until revoked by the taxpayer. If uncertainties exist regarding whether to elect the exclusion, a taxpayer can file an original return without making the election, and then file an amended return at a later date electing the exclusion.

Given the complexity of this area, one would be best served by seeking tax counsel to make sure that you are getting the maximum tax benefits. Contact the Law Offices Of Jeffrey B. Kahn, P.C. with locations in Los Angeles, San Francisco and elsewhere in California.
Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems, get you in compliance with your FBAR filing obligations, and minimize the chance of any criminal investigation or imposition of civil penalties.

What You Must Know About IRS FBAR Penalty Negotiations

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Recently, the IRS has made the Report of Foreign Bank and Financial Accounts (FBAR) penalty enforcement a top priority and this is alarming the taxpayers worldwide. Even in the course of every routine domestic IRS audit, IRS agents are looking for undisclosed foreign bank accounts. In this blog I will discuss some things that you need to keep in mind when negotiating FBAR penalties with the IRS.

1. The penalties for noncompliance in FBAR enforcement are staggering.

FBAR penalties can be unfair as the penalties are based on the account size and not on how much tax you avoided. This is a stark contrast to other IRS penalties which are based on how much additional tax is owed. Given this difference you will always have a bigger risk and more to loose when dealing with FBAR penalties.

2. The two types of FBAR penalties.

The “get off gently FBAR penalty” – If the IRS feels that you made an innocent mistake and “not willfully” ignored to file your FBAR, your “get off gently penalty” will be $10,000 per overseas account per year not reported. To illustrate, if you have five foreign accounts that you failed to report on your FBAR in each of five years, the IRS can penalize you $250,000 regardless of whether you even have that amount sitting in your foreign accounts.

The “disastrous FBAR penalty” – If the IRS can show that you “intentionally” avoided filing your FBAR’s, your minimum “disastrous FBAR penalty” will be 50% of your account value. Additionally, the IRS may also press for criminal charges and if convicted of a willful violation, this can also lead to jail time. The “disastrous FBAR penalty” can also be assessed multiple times thus wiping out your entire savings.

3. The taxpayer’s burden of proving “reasonable cause”

You are obligated to pay the penalty the IRS deems necessary. The IRS can assume the “disastrous FBAR penalty” and they are not required to prove willfulness. It will be the taxpayer that bears the heavy burden of proving that the taxpayer’s failure to comply was due to reasonable cause and not from “willful neglect”.

4. Your appeal option.

Having exhausted all administrative remedies within the IRS first, you can then appeal the proposed FBAR penalties to a Federal District Court but for that court to have jurisdiction you must pay the assessments in full and then sue the IRS in a district court for refund. Since coming up with the money may be impossible for most taxpayers, you should hire an experienced tax attorney to make the most of the IRS appeals process and perhaps avoid the need for litigation. Keep in mind that in the appeals process, you do not have to pay any FBAR penalty until the end. Second, you can be successful if IRS remedies itself thus making court filings unnecessary. And third, even if the administrative remedies do not yield you success, your tax attorney can attempt to negotiate with the IRS to lower your FBAR penalties without going for a trial.

5. The Offshore Voluntary Disclosure Initiative (OVDI) route.

When compared to past Voluntary Disclosure Programs used by people to avoid criminal charges, the OVDI amnesty program is intended to save people with undisclosed foreign accounts from the threat of huge or disastrous FBAR penalties. So to minimize your FBAR penalty, we recommend using the OVDI program as a starting point.

When you make use of OVDI, there is more chance of getting favorable review during the discussion of your potential claim of “reasonable cause”. But outside OVDI, the IRS does not treat people as favorably as those who make themselves visible under the OVDI. It does not matter whether you made an innocent mistake or made an unadvised “quiet” or “soft” disclosure, the ground for your case will be much less sturdy when it is outside OVDI.

The IRS audit division has a way of reaching into the every corner of a taxpayer’s life. By not facing the Federal District Court, you may avoid the prison time but losing your entire wealth through these audits can be nearly as devastating as sitting in a prison. Some people will look at the OVDI route and feel that its terms are unfair and thus not bother entering into the program. What they fail to realize is that the consequences when they get caught are a lot worse in that outside of OVDI the minimum penalty is 50% of your highest balance and the IRS can pursue criminal charges. They also do not realize that the OVDI route is not necessarily set in stone but can serve as a springboard for something better than the maximum penalty of 27.5% of your highest balance. OVDI also provides the benefit that you avoid criminal prosecution.

If you have never reported your foreign investments on your U.S. Tax Returns, you should seriously consider participating in the IRS’s 2012 Offshore Voluntary Disclosure Initiative (OVDI). Once the IRS contacts you, you cannot get into this program and would be subject to the maximum penalties (civil and criminal) under the tax law. Taxpayers who hire an experienced tax attorney in Offshore Account Voluntary Disclosures should result in avoiding any pitfalls and gaining the maximum benefits conferred by this program.

Description: Protect yourself from excessive fines and possible jail time. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles, San Francisco and elsewhere in California qualify you for OVDI.

Tax Tips For U.S. Expat Taxpayers

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If you have fallen behind on your U.S. expat taxes and the IRS has contacted you about delinquent tax returns, what should you do? Here are a few tips on what to do next.

Tip #1 – Do Not Ignore The Notice.

The worst thing you can do is ignore the notice. If you don’t think that you will be able to gather the proper documentation and file the return(s) by the deadline they provide, call them right away. Explain that you are aware of the delinquency and you are doing your best to resolve it. Often they will give you a few extra weeks if you are honestly trying to resolve the situation. If you do nothing at all, the IRS can file a return on your behalf and assess a liability of what they think you owe. Expats in particular want to avoid this, as the IRS won’t include any deductions or credits you may be eligible for—this could be very costly! Hiring a tax attorney would be most helpful to you to secure the additional time and get the information you need.

Tip #2 – Form A Plan.

The IRS may have only requested a particular year or two, but it’s important to determine exactly how many years you are behind and get caught up on all delinquent returns (up to six years is recommended). Most expats who are behind on their returns were unaware of their need to file and will be delinquent for more than one year. While they may only currently be aware of a certain year you failed to file, it is very likely they will eventually uncover the others and then you’ll need to do the entire process all over again. Hiring a tax attorney would be most helpful if you aren’t sure how many years you are behind. A tax attorney can also qualify you for amnesty in the IRS’s 2012 Offshore Voluntary Disclosure Initiative (OVDI).

Tip #3 – Gather Your Documents.

The first step, and arguably the most time-consuming, is digging up the documents necessary to file back taxes. Most importantly, you will need to gather any 1099s, W2s or other US income reporting statements. Hiring a tax attorney would be most helpful if you have misplaced these documents, as copies can be requested from the IRS. A tax attorney can also help you identify exactly what you need to collect.

Tip #4 – Prepare And File.

With the complexity surrounding tax reporting by expats, a tax attorney would be most helpful in making sure that all reporting obligations are satisfied and that you are utilizing all tax breaks including carryovers from the Foreign Tax Credit or any capital losses.

Tip #5 – Evaluate Your Options.

Sometimes there are taxes owed on back tax returns and if you can’t pay everything you owe, there are options to avoid collection action by the IRS. Most taxpayers will apply for an Installment Agreement but keep in mind that with this option, interest and penalties continue to accrue so long as you have a balance, so paying as much as possible will help reduce the total debt over time. A tax attorney would be most helpful in determining your options and whether penalties can be abated.

The process of becoming compliant with your U.S. expat taxes can be stressful, but hiring a tax attorney with experience in this area and getting caught up as soon as possible is clearly your best option. The longer you wait, the more expensive it can be. This is particularly important if you need to file past FBARs, as the IRS is cracking down on tax evaders and stiff penalties can be assessed for every year you are delinquent.

If you have never reported your foreign investments on your U.S. Tax Returns, you should seriously consider participating in the IRS’s 2012 Offshore Voluntary Disclosure Initiative (OVDI). Once the IRS contacts you, you cannot get into this program and would be subject to the maximum penalties (civil and criminal) under the tax law. Taxpayers who hire an experienced tax attorney in Offshore Account Voluntary Disclosures should result in avoiding any pitfalls and gaining the maximum benefits conferred by this program.

Description: Protect yourself from excessive fines and possible jail time. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles, San Francisco and elsewhere in California qualify you for OVDI.