U.S. Taxpayer Worldwide Income Reporting Requirements

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Many U.S. taxpayers do not realize that they must report their worldwide income, regardless of whether they are living in the U.S. or abroad.  If you are a U.S. Citizen or resident alien, you must report your worldwide income from whatever source, subject to the same income tax filing requirements that apply to U.S. Citizens or resident aliens living in the U.S.

When a U.S. taxpayer owns or has signatory authority over a foreign account, the reporting requirements become more complex.   All U.S. taxpayers who have an interest in, or signatory or other authority over a bank, securities or other similar foreign accounts must file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), if the aggregate value of the foreign accounts exceeds $10,000 at any time during the calendar year.  As of October 1, 2013 the FBAR form must be filed through the Financial Crimes Enforcement Network’s (FinCEN’s) Bank Secrecy Act E-Filing System on or before June 30th of the year following the calendar year being reported.  For example, to report foreign accounts held open in 2013, the taxpayer must file the FBAR by June 30, 2014.

In addition to filing an FBAR form, the U.S. taxpayer must follow certain reporting requirements on his or her annual tax return.  First, the U.S. taxpayer must include a completed Schedule B, Interest and Ordinary Dividends, with his or her annual tax return.  On Schedule B, the taxpayer will complete Part III, Foreign Accounts and Trusts, which asks whether, at any time in the year, the taxpayer had a financial interest in or signatory authority over a foreign financial account.  Schedule B also asks whether the taxpayer is required to file an FBAR, and if so, in which foreign country the financial account was located.

The U.S. Taxpayer may also be required to file Form 8938, Statement of Specific Foreign Financial Assets with his or her annual tax return.  Whether a taxpayer is required to file this form depends on where the taxpayer lives, the taxpayer’s filing status, and the value in the accounts.  For example, unmarried taxpayers living in the United States must file Form 8938 if the total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.

Failure to comply with the above reporting requirements can result in steep penalties to the unwitting taxpayer.  Failure to file an 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 and 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.

U.S. taxpayers who have foreign financial accounts 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 owing foreign financial accounts.

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.

 

Eliminating Tax Penalties Due to Reasonable Cause

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If you have made a mistake on your tax return that is later discovered by the IRS, you will be charged interest on the amount you owe. In addition, the IRS has the discretion to assess penalties requiring you to pay extra. But this doesn’t mean that you will have to pay these penalties. Working with a tax lawyer in Los Angeles or elsewhere can help in getting the penalties reduced or even dropped.

About one-third of all IRS penalties are abated and your odds of having your penalties dropped are much higher if you work with a tax attorney on your case. In order to convince the IRS to remove the penalties they have imposed, you need to convince them of special circumstances that lead to “reasonable cause” for you to not have made a correct filing initially.

This goes beyond just admitting that you made an honest mistake. Here are a few of the scenarios that the Law Offices Of Jeffrey B. Kahn, P.C.  know that the IRS will consider to be reasonable cause for an erroneous tax filing:

  • A death or serious illness in the family.
  • Incorrect advice given by an IRS agent in person or over the phone.
  • The loss of records because of a fire or natural disaster.
  • An error made by your tax preparer.

If you feel that you are being unfairly punished for a problem with a tax filing that was beyond your control, your best bet is to contact an IRS attorney from our firm who can review the facts in your case.

An experienced attorney with the Law Offices Of Jeffrey B. Kahn, P.C. may be able to help you get your tax penalties reduced or eliminated. Learn about the circumstances a tax attorney can use to plead your case with the IRS.

The Essential Records to Have for a Tax Audit

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If you are getting ready for a tax audit, one of the most important things to do is gather and organize your tax records and receipts. There’s a good chance that you have a large amount of documents and receipts in your possession. No matter how organized you are, it can be a daunting task to collect the right pieces and make sure that you have them organized and handy for the audit conference.

The Law Offices Of Jeffrey B. Kahn, P.C.  has seen many tax audits that hinge on whether or not the taxpayer can provide proper documentation for their previous tax filings. A tax lawyer in Fairfield or elsewhere can make sure that the documentation is complete and proper.  By submitting this to your attorney in advance of the audit, your attorney can review your documentation and determine if there are any gaps that need to be addressed. This will allow you to have in in-depth conversation with your IRS audit attorney.

So what are the most essential tax records to have ahead of your audit? Here are a few must-have items:

  • Any W-2 forms from the previous year. This can include documents from full-time and part-time work, large casino and lottery winnings and more.
  • Form 1098 records from your bank or lender on mortgage interest paid from the previous year.
  • Records of any miscellaneous money you earned and reported to the IRS including work done as an independent contractor or freelancer, interest from savings accounts and stock dividends.
  • Written letters from charities confirming your monetary donations from the previous year.
  • Receipts for business expenses you claimed.

The Law Offices Of Jeffrey B. Kahn, P.C. has helped many people minimize or avoid adjustments from IRS audits. Working with a tax attorney is the best bet for minimizing adjustments that would create liability to the IRS.

The Importance of Avoiding Tax Liens

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If you have recently received notice that there is a tax lien against your home, you need to quickly contact a tax lawyer for IRS tax help. Receiving official notice from the IRS about a tax lien against your home means that the government has placed a legal claim against your home as a form of leverage to attempt to secure its interest in your assets to satisfy past tax debts. While this doesn’t mean that the IRS is going to take over your home and evict you, it does have some potentially negative consequences.

With the current housing market, tax attorneys in California often have to deal with helping homeowners get a tax lien removed so they can sell or refinance their home. The easiest resolution of this problem is where the proceeds of the sale or refinancing can fully satisfy the lien at closing.  If this isn’t possible for financial reasons, an experienced tax attorney at the Law Offices Of Jeffrey B. Kahn, P.C. can request the IRS to release or subordinate the lien to allow the transaction to proceed if it can be shown that the IRS would be in no worse position by allowing the sale or refinancing to go through.

Once a tax lien is filed, it will stay on your credit history for seven years.  However, the Law Offices Of Jeffrey B. Kahn, P.C. can help you negotiate a resolution through the IRS Fresh Start Program which offers a one-time way to get this mark removed from your credit.

If you are in danger of having a tax lien placed against your property, it’s urgent that you speak with an income tax attorney. The experienced tax attorneys in the Law Offices Of Jeffrey B. Kahn, P.C. know how to keep this from happening.

Time Limits on IRS Collection Efforts

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Once you have an assessment our outstanding balance with IRS, the IRS is notorious for aggressively pursuing collection action by issuing levies on your bank accounts and sources of income.  Their efforts though cannot last forever. It’s a little-known fact that the IRS has a Statute Of Limitations on collecting amounts owed to IRS. If you have owed money to the IRS for some time, you might be able to work with a tax attorney to get at least some of your IRS debt erased where the Statute Of Limitations is soon to expire.

Generally, the IRS has 10 years from the date the taxes were assessed to collect any past taxes. If you don’t file a return, the IRS will make a deficiency assessment based on a substitute return they file for you, so don’t expect that not filing a tax return will prevent the 10-year period to start.

Beware that States will have their own Statute Of Limitations for the collection of State taxes.  In California the Statute Of Limitations is 20 years.  If you owe IRS and the State, you can work with tax lawyer in Los Angeles  and use the different Statute Of Limitations to your advantage. A consultation with the Law Offices Of Jeffrey B. Kahn, P.C. can help you determine what the best strategy is for you.

The Law Offices Of Jeffrey B. Kahn, P.C. has helped many people avoid collection action by the IRS and State tax agencies. Working with a tax attorney is the best bet for reducing or eliminating the amount you owe.

Appealing the Results of a Tax Audit

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Every taxpayer who is being examined in a tax audit has the right to dispute the auditor’s final determination.  You do not have to accept the auditor’s findings if you believe any or all of the adjustments are wrong and/or penalties should not be imposed.  Your best bet is to contact a California tax attorney who can effectively start the appeals process. Many people who have lost an IRS audit have seen the amount they owe in taxes reduced or even eliminated after hiring a tax lawyer in San Diego or elsewhere to help with them challenge the auditor’s decision.

Once the auditor issues the final determination, you have up to 30 days to file an appeal with the IRS. By working with a tax attorney, an effective and complete written protest letter is prepared and filed with the IRS Office Of Appeals challenging the determination. The IRS Office Of Appeals is a division of IRS that is separate from the Examination Division that performed your initial audit. This is done to ensure a level of transparency and fairness during the appeals process.  Within the next few months the IRS Office Of Appeals will notice you and your representative that the appeal as been assigned to an Appeals Officer.

The appeals process can be complex especially when the issues involve the correct interpretation and application of sometimes archaic tax provisions.  Therefore, you want to make sure you are prepared for your appeals hearing in order to secure the most favorable result. This includes collecting all of your relevant tax records and information ahead of time. You’ll also want to try and get as much information about the original tax audit as possible. You can file a Freedom of Information Act request on the auditor’s records — this will let you know the information they based their original decision on.

Even if your appeal has been denied or you disagree with the decision of the Appeals Officer, you are not out of options. The Law Offices Of Jeffrey B. Kahn, P.C. can help you to file a Petition in Tax Court to get the amount you owe reduced or eliminated. Many people who have lost their appeal have had the amount of their tax debt lowered by disputing the proposed adjustments in Tax Court.

The Law Offices Of Jeffrey B. Kahn, P.C. has helped many people appeal their tax audit. Working with a tax attorney is the best bet for reducing or eliminating the amount you owe.

What to do if you failed to declare your closed foreign bank account that was open within the last six years?

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Even though you may have closed your foreign accounts years ago, the IRS can go back as far as six years to impose penalties and perhaps even criminal prosecution for taxpayers who did not disclose their worldwide income on their U.S. income tax returns nor report their foreign accounts to the U.S. Treasury.

IRS has established programs for taxpayers to voluntarily come forward and disclose unreported foreign income and foreign accounts under what the IRS calls the Offshore Voluntary Disclosure Initiative (OVDI).

On January 9, 2012 the IRS announced the terms of the 2012 OVDI which requires that taxpayers: (1) File 8 years of back tax returns reflecting unreported foreign source income; (2) Calculate interest each year on unpaid tax; (3) Apply a 20% accuracy-related penalty under Code Sec. 6662 or a 25% delinquency penalty under Code Sec. 6651; and (4) Apply up to a 27.5% penalty based upon the highest balance of the account in the past eight years.

In return for entering the offshore voluntary disclosure program, the IRS has agreed not to pursue charges of criminal tax evasion which would have resulted in jail time or a felony on your record; and other fraud and filing penalties including IRC Sec. 6663 fraud penalties (75% of the unpaid tax) and failure to file a TD F 90-22.1, Report of Foreign Bank and Financial Accounts Report, (FBAR) (the greater of $100,000 or 50% of the foreign account balance).

Recent or past 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.

Taxpayers who hire an experienced tax attorney in Offshore Account Voluntary Disclosures should result in avoiding any pitfalls of non-disclosure or incomplete disclosure.

Classification of Taxpayers for U.S. Tax Purposes

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U.S. law treats U.S. persons and foreign persons differently for tax purposes. Therefore, it is important to be able to distinguish between these two types of individual taxpayers.  This area of the tax law can be quite confusing.

For an individual to be classified as ”United States person” for tax purposes means he or she is one of the following:

  • A citizen of the United States
  • A resident of the United States who holds a Green Card or “H1B” Visa
  • A resident of the United States who meets the “Substantial Presence Test” for the calendar year

The following individuals if NOT residents or citizens of the U.S. should be treated as foreign persons:

  • An individual temporarily present in the United States as a foreign government-related individual under an “A” or “G” visa.
  • A teacher or trainee temporarily present in the United States under a “J” or “Q” visa, who substantially complies with the requirements of the visa.
  • A student temporarily present in the United States under an “F”, “J”, “M”, or “Q” visa, who substantially complies with the requirements of the visa.
  • A professional athlete temporarily in the United States to compete in a charitable sports event.

Under the “Substantial Presence Test” you will be considered a U.S. resident for tax purposes if you meet the substantial presence test for calendar year 2013. To meet this test, you must be physically present in the United States on at least:

  1. 31 days during 2013, and
  2. 183 days during the 3-year period that includes 2013, 2012, and 2011, counting:
    1. All the days you were present in 2013, and
    2. 1/3 of the days you were present in 2012, and
    3. 1/6 of the days you were present in 2011.

Example.

You were physically present in the United States on 120 days in each of the years 2011, 2012, and 2013. To determine if you meet the substantial presence test for 2013, count the full 120 days of presence in 2013, 40 days in 2012 (1/3 of 120), and 20 days in 2011 (1/6 of 120). Because the total for the 3-year period is 180 days, you are not considered a resident under the substantial presence test for 2013.

If you are determined to be a U.S. person, you are required to report your world-wide income on your U.S. income tax returns and annually disclose all foreign bank accounts to the U.S. Treasury where the aggregate value of those accounts exceed $10,000.00.

For those U.S. persons who have not satisfied these requirements in any of the last six calendar years, in addition to the back taxes, interest and penalties, the government may impose include a fine of not more than $500,000.00 and imprisonment of not more than five years, for failure to file a report, supply information, and for filing a false or fraudulent report.

The IRS has established the Offshore Voluntary Disclosure Initiative (OVDI) which allows U.S. persons to come forward to avoid criminal prosecution and not have to bear the full amount of penalties normally imposed by IRS.  U.S. persons 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.

Disclosing Foreign Bank Accounts Through the OVDI Program

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A taxpayer who has not disclosed foreign bank accounts to the IRS and to cure this delinquency and avoid criminal repercussions applies to the Offshore Voluntary Disclosure Initiative (“OVDI”), generally must pay a miscellaneous Title 26 offshore penalty, in lieu of traditional penalties that would apply to foreign assets or entities outside of OVDI.  The most significant penalty that the offshore penalty replaces is the penalty for failure to file a Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (“FBAR”).  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.  Non-willful violations that are not due to reasonable cause incur a penalty of $10,000 per violation.

Generally, the miscellaneous offshore penalty under the OVDI program equals 27.5% of the highest aggregate balance in the foreign assets or entities during the years covered by the OVDI program, but may be reduced in limited cases to 12.5% or 5%.  For example, consider a taxpayer who has the following account balances for the eight-year OVDI disclosure period 2005 through 2012:

Year

Interest Income

Account Balance

2005

$1,000

$1,001,000

2006

$1,000

$1,002,000

2007

$1,000

$1,003,000

2008

$1,000

$1,004,000

2009

$1,000

$1,005,000

2010

$1,000

$1,006,000

2011

$1,000

$1,007,000

2012

$1,000

$1,008,000

 

A taxpayer in the OVDI program will pay any additional tax and a 20% accuracy-related penalty for the unreported interest income each year, plus the offshore penalty equal to 27.5% of the highest account balance during the disclosure period, or $277,200 ($1,008,000 x 27.5%).

By contrast, if the taxpayer does not participate in the OVDI program, the IRS could charge a fraud penalty of 75% instead of the 20% accuracy-related penalty for the unreported interest income each year, plus the offshore penalty equal to 50% of the highest account balance during the disclosure period, or $504,000 ($1,008,000 x 50%) (50% of the highest account balance for each of the past six years).  The IRS could also proceed with criminal prosecution that could include incarceration.

Certain taxpayers may qualify for even greater savings through a reduction of the offshore penalty.  Taxpayers whose highest aggregate foreign account balance is less than $75,000 for each of the years in the OVDI disclosure period may qualify for a reduced 12.5% offshore penalty.

Taxpayers who fall into one of three specific categories may qualify for a reduced 5% offshore penalty.  The first category includes taxpayers who inherited the undisclosed foreign accounts or assets.  Second, taxpayers who are foreign residents and who were unaware that they were U.S. citizens may qualify for a reduced 5% offshore penalty.  Finally, U.S. taxpayers who are foreign residents may also qualify for the reduced penalty in certain circumstances.  The taxpayer in the example above would only pay an offshore penalty of $50,400 ($1,008,000 x 5%). The IRS has been very strict in applying the 5% rate so it would be in your best interest to have the tax attorneys of the Law Office Of Jeffrey B. Kahn, P.C. represent you to avoid any pitfalls and gain the maximum benefits conferred by this program, including a possibility of reduced offshore penalties.

Beware the Potential Tax Pitfalls of Investing in Offshore Mutual Funds – “PFIC” Concerns

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U.S. persons ought to be aware of the potential tax heartaches associated with investing in mutual funds held by foreign banks or foreign brokerage firms. When making such investments through U.S. firms, any appreciation or depreciation of value of the funds is not recognized as gain or loss until the fund is sold or liquidated.  This is not the case with the same type of investments in foreign firms.  Each year the U.S. investor must pick up as income or record a loss in the appreciation or depreciation of value of the funds even though there was no sale or liquidation of the funds.  Essentially, such an investor looses the advantage of deferring gains which is enjoyed by those investors dealing with U.S. firms.

To understand how this operates – Under the Internal Revenue Code, there is a concept called Passive Foreign Investment Company or “PFIC”.  A foreign corporation is classified as a PFIC if it meets one of the following tests:

  1. Income Test– 75% or more of the corporation’s gross income is passive income (interest, dividends, capital gains, etc.)
  2. Asset Test– 50% or more of the corporation’s total assets are passive assets; passive assets are investments that produce interest, dividends or capital gains.

The IRS has extended the characterization of a PFIC to include most foreign-based mutual funds, hedge funds and other pooled investment vehicles.

A. U.S. taxpayer with these investments is required to fill out Form 8621 and include it with his Form 1040 along with the appropriate PFIC income and tax computations.  The IRS offers various complicated methods of reporting PFIC income.  Under one such method, “Mark-to-Market”, the IRS requires the reporting of the value of a mutual fund from year to year and taxes any appreciation in the mutual fund values from year to year.  The tax rate that applies is 20%. This is in addition to the normal taxation of dividends and capital gains that domestic mutual funds are taxed on.

Reporting the appreciation of a mutual fund from year to year may end up being no small task as oftentimes a typical stock portfolio will contain twenty to thirty funds which may involve lots of trade activity over the course of many years.  The taxpayer needs to keep accurate and comprehensive records of all information on the mutual fund(s) including share basis, yearly balances, and any sales or purchases from year to year.

If you have never reported your foreign investments on your U.S. Tax Returns, the IRS has established the Offshore Voluntary Disclosure Initiative (OVDI) which allows taxpayers to come forward to avoid criminal prosecution and not have to bear the full amount of penalties normally imposed by IRS.  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.