Treasury Inspector General Finds 10% of Foreign Earned Income Exclusions claimed in 2008 Are Invalid or Erroneous
TIGTA Finds Significant Loss in IRS Revenue Because of Erroneously Claimed Foreign Earned Income Tax Exclusions
NEW HIRE-FATCA ACT PASSED IN EARLY 2010 HAS SOME CHANGES FOR FOREIGN TRUSTS AND FIDEICOMISOS
A widely distributed article recently published by some attorneys contains some dire warnings about the adverse income tax consequences of the new foreign trust provisions in the HIRE-FATCA Act passed early in 2010 with respect to Fideicomisos (which the IRS currently requires file Forms 3520 and 3520A because the IRS currently holds Fideicomisos to be foreign trusts). The conclusions in this article are most likely not correct if the Fideicomiso has no income and contains property held for investment or held for personal use by the beneficiary (not a rental property). The IRS has not at this time ( nor is it likely to in the near future) issued any regulations further explaining the effect of the provisions of the new law on Fideicomisos and foreign trusts. What the regulations or further guidance may say is pure speculation. The general principles of trust taxation which are most likely to apply are stated in the next paragraph.
Under general trust tax law involving income and distributions from trusts to beneficiaries, unless the trust generates taxable income, the mere fact that personal use of foreign trust real property by a beneficiary is treated as a distribution to that beneficiary, will not cause the personal use to be taxed to the owner or beneficiary of the Fideicomiso because distributions from trusts are only taxable to the extent of the trusts DNI (Distributable Net Income).
You must keep in mind that until the IRS issues further guidance and regulations on this new law, you cannot be certain they will not “twist” its interpretation of the new changes in a manner which is not consistent with prior long standing us trust tax principles. Therefore some uncertainty will exist until then.
NEW FOREIGN ACCOUNT TAX COMPLIANCE ACT – REPORTING REQUIREMENTS
The new Foreign Account Tax Compliance Act (FATCA) requires that taxpayers report all foreign financial assets if the aggregate current fair market value of all such assets equal $50,000 or more. Foreign financial assets include foreign bank accounts, brokerage accounts, stocks, bonds, and ownership in foreign entities such as foreign corporations, partnerships, trusts, and LLCs. The IRS has the ability under the new law to define almost any asset located outside the US as a foreign financial assets required to be reported under this law. They will in the future be issuing regulations defining the type of assets they have determined are included under this new law.
These items will either be reported on an attachment to your US tax return or the IRS is most likely to create a new tax form to attach to your return for the reporting. For each such asset you must state full information including account numbers, name and address of financial institution or stock issuer, and the highest value of the foreign asset during the tax year.
If you meet the aggregate $50,000 in value threshold, you will have to report all the information on each asset regardless of the percentage you own or its small value. All other foreign asset reporting forms such as FBARs, Form 5471, 8865, 3520, 3520A, etc must also still be filed if required.
The minimum penalty for failing to report this data begins at $10,000 and can go up from there depending on the circumstances. This is generally effective for tax years that begin after 3/18/10.
NEW HIRE ACT PASSED IN EARLY 2010 HAS SOME CHANGES FOR FOREIGN TRUSTS AND FIDEICOMISOS
A widely distributed article recently published by some attorneys contains some dire warnings about the adverse income tax consequences of the new foreign trust provisions in the HIRE Act passed early in 2010 with respect to Fideicomisos (which the IRS currently requires file Forms 3520 and 3520A because the IRS currently holds Fideicomisos to be foreign trusts). The conclusions in this article are most likely not correct if the Fideicomiso has no income and contains property held for investment or held for personal use by the beneficiary (not a rental property). The IRS has not at this time ( nor is it likely to in the near future) issued any regulations further explaining the effect of the provisions of the new law on Fideicomisos and foreign trusts. If and when those regulations are issued, they might change the general rule for income taxation of trust income contained in the following paragraph which will most likely apply to the new Act provisions.
Under general trust tax law involving income and distributions from trusts to beneficiaries, unless the trust generates taxable income, the mere fact that personal use of foreign trust real property by a beneficiary is treated as a distribution to that beneficiary, will not cause the personal use to be taxed to the owner or beneficiary of the Fideicomiso because distributions from trusts are only taxable to the extent of the trusts DNI (Distributable Net Income).
FIVE TAX SCAMS LISTED BY IRS INCLUDE HIDING ASSETS AND INCOME OFFSHORE
- Phishing Phishing is a tactic used by scam artists to trick unsuspecting victims into revealing personal or financial information in an electronic communication. Scams can take the form of e-mails, tweets or phony websites and they try to mislead consumers by telling them they are entitled to a tax refund from the IRS and they must reveal personal information to claim it. Regardless of how official this e-mail may look and sound, the IRS never initiates unsolicited e-mail contact with taxpayers about their tax issues. Phishers use the personal information obtained to steal the victim’s identity, access bank accounts, run up credit card charges or apply for loans in the victim’s name. If you receive an e-mail that you suspect is a phishing attempt or directs you to an imitation IRS website, please forward it to the IRS at phishing@irs.gov. You can also visit IRS.gov and enter the keyword phishing for additional information.
- Return Preparer Fraud Dishonest tax return preparers can cause trouble for taxpayers who fall victim to their ploys. Such preparers are skimming a portion of their clients’ refunds, charging inflated fees for tax preparation or are attracting new clients by promising refunds that are too good to be true. To increase confidence in the tax system, the IRS is requiring all paid return preparers to register with the IRS, pass competency tests and attend continuing education.
- Hiding Income Offshore Taxpayers have tried to avoid or evade U.S. income tax by hiding income in offshore banks and brokerage accounts. IRS agents continue to develop their investigations of these offshore tax avoidance transactions using information gained from more than 14,700 voluntary disclosures received last year. Taxpayers also evade taxes by using offshore debit cards, credit cards, wire transfers, foreign trusts, employee-leasing schemes, private annuities or life insurance plans.
- Abuse of Charitable Organizations and Deductions The IRS continues to observe the misuse of tax-exempt organizations. This includes arrangements to improperly shield income or assets from taxation and attempts by donors to maintain control over donated assets. The IRS also continues to investigate various schemes where donations are highly overvalued or the organization receiving the donation promises that the donor can purchase the items back at a later date at a price the donor sets.
- 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 IRS.gov. These arguments are false and have been thrown out of court.
TDF 90-22.1 FOREIGN FINANCIAL ACCOUNT REPORT DUE 6/30/10 – STREET ADDRESS TO USE FOR DHL, FED EXP OR UPS DELIVERY
TDF 90-22.1 FOREIGN FINANCIAL ACCOUNT REPORT DUE 6/30/10 – STREET ADDRESS TO USE FOR DHL, FED EXP OR UPS DELIVERY
The following street address should be used to file TDF 90-22.1 (FBAR) form when the US mail is not available for delivery. These private delivery services will not deliver to the PO Box shown delivery address shown on the form’s instructions.:
IRS Detroit Computing Center
Attn: FBAR Mailroom
4th Floor
985 Michigan Ave.
Detroit, MI 48226
(313) 234-1062
This form must be filed immediately. If it does not arrive by 6/30/10, you may incur a $10,000 late filing penalty. The fine can be greater if you do not file at all and also might include criminal prosecution. When in doubt whether you owe the form to the US Treasury, best to file just to be certain there are no problems since it does not cause any additional income tax cost, and is only a reporting form.
Due Date for FBAR Filing Fast Approaching
Due Date for FBAR Filing Fast Approaching
The deadline for filing Report of Foreign Bank and Financial Accounts,Form TD F 90-22.1 (FBAR) for calendar 2009 is fast approaching. These reports are due by June 30th each year. Unlike the rule for tax forms, FBAR must be received by Treasury on or before the June 30th date to be considered timely filed. Therefore, one should plan accordingly and file the FBAR in sufficient time in advance of the due date. No extension of time to file is permitted.
Penalties can be severe. Persons who are required to file the FBAR and who do not do so by June 30th are subject to a penalty. For a willful violation the penalty can be as high as the greater of $100,000 or 50% of the amount in the foreign account. For a nonwillful violation that is not corrected and for which there is no reasonable cause, the penalty can be as high as $10,000.
Several IRS pronouncements should be considered when working on 2009 FBARs, including Announcement 2010-16 and Notice 2010-23. You can link directly to these pronouncements by clicking on the appropriate item.
IRS PROPOSES JOINT AUDITS OF INTERNATIONAL COMPANIES – INDIVIDUALS WILL PROBABLY BE NEXT
The IRS Commissioner has proposed joint audits of International Companies by the US and the tax agency of the Country in which they are doing business abroad. This is a further extension of the general worldwide opinion that if all country taxing agencies work together they will all benefit by increased tax collection.
This is just the first step of what will most likely follow in a few years (or less) which will be joint country audits of individuals living and working abroad. This means that in the future the IRS and the foreign country taxing agency will institute joint audits of US individuals living and working abroad.
Due Date for Other Foreign Tax Reporting Forms
Form 5471 ( filed if you own a foreign corporation) and Form 8865 (filed if you participate in a foreign partnership) are both due by the extended due date of your personal tax return. Forms 3520 (for foreign trusts) is also due by the extended due date of your personal tax return. However form 3520A which is also filed for foreign trusts is due on 3/15 of each year, but can be extended using Form 7004 to September 15th following the end of the calendar year.
There are severe and punitive penalties for failing to file these forms at at all or for filing them late.
IMPORTANT DUE DATES ARE NEAR FOR EXPATRIATES
If you were living and working abroad on 4/15/10, the due date of your return (but not payment of any tax due) was automatically extended until 6/15/10. You can further extend your personal income tax return by filing Form 4868 by 6/15/10 until 10/15/10. The extension must be send by US mail or UPS, DHL or Fed Express overnight express service and dated or postmarked on the 15th.
The Foreign Bank and Financial Account reporting form TDF 90-22.1 is must be received by the Detroit address it must be mailed to (it is filed separately from your Form 1040) by 6/30/10. Failure to file that form or filing it late will result in an IRS penalty of $10,000 or more. This form must be filed if your personal foreign accounts or the foreign accounts you sign on but have no ownership interest equal or exceed $10,000 at any time during 2009 when all accounts are aggregated together (combined in one total). That means even though no individual account exceeds $10,000 if you combine the highest balances during 2009 together an that amount is met or exceeded you must file the form. This includes foreign stock broker accounts and any type of foreign account in which an entity holds custody of financial assets (such as credit balances in foreign credit card accounts)
