The order was signed by Senior District Judge Thelton E. Henderson, and allows the IRS to identify U.S. taxpayers who hold or held interests in financial accounts at FCIB and other financial institutions that used the Wells Fargo correspondent account.

This article will briefly explain the IRS John Doe summons. It is not intended to constitute tax or legal advice

Correspondent Accounts

According to the DOJ, “A correspondent account is a bank deposit account maintained by one bank for another bank. Financial transactions involving U.S. dollars flow through U.S. banks. Therefore, foreign banks that do business in U.S. dollars, but have no office in the U.S., obtain a correspondent account at a U.S. bank in order to engage in such transactions. These transactions leave a trail in the U.S. that the IRS can access through the records of the correspondent bank accounts. These correspondent bank accounts have records of money deposited, money paid out through checks and money moved through the correspondent account by wire transfers.” The IRS can obtain all of this desired information through a John Doe summons issued to the U.S. bank holding the correspondent account.

Canadian Imperial Bank of Commerce’s FirstCaribbean International Bank

FCIB is based in Barbados and has branches in 18 Caribbean countries, according to the declaration of IRS Revenue Agent Cheryl R. Kiger, filed in support of the court petition. These countries include the British Virgin Islands, Dominica, Cayman Islands, Bahamas, and Barbados, among others. FCIB does not have any U.S. branches; however, it does maintain a U.S. correspondent account at Wells Fargo Bank N.A. Wells Fargo, headquartered in San Francisco, CA is the fourth largest bank in the U.S. by assets, and the largest bank when ranked by market capitalization, according to Wikipedia.

Per Agent Kiger’s declaration, the IRS discovered that U.S. taxpayers were using FCIB to help them escape detection of their offshore accounts by the IRS and to not pay U.S. federal income tax on money held in such offshore accounts. According to the DOJ release, after reviewing information submitted by more than 120 FCIB customers who enrolled in the IRS’s Offshore Voluntary Disclosure Program, the IRS determined that many FCIB customers in the John Doe summons class, “[M]ay have been under-reporting income, evading income taxes, or otherwise violating the internal revenue laws of the United States.”

Latest Example of How Offshore Voluntary Disclosure Programs Help IRS Identify Other Non-Compliant US Taxpayers

Since 2009, Sherayzen Law Office attorneys have predicted that the IRS Offshore Voluntary Disclosure Programs will produce a wealth of information that the IRS will use to identify other targets for investigation and prosecution. We further predicted the more widespread use of John Doe summons. Finally, since the Wegelin bank case began, we have repeatedly advised our clients that the IRS is likely to use the correspondent accounts opened with U.S. banks to identify non-compliant taxpayers with undisclosed foreign accounts.

Over the past four years, we have seen all of our predictions come true, and the latest move by the IRS against the FirstCaribbean International Bank is just the latest example of it.

According to Kathryn Keneally, Assistant Attorney General for the Justice Department’s Tax Division, “The Department of Justice and the IRS are committed to global enforcement to stop the use of foreign bank accounts to evade U.S. taxes. This John Doe summons is a visible indication of how we are using the many tools available to us to pursue this activity wherever it is occurring. Those who are still hiding should get right with their country and their fellow taxpayers before it is too late.” Acting IRS Commissioner Steven T. Miller added, “This summons marks another milestone in international tax enforcement. Our work here shows our resolve to pursue these cases in all parts of the world, regardless of whether the person hiding money overseas chooses a bank with no offices on U.S. soil.”

Contact Sherayzen Law Office for Help With the Voluntary Disclosure of Your Foreign Bank Accounts

If you are a US taxpayer who is using foreign bank accounts to attempt to under-report US income or evade US tax laws, this summons should serve as a warning to you. The IRS will likely increase their use of enforcement mechanisms such as the John Doe summons in the near future, so you are highly advised to seek an experienced attorney in these matters.

For the U.S. taxpayers with have undisclosed financial accounts in FirstCaribbean International Bank, the time to act is now – before the IRS finds them.

This is why you should contact Sherayzen Law Office experienced experts in Offshore Voluntary Disclosures now. Our international tax attorneys can assist you in all of your tax and legal needs concerning undisclosed foreign accounts and income and help you avoid making costly mistakes.

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Due to the current budget situation, including the sequester, all IRS operations will be closed on those days. This means that all IRS offices, including all toll-free hotlines, the Taxpayer Advocate Service and the agency’s nearly 400 taxpayer assistance centers nationwide, will be closed on those days. IRS employees will be furloughed without pay. No tax returns will be processed and no compliance-related activities will take place.

Taxpayers needing to contact the IRS about their returns or payments should be sure to take these furlough dates into account. In some instances, this may include taxpayers with returns or payments due soon after a furlough day, such as the June 17 deadline for taxpayers abroad and those making a second-quarter estimated tax payment as well as the September 3 deadline for truckers filing a highway use tax return.

No Impact on Tax-Filing and Tax-Payment Deadlines, but No Confirmation of Receipt

Because none of the furlough days are considered federal holidays, the shutdown will have no impact on any tax-filing deadlines. The IRS will be unable to accept or acknowledge receipt of electronically-filed returns on any day the agency is shut down.

Similarly, tax-payment deadlines are also unaffected. The only tax payment deadlines coinciding with any of the furlough days relate to employment and excise tax deposits made by business taxpayers. These deposits must be made through the Treasury Department’s Electronic Federal Tax Payment System (EFTPS), which will operate as usual.

Impact on Providing Documents to the IRS

IRS states that it will give taxpayers extra time to comply with a request to provide documents to the IRS. This includes administrative summonses, requests for records in connection with a return examination, review or compliance check, or document requests related to a collection matter. No additional time is given to respond to other agencies or the courts.

Where the last day for responding to an IRS request falls on a furlough day, the taxpayer will have until the next business day. If the last day to respond is Friday, May 24, for example, the taxpayer will have until Tuesday, May 28 to comply (Monday, May 27 is Memorial Day).

Some Services Will Continue to Function

Some web-based online tools and phone-based automated services will continue to function on furlough days, while others will be shut down. Available services include Withholding Calculator, Order A Transcript, EITC Assistant, Interactive Tax Assistant, the PTIN system for tax professionals, Tele-Tax and the Online Look-up Tool for those needing to repay the first-time homebuyer credit. Services not available on those days include Where’s My Refund? and the Online Payment Agreement.

Additional Furlough Days Possible

At a later date, the IRS may possibly announce one or two additional furlough days if necessary.

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This article will briefly explain some of the major Fifth Protocol (“Protocol”) changes to the US-Canada Income Tax Treaty (“Treaty”). It is not intended to constitute tax or legal advice, and it does not cover every change to the Treaty.

Cross-border taxation can involve many complex tax and legal issues, so you are advised to seek an experienced attorney in these matters. Sherayzen Law Office, PLLC can assist you in all of your tax and legal needs, and help you avoid making costly mistakes.

Treaty Article XI- Withholdings on Interest

One substantial change to the Canada-US Tax treaty was the elimination of withholding tax on cross-border interest payments to unrelated parties. According to the Protocol, “[I]nterest means income from debt-claims of every kind, whether or not secured by mortgage, and whether or not carrying a right to participate in the debtor’s profits, and in particular, income from government securities and income from bonds or debentures, including premiums or prizes attaching to such securities, bonds or debentures, as well as income assimilated to income from money lent by the taxation laws of the Contracting State in which the income arises.” It should be noted however that “interest” under this definition does not include dividends.

Taxpayer Migration – Protection Against Double Taxation

Under the previous rule, the US and Canada were allowed to tax residents on all of their capital gains without any provisions made for the fact that a country may have leveled a pre-departure tax on emigrants. The Protocol addressed this concern by allowing such individuals to “[E]lect to be treated for the purposes of taxation in the other Contracting State, in the year that includes that time and all subsequent years, as if the individual had, immediately before that time, sold and repurchased the property for an amount equal to its fair market value at that time.” (See Article 8 of the Protocol).

Mandatory Arbitration

For US and Canadian residents subject to certain unresolved double-taxation issues between US and Canadian revenue authorities within a specified time period, the Protocol changed the existing Treaty to allow taxpayers to require that the revenue authorities of the two countries enter a binding arbitration. While the arbitration procedure is mandatory for revenue authorities once compelled by a taxpayer, the decision of whether to do so is entirely optional for the taxpayer. A taxpayer must have filed a tax return with at least one of the two countries to utilize the election.

“Limited Liability Companies” (LLCs) and Other Hybrid Entities

LLCs and certain other hybrid entities face different tax treatment in the US and Canada. In general, in the US, such entities are treated as pass-through vehicles, whereas in Canada, they are treated as corporations (please see Department of Finance Canada for more information about Canadian taxation). Prior to the Protocol, a reduced withholding tax rate was not available to such entities because an entity must be taxable as a “resident” in at least one of the two countries in order to benefit from the Treaty. According to the Department of Finance Canada, under the Protocol changes, “Income that the residents of one country earn through a hybrid entity will in certain cases be treated by the other country (the source country) as having been earned by a resident of the residence country. On the other hand, a corollary rule provides that if a hybrid entity’s income is not taxed directly in the hands of its investors, it will be treated as not having been earned by a resident.”

Contact Sherayzen Law Office for Help with US-Canada Cross-border Tax Issues

If you have any questions regarding US-Canada tax treaties or you have not filed your Forms 8891, contact the experienced tax attorneys of Sherayzen Law Office for help.

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This article will briefly explain the active financing exception to the subpart F rules and the look-through rule of Section 954(c)(6) and detail the extensions of such provisions provided for by the American Taxpayer Relief Act of 2012. The article is not intended to convey tax or legal advice.

IRS Subpart F rules and the IRC sections covering Controlled Foreign Corporations involve many complex tax and legal issues, so it is advisable to seek an experienced attorney in these matters. Sherayzen Law Office, PLLC can assist you in all of your tax and legal needs, and help you avoid making costly mistakes.

Active Financing Income Exception to Subpart F Rules

IRC Section 954(h) provides for a special exception from IRS subpart F rules for “[I]ncome derived in the active conduct of banking, financing, or similar businesses.” In general, a controlled foreign corporation (“CFC”) will be treated as being predominately engaged in the active conduct of banking, financing, or similar businesses if more than 70% of the gross income of the CFC is derived directly from the, “[A]ctive and regular conduct of a lending or finance business from transactions with customers which are not related persons.”

The active financing exception was originally included in the Taxpayer Relief Act of 1997; the same act also modified Passive Foreign Investment Company (“PFIC”) rules to eliminate overlap between Subpart F and PFIC provisions as a special one-year exception (President Clinton vetoed this provision under the Line Item Veto Act, but it was reinstated after the US Supreme Court ruled that the Line Item Veto Act was unconstitutional). IRC Section 954(h)(3) was later amended by the American Jobs Creation Act of 2004 (Public Law 108-357) to provide for the temporary exception, and the Tax Increase Prevention and Reconciliation Act of 2005 subsequently extended the exception for tax years ending in 2007 and 2008. The Middle Class Tax Relief Act of 2010 further extended the active financing exception through 2011. Under the new American Taxpayer Relief Act of 2012, the exception was retroactively extended through the end of 2013.

Subpart F Look-Through Rule of IRC Section 954(c)(6)

IRC Section 954(c)(6)(A) (“Look-thru rule for related controlled foreign corporations “) provides that, in general, “For purposes of this subsection, dividends, interest, rents, and royalties received or accrued from a controlled foreign corporation which is a related person shall not be treated as foreign personal holding company income to the extent attributable or properly allocable (determined under rules similar to the rules of subparagraphs (C) and (D) of section 904(d)(3)) to income of the related person which is neither subpart F income nor income treated as effectively connected with the conduct of a trade or business in the United States.” Treatment of other types of equivalent interest is also addressed in the section.

The Look-Through Rule was part of Tax Increase Prevention and Reconciliation Act of 2005 and originally applied to tax years beginning after December 31, 2005, and before January 1, 2009. Certain parts of the original look-through rule were subsequently modified by later acts, and the rule itself was extended through the end of 2011 by the Middle Class Tax Relief Act of 2010. Under the new American Taxpayer Relief Act of 2012, the rule now applies to foreign corporation tax years beginning after December 31, 2005, and before January 1, 2014.

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“Our hearts go out to the people affected by this tragic event,” said IRS Acting Commissioner Steven T. Miller. “We want victims and others affected by this terrible tragedy to have the time they need to finish their individual tax returns.”

Under the relief announced today, the IRS will issue a notice giving eligible taxpayers until July 15, 2013, to file their 2012 returns and pay any taxes normally due April 15. No filing and payment penalties will be due as long as returns are filed and payments are made by July 15, 2013.

Note, however, by law, interest, currently at the annual rate of 3 percent compounded daily, will still apply to any payments made after the April deadline.

The IRS will automatically provide this extension to anyone living in Suffolk County. If you live in Suffolk County, no further action is necessary by taxpayers to obtain this relief. However, eligible taxpayers living outside Suffolk County can claim this relief by calling 1-866-562-5227 starting Tuesday, April 23, 2013, and identifying themselves to the IRS before filing a return or making a payment. Eligible taxpayers who receive penalty notices from the IRS can also call this number to have these penalties abated.

Eligible taxpayers who need more time to file their returns may receive an additional extension to Oct. 15, 2013, by filing Form 4868 by July 15, 2013.

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This article strives to explain the basics of IRC Section 7502 and various revenue rulings clarifying the IRS position regarding timely filing of U.S. tax returns and other documents mailed from foreign countries. It is not intended to constitute tax or legal advice.

International taxation can involve many complex tax and legal issues, so it is highly advisable to seek an experienced attorney in these matters. Sherayzen Law Office, PLLC can assist you in all of your tax and legal needs, and help you avoid making costly mistakes.

A Brief History of IRC Section 7502 and Other Rules

Under the general rule of Internal Revenue Code Section 7502:

“if any return, claim, statement, or other document required to be filed, or any payment required to be made, within a prescribed period or on or before a prescribed date under authority of any provision of the internal revenue laws is, after such period or such date, delivered by United States mail to the agency, officer, or office with which such return, claim, statement, or other document is required to be filed, or to which such payment is required to be made, the date of the United States postmark stamped on the cover in which such return, claim, statement, or other document, or payment, is mailed shall be deemed to be the date of delivery or the date of payment, as the case may be.”

In other words, generally, if a taxpayer mailed a return or the other specified items before a stated deadline, the mailing date would be treated as the filing date, even though the return or other specified documents were received after the actual deadline (this is also commonly known as the “mailbox rule”).

For U.S. taxpayers living overseas, in Rev. Rul. 80-218 the IRS further clarified, “United States federal tax returns mailed by taxpayers in foreign countries will be accepted as timely filed if they bear an official postmark dated on or before midnight of the last date prescribed for filing, including any extension of time for such filing.” Note that Rev. Rul. 80-218 only addressed federal tax returns, and not the other types of items specified in IRC Section 7502, above.

Obstacles Overseas Taxpayers Face in Timely Filing Their Tax Returns

U.S. taxpayers living overseas have faced many obstacles when mailing various tax documents to the IRS from foreign countries, though. For instance, Pekar v. Commissioner, 113 T.C. 158 (1999), the Tax Court upheld the IRS’ determination that a taxpayer was liable for an addition to tax under IRC Section 6651(a)(1) for failing to file a tax return on or before the date prescribed for filing, despite the fact that the foreign postmark date that appeared on the envelope with the return was the return’s due date. The Tax Court held that Section 7502 did not apply to foreign postmarks, and that “foreign postmarks do not effectively cause the filing date of a document to be the postmark date.” In Action on Decision 2002-04, however, the IRS later filed a motion requesting that the Tax Court modify its opinion, and stated it would not follow the opinion regarding whether the late-filing addition to tax penalty applies.

Because of uncertainty that existed as to what types of private mail delivery services would be viewed as acceptable for filing a federal tax return outside of the U.S., Congress added IRC Section 7502(f). IRS Notice 2004-83 subsequently updated the list of designated private delivery services, including certain international private delivery services.

In Rev. Rul. 2002-23, the IRS additionally addressed some of the unresolved issues mentioned above resulting from Pekar and various revenue rulings. The Service held that it would accept federal tax returns properly meeting the requirements of Rev. Rul. 80-218, and that, “A federal tax return, claim for refund, statement, or other document required or permitted to be filed with the Service or with the United States Tax Court that is given to a designated international delivery service before midnight on the last date prescribed for filing shall be deemed timely filed pursuant to section 7502(a), (d)(1), and (f)(1).”

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In this article, we will explain the basics of Subpart F income. It is not intended to constitute tax or legal advice. Subpart F income is an extremely complex area of international tax law and U.S. taxpayers may face significant tax liabilities if they do not have proper tax planning for their CFCs. It is advisable to seek an experienced attorney. Sherayzen Law Office, PLLC can assist you in all of your tax and legal needs, and help you avoid making costly mistakes.

Subpart F Income

Subpart F income is defined in Internal Revenue Code Section 952 to include numerous categories of income of a CFC. Specifically, it consists of insurance income (as defined in IRC section 953), IRC section 954 “foreign base company income”, income as determined under IRC section 952(a)(3) (amounts subject to the International Boycott rules of IRC section 999), illegal bribes, kickbacks, or other payments unlawful under the Foreign corrupt Practices Act of 1977, and income derived from any foreign country when IRC section 901(j) applies to such country.

Foreign base company income is comprised of the following items: foreign personal holding company income, foreign base company sales income, foreign base company services income, foreign base company shipping income, and foreign base company oil-related income.

Let’s analyze in slightly more detail one of the most common types of subpart F income for U.S. shareholders of a CFC- foreign personal holding company income.

Foreign Personal Holding Company Income

In general, foreign personal holding company income (FPHCI) includes the following items: dividends (or payments in lieu of dividends), rents, royalties, annuities, interest (and income equivalent to interest); net gains from the sale and exchange of certain properties (including gains from the sale or other disposition of any interest in a partnership or trust); gains from commodities transactions; net currency gains from nonfunctional transactions; and income from notional principal contracts.

Certain specific items are excluded from being treated as FPHCI. For example, dividends and interest received may be excluded if they are received from corporations that are related persons and organized in the same country with a substantial part of assets (more than 50 percent) used in its trade or business in that country. Another set of importance exclusions includes: rents and royalties received from unrelated persons in the ordinary conduct of business of the CFC or from related persons for use of property in country of organization; gains from the sale or exchange of inventory; dealer property; property that gives rise to active rent or royalty income; and property that was used in the CFC’s trade or business. In general, exclusions also exist for various insurance and banking business-related activities.

De Minimis Exclusion of Subpart F Income

IRC Section 954 sets forth the de minimis rule for exclusion of Subpart F income. This rule excludes all gross income for the taxable year from being treated as foreign base company income or insurance income if the sum of the CFC’s gross foreign base company income and gross insurance income is less than the lower of 5% of gross income or $1 million. On the other hand, it should be noted that, if the sum of foreign base company income and gross insurance income for the taxable year exceeds 70 percent of gross income, subject to certain provisions, then the entire gross income of the CFC will be treated as foreign base company income or insurance income.

Contact Sherayzen Law Office for Help With Subpart F International Tax Issues

If you own a foreign corporation, you may be subject to Subpart F rules with complex compliance tax issues. These issues are so complex that you should approach them only with an experienced tax professional.

Our international tax attorneys are highly experienced in dealing with Controlled Foreign Corporations and Subpart F issues. Contact Sherayzen Law Office NOW for professional help with Subpart F tax compliance and tax planning.

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This article will explain the basics of constructive dividends. It is not intended to constitute tax or legal advice.

Corporate taxation can involve many complex tax and legal issues, so it may be advisable to seek an experienced attorney in these matters. Failure to do proper tax planning can result in significant adverse tax consequences. Sherayzen Law Office, PLLC can assist you in all of your tax and legal needs, and help you avoid making costly mistakes.

Constructive Dividends

In general, a constructive dividend can be any type of economic benefit made to the shareholders by a corporation without an expectation of repayment that represents an undeclared dividend. If the economic benefits were primarily of a personal nature rather than business–related interests to the corporation, they will likely be treated as constructive dividends. Constructive dividends, as with declared dividends, can thus be distributions of cash and/or property as well as other types of payments that provide an economic benefit to the shareholder(s).

Because of the greater potential for self-dealing in closely-held and family-owned small corporations, the IRS is especially vigilant when it comes to possible constructive dividend situations in such entities. Shareholder-owners will often run afoul of tax laws if they attempt to have the corporation make payments for their personal, non-corporate related expenses, of if they try to distribute corporate profits to themselves by having the corporation report illegitimate expenses, rather than by paying a dividend.

Types of Constructive Dividends

There are numerous types of payments or economic benefits to shareholders that can be re-characterized as constructive dividends. If you are a shareholder in a closely-held corporation you should be aware of the possibilities.

One common constructive dividend is unreasonable compensation paid by a corporation to a shareholder-employee. Frequently, members of family-owned corporations will try to shift income by having their corporations pay excessive salaries (compared to the work actually performed) to family members who pay at lower tax rates, thereby reducing corporate net income at the same time. Because of the potential for tax abuse, shareholder-owners of small corporations will need to be able to show that the salaries paid were legitimate. Some factors to consider, among others, will be the nature and complexity of the work performed by the employee, the employee’s qualifications for the job, a comparison of salary paid by the corporation to prevailing salaries for similar jobs, as well as the ratio of dividends paid to salary by the corporation.

Bargain sales or rentals of property by the corporation to its shareholder(s) will also likely be deemed to be constructive dividends, depending upon the circumstances. For example, if a shareholder purchases property at a bargain rate below its true fair market value, a constructive dividend will arise on the amount of difference between what the property was purchased for and its actual value. Thus, if you are making such transactions, you should have a legitimate appraisal of the property and treat the sale at arm’s length in order to decrease the potential for a constructive dividend to be declared.

A constructive dividend can also arise when a corporation makes payments on behalf of its shareholder-employees personal expenses, or if the shareholder-employees use corporate property for personal use. An example of the latter situation may occur when shareholders use a company car or plane for non-corporate reasons without adequate payment to the corporation for personal use.

Constructive dividends may also be deemed by the IRS to be paid when a corporation makes payments to shareholders that are not bona fide loans. The determination of whether a payment was in fact a bona fide loan is a very complex tax issue that involves numerous factors, such as whether interest was actually paid by the shareholder to the corporation, and whether a loan agreement existed.

Proper Tax Planning is Required To Reduce the Probability of Constructive Dividend Classification During IRS Audit

While representing clients in IRS audits, I see that the widespread use of constructive dividends by the IRS. While this is a fairly common audit issue, it is appalling to see that this problem may have been prevented through timely tax planning by the taxpayers or their accountants.

This is why it is important to resolve this issue before the IRS audit begins, even if it means amending already filed tax returns. However, this is a job for an experienced tax attorney; I would strongly advise against doing the tax planning for such complex issues by yourself.

Contact Sherayzen Law Office for Help With Tax Planning

This is why you should contact Sherayzen Law Office before the IRS finds you. Our tax attorneys are experienced professionals who constantly deal with the IRS; we know what to look for and where potential problems may arise, and we can use this knowledge to help you.

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