SDOP Voluntary Disclosure Period and Tax Return Filing Deadline

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A lot of tax professionals and taxpayers fail to recognize the vital connection between a tax return filing deadline (like April 18, 2016) and the determination of the SDOP Voluntary Disclosure Period. In this article, I will explain what the SDOP Voluntary Disclosure Period and how it is related to tax return filing deadlines.

SDOP Background

Streamlined Domestic Offshore Procedure exists in its current format since June 18, 2014, when the IRS announced the most dramatic changes to its Offshore Voluntary Disclosure Program (OVDP) since 2009 OVDP. In essence, SDOP is an alternative to OVDP and allows taxpayers to bring their tax affairs into full compliance with US tax laws in a simpler way with a lower penalty.

SDOP Voluntary Disclosure Period

One of the most important differences between SDOP and OVDP is the Voluntary Disclosure Period – i.e. how many tax years should the voluntary disclosure cover. While OVDP voluntary disclosure period covers the past eight years for FBARs and tax returns, SDOP voluntary disclosure period covers only six past years of FBARs and only three years of past tax returns.

Connection Between SDOP Voluntary Disclosure Period and the Tax Return Filing Deadline

There is an important connection between SDOP voluntary disclosure period and the Tax Return Filing Deadline. As it mentioned above, SDOP Voluntary Disclosure Period covers “past” three years of tax returns.

What does “past year” mean in this context? It means a year for which the U.S. tax return due date (or properly applied for extended due date) has passed. The connection between SDOP voluntary disclosure period and the tax return filing deadline now becomes clear.

Let’s illustrate it further with a hypothetical example. If SDOP is scheduled to be completed on April 1, 2016, the SDOP voluntary disclosure period will cover the most recent three years of U.S. tax returns for which the Tax Return filing Deadline has passed. As of April 1, 2016, the deadline for the 2015 tax return has not yet passed; this means that the SDOP voluntary disclosure period (for tax return purposes) will cover tax years 2012-2014.

If SDOP is scheduled to be completed on April 30, 2016 and the 2015 tax return was timely filed (if not and no extension was filed, the taxpayer will likely be disqualified from participating in SDOP), then the SDOP voluntary disclosure period will shift to the tax years 2013-2015.

What if SDOP is completed on April 30, 2016, and an extension was filed for the 2015 tax return? In this case, the SDOP voluntary disclosure period will remain limited to 2012-2014 tax years.

SDOP Voluntary Disclosure Period’s Relationship to Tax Filing Deadline Offers Planning Opportunities

This relationship between SDOP voluntary disclosure period and the tax filing deadline offers plenty of planning opportunities for SDOP disclosures which are completed around the tax filing deadline because it allows the taxpayer’s attorney (who is doing SDOP on behalf of his client) exercise a certain degree of control over which years will be included in the SDOP voluntary disclosure period.

For example, if a taxpayer has a large tax liability in the tax year 2012 if the return is amended and a small tax liability in the tax year 2015, then the taxpayer’s attorney will likely choose to prepare and file timely 2015 tax return. On the other hand, there are situations where the taxpayer would like to include tax year 2012 in the SDOP voluntary disclosure period (for example, if there is a large foreign capital loss), then the taxpayer’s attorney would opt for filing an extension for the 2015 tax return.

It is important to emphasize that a decision with respect to SDOP voluntary disclosure period should always rest with an international tax attorney who is handling the SDOP disclosure. There may be complex reasons for excluding and including years within SDOP voluntary disclosure period and only an experienced tax professional should make these decisions.

Contact Sherayzen Law Office for Professional Help with Your Voluntary Disclosure

Offshore Voluntary Disclosures with respect to unreported foreign income and foreign assets can be extraordinarily complex, especially in light of draconian IRS penalties that U.S. taxpayers often face. This is why these matters should always be handled by an experienced international tax attorney.

Sherayzen Law Office is one of the most experienced international tax laws firms, especially when it comes to offshore voluntary disclosures. We have helped clients around the world to participate in every major voluntary disclosure program, including 2009 OVDP, 2011 OVDI, 2012 OVDP, 2014 OVDP (now closed), Streamlined Domestic Offshore Procedures, Streamlined Foreign Offshore Procedures and other related voluntary disclosure options. Not only did we help our clients to go through these complex legal procedures and prepared all of their tax forms (including those related to foreign business ownership, trust ownership and PFICs), but we also saved our clients millions in potential penalties and tax liabilities!

We can help You! Contact Us Today to Schedule Your Confidential Consultation!

IRS Increases Interest Rates for the Second Quarter of 2016

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On March 16, 2016, the Internal Revenue Service announced that interest rates have increased for the second quarter of 2016, which began on April 1, 2016 and ends on June 30, 2016. The second quarter of 2016 IRS interest rates will be:

four (4) percent for overpayments [three (3) percent in the case of a corporation];
one and one-half (1.5) percent for the portion of a corporate overpayment exceeding $10,000;
four (4) percent for underpayments; and
six (6) percent for large corporate underpayments.

The increase in the IRS interest rates for the second quarter of 2016 is the first such increase since the fourth calendar quarter of 2010. The second quarter of 2016 interest rates are computed from the federal short-term rate determined during January 2016 and went into effect Feb. 1, 2016, based on daily compounding. The federal short-term rate has increased from 0% to 1%. This is the first change to the interest rates since the fourth calendar quarter of 2010 when the federal short-term rate decreased from 1% to 0%.

Under the Internal Revenue Code, the rate of interest for the second quarter of 2016 is determined on a quarterly basis. For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points.

Generally, in the case of a corporation, the underpayment rate is the federal short-term rate plus 3 percentage points and the overpayment rate is the federal short-term rate plus 2 percentage points. The rate for large corporate underpayments is the federal short-term rate plus 5 percentage points. The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point.

It is important to note that the increase in the interest rates for the second quarter of 2016 directly affects the calculation of PFIC interest.

Outbound Foreign Trust: An Introduction

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One of the most fundamental distinctions in US foreign trust law is the difference between an inbound foreign trust and an outbound foreign trust. This distinction was emphasized by the landmark piece of legislation “The Small Business Job Protection Act of 1996″ and should be clearly understood by US tax lawyers as well as US grantors and US beneficiaries of a foreign trust.

Definition of an Outbound Foreign Trust

In order for a foreign trust to be deemed “outbound”, two conditions must be satisfied. First, the trust was created through the transfer of assets by a US person. Second, the trust must be a foreign trust or a domestic trust that later became a foreign trust.

Obviously, a transfer by a foreign person of exclusively foreign assets to a foreign trust which has only foreign beneficiaries is completely irrelevant because there is no nexus with the United States (hence, the foreign trust is not subject to taxation in the United States).

Two Areas of Special Importance of an Outbound Foreign Trust

There are two particular areas of special interest for international tax lawyers with respect to an outbound foreign trust. First, the grantor trust rule under IRC (Internal Revenue Code) Section 679. In general, where a US grantor transfers property to a foreign trust, IRC Section 679 taxes the US grantor as the owner of any portion of a foreign trust attributable to the transferred property in any year in which the trust has a US beneficiary. This is a complex rule that deserves special treatment in a separate article.

The second area of special importance with respect to outbound foreign trusts is the taxation of the transfer of appreciated assets to a nongrantor foreign trust under IRC Section 684 and the excise tax under the already-repealed IRC Sections 1491-1494. Again, this is a topic that should be discussed in a separate article; I just wanted the readers to be aware of the existence of this rule.

Obviously, there are other highly important tax issues associated with an outbound foreign trust, but these issues are usually discussed in conjunction with an inbound foreign trust, taxation of foreign trusts in general, or they are similar to taxation of US domestic trusts.

Contact Sherayzen Law Office for Help With Respect to US Taxation of an Outbound Foreign Trust

The US tax issues associated with foreign trusts in general and an outbound foreign trust in particular are immensely complex. This is why, if you are a US person who is considered to be an owner or a beneficiary of an outbound foreign trust, you should contact Sherayzen Law Office for help with your US tax compliance and planning with respect to this outbound foreign trust.

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Streamlined Five Percent Offshore Penalty Calculation

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Despite its appearances, the calculation of the Streamlined Domestic Offshore Procedures Title 26 Miscellaneous Offshore Penalty (“Streamlined Five Percent Offshore Penalty) may actually be a complex process. Moreover, the correct calculation of the Streamlined Five Percent Offshore Penalty may lead to some paradoxical conclusions, including a preference for the OVDP Penalty (now closed). Due to the complexity of the calculation of the Streamlined Five Percent Offshore Penalty, this process should be handled by an experienced international tax lawyer. Nevertheless, in this article, I will outline some of the general contours of this process for educational purposes only.

General Calculation of the Streamlined Five Percent Offshore Penalty

The calculation of the Streamlined Five Percent Offshore Penalty is a three-step process. First, you need to identify the Penalty Base. Second, you need to determine the December 31 value of each asset included in the Penalty Base and enter these values into Form 14654. Finally, you need to determine the aggregate value of these assets per year and apply the Streamlined Five Percent Offshore Penalty to the highest aggregate value.

Penalty Base of the Streamlined Five Percent Offshore Penalty

The first and most important step in the calculation is determining the Penalty Base. I strongly advise retaining an international tax lawyer to do this calculation for you; neither the accountants nor the clients themselves should be trusted with this task, because it requires a legal determination of what assets need to be included in the Penalty Base for the Streamlined Five Percent Offshore Penalty.

In general, however, the Penalty Base consists of all foreign assets that are subject to the Streamlined Five Percent Offshore Penalty – i.e. a legal determination needs to be made with respect to which assets need to be included in the calculation of this penalty and which assets do not need to be included.

This determination needs be made with respect to assets that the taxpayer had in each of the last six years – this is called the voluntary disclosure period. For example, in general, the voluntary disclosure period for taxpayers who are filing their voluntary disclosure under the Streamlined Domestic Offshore Procedures in March of 2016 will be calendar years 2009-2014.

After a few changes in its position, the IRS finally established its position on the calculation of the Penalty Base and it is frightfully broad. In general, the Penalty Base for the Streamlined Five Percent Offshore Penalty consists of three types of assets. First, it includes, for each of the six years in the voluntary disclosure period, all foreign financial accounts (as determined by the FBAR rules) in which the taxpayer has a personal financial interest and which should have been, but were not reported, on an FBAR.

The second class of assets, consists of all foreign financial assets (as defined in the instructions for Form 8938) in which the taxpayer has a personal financial interest and that should have been, but were not, reported on Form 8938. Note here the difference in the number of years applicable to this asset class – only in each of the three years in the covered tax return period (i.e. in our example above, in general, it would be years 2012-2014; however, if the 2015 tax return was filed, then, the covered tax return period could shift to 2013-2015). This is very different from the first class of assets reportable on the FBARs. The difference is due to the fact that the Streamlined Domestic Offshore Procedures only require the tax returns to be filed for the past three years, while the FBAR covers the past six years.

This second class of assets is the most problematic, because Form 8938 is very broad and covers a wide range of assets, including interests in foreign businesses and foreign trusts. Moreover, the Streamlined Five Percent Offshore Penalty is even applicable to the assets that are reportable on Forms 3520, 5471, 8621 and other forms which are linked to Form 8938 – i.e. foreign financial assets that would be reportable on Form 8938 had it not been for the provision in Form 8938 instructions designed to eliminate the burden of the duplicate reporting. Other complications may arise with respect to the spectrum of assets that should be included in this second category of the Penalty Base.

The third class of assets includes all foreign financial accounts and other foreign financial assets that were reported on the FBAR and Form 8938, but the gross income for these accounts and assets was not reported in that year. This is called income tax non-compliance.

Valuation of Assets for Streamlined Five Percent Offshore Penalty

After your international tax lawyer determines the assets that need to be included in the Penalty Base, the next step is to value these assets in order to enter them into Form 14654 (here, if you have numerous assets, I recommend that your lawyer creates an attachment that includes all required information). There are two important issues that one must remember with respect to asset valuation for the purpose of calculating the Streamlined Five Percent Offshore Penalty.

First, your lawyer should value the assets as of December 31 value of the applicable year; the IRS is not looking for the highest value of an asset, just the December 31 value. This is easy to do with respect to foreign financial accounts, but the problems arise with respect to other assets included in the Penalty Base, which leads us to the second issue.

Second, special rules apply to valuation of ownership of foreign disregarded entities, corporations and trusts. A reasonable valuation method should be used in making these determinations. Oftentimes, the balance sheet of Form 5471 can be used; however, sometimes an event (for example, a sale of corporate stock) may occur which provides a reasonable value for the stock. Remember, however, the valuation should be done as of December 31. This means that, if the stock is sold on December 30, the value of the stock (for the purpose of the year in which the stock is sold) would be zero.

Application of the Streamlined Five Percent Offshore Penalty to the Highest Aggregate Balance

The last step in the Streamlined Offshore Five Percent Penalty calculation is the easiest. Once the asset values included in the Penalty Base are properly valued and entered into Form 14654, the international tax lawyer needs to add-up the totals for each year and determine the highest aggregate amount among the years. Then, the lawyer should apply the Streamlined Five Percent Offshore Penalty to the highest aggregate balance – this is the amount due to the IRS.

Contact Sherayzen Law Office for Help With Your Voluntary Disclosure Under the Streamlined Domestic Offshore Procedures

The determination of the Streamlined Five Percent Offshore Penalty may be a difficult and tricky process and you need an international tax lawyer to do it. Moreover, the actual choice of the type of voluntary disclosure that a taxpayer should pursue needs be analyzed by an experienced attorney.

Sherayzen Law Office is a leading offshore voluntary disclosure law firm in the world with clients in virtually every continent. We have helped hundreds of US taxpayers to bring their US tax affairs into full compliance with US tax laws and we can help You!

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Austin FBAR Tax Lawyer

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A question that I would like to explore in this article is: Who is considered to be an Austin FBAR tax lawyer?

It seems to be an odd question, because a lot of people would say that an Austin FBAR tax lawyer is an attorney who resides in Austin and does FBAR law.

This, however, is an over-simplistic and incorrect view. First of all, there is no area of “FBAR” law. Rather, FBAR is a tax information return which is being administered by the IRS on behalf of FinCEN. This means that FBAR “law” forms part of a larger compliance framework within the area of international tax law. In essence, all “FBAR tax lawyers” are in reality international tax lawyers who must be knowledgeable not just about the FBARs, but about all relevant areas of international tax law.

However, despite its technical deficiencies, the term FBAR tax lawyers is commonly used to describe an international tax lawyer who helps his clients with FBAR compliance.

Second, an Austin FBAR tax lawyer does not mean that the tax lawyer must reside in Austin. FBAR is part of US federal tax law and can be practiced by an international tax lawyer who is licensed in any of the 50 states of the United States.

Thus, an international tax lawyer who is able to help his clients with FBAR compliance in Austin, Texas, is an Austin FBAR tax lawyer. This means that an Austin FBAR tax lawyer can actually reside in Minneapolis or any other city.

In this case, the modern means of communications usually come into play: email, Skype video conferences, telephone and regular mail. In fact, aside from initial consultation, your communication with an Austin FBAR tax lawyer who actually resides in Austin is likely to be limited exactly to these modern means of communication with very rare (if any) face-to-face meetings.

With this information in mind, we can now go back and answer my original question: Who is considered to be an Austin FBAR tax lawyer? The answer is as follows: An Austin FBAR tax lawyer is an international tax lawyer who is licensed to practice in any of the 50 states of the United States, resides anywhere in the United States (Minneapolis, for example) or any other country, and helps his clients in Austin with FBAR compliance with the help of modern means of communication.

Contact Sherayzen Law Office If You Are Looking for an Austin FBAR Tax Lawyer

If you are looking for an Austin FBAR tax lawyer, contact Sherayzen Law Office, Ltd., an international tax law firm that specializes in FBAR compliance and helps its clients in Austin, Texas.

Our professional legal team is highly experienced in FBAR compliance, including current FBAR compliance and FBAR voluntary disclosures. We have helped clients with every major IRS voluntary disclosure program (2009 OVDP, 2011 OVDI, 2012 OVDP and the currently-existing 2014 OVDP), both types of Streamlined Disclosures (Streamlined Domestic Offshore Procedures and Streamlined Foreign Offshore Procedures), Delinquent International Information Return Submission Procedures and Delinquent FBAR Submission Procedures.

Contact Us Today to Schedule Your Confidential Consultation!