2015 Inflation Adjustments to Tax Benefits

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The IRS recently announced annual inflation adjustments for more than 40 tax provisions, including the tax rate schedules, and other tax changes. Revenue Procedure 2014-61 provides details about these 2015 inflation adjustments. In this writing, I would like to highlight main 2015 inflation adjustments.

1. 2015 inflation adjustments for income tax brackets. The tax rate of 39.6 percent affects singles whose income exceeds $413,200 ($464,850 for married taxpayers filing a joint return), up from $406,750 and $457,600, respectively. The other marginal rates – 10, 15, 25, 28, 33 and 35 percent – and the related income tax thresholds are described in the revenue procedure.

2. 2015 inflation adjustments for Standard Deduction. The standard deduction rises to $6,300 for singles and married persons filing separate returns and $12,600 for married couples filing jointly, up from $6,200 and $12,400, respectively, for tax year 2014. The standard deduction for heads of household rises to $9,250, up from $9,100.

3. 2015 inflation adjustments for Itemized Deduction Limitation. The limitation for itemized deductions to be claimed on tax year 2015 returns of individuals begins with incomes of $258,250 or more ($309,900 for married couples filing jointly).

4. 2015 inflation adjustments for Personal Exemption Amounts. The personal exemption for tax year 2015 rises to $4,000, up from the 2014 exemption of $3,950. However, the exemption is subject to a phase-out that begins with adjusted gross incomes of $258,250 ($309,900 for married couples filing jointly). It phases out completely at $380,750 ($432,400 for married couples filing jointly.)

5. 2015 inflation adjustments for Alternative Minimum Tax (AMT): AMT exemption amount for tax year 2015 is $53,600 ($83,400, for married couples filing jointly). The 2014 exemption amount was $52,800 ($82,100 for married couples filing jointly).

6. 2015 inflation adjustments for Earned Income Credit (EIC) amount. The maximum EIC amount is $6,242 for taxpayers filing jointly who have 3 or more qualifying children, up from a total of $6,143 for tax year 2014. The revenue procedure has a table providing maximum credit amounts for other categories, income thresholds and phaseouts.

7. 2015 inflation adjustments for Estate Basic Exclusion Amounts. Estates of decedents who die during 2015 have a basic exclusion amount of $5,430,000, up from a total of $5,340,000 for estates of decedents who died in 2014.

8. 2015 inflation adjustments for Foreign Spouse Gifts. The exclusion from tax on a gift to a spouse who is not a U.S. citizen is $147,000, up from $145,000 for 2014.

9. 2015 inflation adjustments for Foreign Earned Income Exclusion (FEIE). The 2015 FEIE breaks the six-figure mark, rising to $100,800, up from $99,200 for 2014.

10. 2015 inflation adjustments for Annual Gift Exclusion Amount. The annual exclusion for gifts remains at $14,000 for 2015.

IRS Form 1041 Penalties and Interest

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Form 1041 (“U.S. Income Tax Return for Estates and Trusts”) is used by a fiduciary of a domestic decedent’s estate, trust, or bankruptcy estate for a number of important reporting reasons. Interest may be charged and various penalties may be assessed for failure to meet reporting requirements and to pay necessary taxes.

In this article, we will detail the various penalties that may be imposed, and interest that may be charged, concerning Form 1041. This article is not intended to convey tax or legal advice. If you have any questions about filing Form 1041, or any other tax or legal questions, please contact Mr. Eugene Sherayzen, an experienced tax attorney at Sherayzen Law Office, Ltd.

Form 1041 Interest

Interest will be charged on any taxes that were not paid by the due date of Form 1041, regardless of whether an extension of time to file was granted. In addition, interest will also be charged on any Form 1041 penalties imposed resulting from failure to file, negligence, fraud, substantial valuation misstatements, substantial understatements of tax, and reportable transaction understatements.

Interest is charged on the penalty from the date the Form 1041 is due, including any extensions, and is charged at a rate determined under Internal Revenue Code Section 6621.

Form 1041 Late Filing Penalty

A penalty may be assessed for 5% of the tax due for each month (or part of a month) for which Form 1041 is not filed, up to a maximum of 25% of the tax due (and 15% for each month, or part of a month, up to a maximum of 75% if the failure to file is fraudulent). If the late Form 1041 is more than 60 days late, the minimum penalty to be assessed will be the smaller of $135 or the tax due. In certain cases, penalties may not be imposed if a taxpayer can prove the failure to file Form 1041 was due to reasonable cause.

Form 1041 Late Payment of Tax Penalty

A penalty for not paying tax owed when due may apply to any unpaid tax as calculated on Form 1041; the late payment Form 1041 penalty is an addition to interest charges on late payments. In general, the late payment penalty is 0.5% of the unpaid amount for each month (or part of a month), up to a maximum penalty is 25% of the unpaid amount.

Penalty for Failure to Provide (Form 1040) K-1 Timely

Because Schedule K-1 (Form 1041) must be provided on or before the day Form 1041 is required to be filed to each beneficiary who receives a distribution of property or an allocation of an item of the estate, a penalty for the failure to provide this information timely if Form K-1 if filed late. This penalty applies to both a failure to provide Schedule K-1 to a beneficiary when due and for each failure to include on Schedule K-1 all the information required to be shown (or the inclusion of incorrect information).

The standard penalty for failure to provide Form 1041 K-1 timely is $100. The maximum penalty up to $1.5 million for all such failures during a calendar year may be imposed. Furthermore, if the requirement to report information was intentionally disregarded, each $100 penalty will be increased to $250 or, if greater, 10% of the aggregate amount of items that were required to be reported; in this case, the $1.5 million maximum will not apply.

However, if a fiduciary can demonstrate that the failure to provide information timely was due to reasonable cause and not due to willful neglect, this penalty may not be imposed.

Underpaid Estimated Tax Penalty

In situations in which a fiduciary underpaid estimated tax, Form 2210 (“Underpayment of Estimated Tax by Individuals, Estates, and Trusts”) will need to be utilized to figure any penalty; this amount is then input onto line 26 of Form 1041.

Trust Fund Recovery Penalty

A Trust Fund Recovery Penalty may be imposed if certain excise, income, social security, and Medicare taxes that were required to collected or withheld, were not, or if such taxes were not paid. This penalty may apply to all persons responsible for collecting, accounting for, or paying over these taxes, and who acted willfully in not doing so. The Trust Fund Recovery Penalty will be equal to the unpaid trust fund tax.

Other Form 1041 Penalties

In addition, other standard penalties may apply to Form 1041, such as negligence and substantial understatement of tax penalties, among others. The IRS defines negligence to mean “[A] failure to make a reasonable attempt to comply with the tax law or to exercise ordinary and reasonable care in preparing a return. Negligence also includes failure to keep adequate books and records.” A substantial understatement of tax will occur when an understatement is more than the greater of 10% of the correct tax or $5,000, subject to certain exceptions.

Contact Sherayzen Law Office for Help With Trust Tax Compliance Issues

Trust tax compliance may involve complex issues, and the penalties for failing to meet Form 1041 compliance requirements can potentially be significant. You are advised to seek the advice of an attorney practicing in this area. If you have any questions, please contact Sherayzen Law Office, Ltd. for all of your tax and legal needs.

Who Must File IRS Form 1042

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Form 1042 (“Annual Withholding Tax Return for U.S. Source Income of Foreign Persons”) serves a number of important reporting purposes. In general, it is used to report the tax withheld under chapter 3 of the Internal Revenue Code (“IRC”) on certain income of foreign persons (such as nonresident aliens, foreign partnerships, foreign corporations, foreign estates, and foreign trusts), as well as to report the tax withheld under chapter 4 of the IRC on payments subject to tax withholding. It also utilized to report tax withheld pursuant to IRC Section 5000C (“Imposition of tax on certain foreign procurement”), and reportable payments from Form 1042-S under chapters 3 or 4.

In this article, we will cover who is responsible for filing Form 1042. US individuals involved with cross-border businesses or living overseas should be aware of this form as they may be subject to the form’s filing requirements for a variety of common reasons, without even knowing it. For instance, US-source alimony paid to a nonresident alien former spouse may be reportable by a withholding agent on Form 1042 (in addition to 1042-S), even if the entire amount is exempt under a tax treaty.

This article provides general information and is not intended to convey tax or legal advice. Please contact Mr. Eugene Sherayzen, an experienced tax attorney at Sherayzen Law Office, Ltd. if you have any questions about filing this form, or any other US-international tax questions.

Who is Responsible for Filing Form 1042?

As noted by the IRS, unless an exception applies, “every withholding agent or intermediary who receives, controls, has custody of, disposes of, or pays a withholdable payment, including any fixed or determinable annual or periodical income, must file an annual return for the preceding calendar year” on Form 1042. The IRS defines “withholding agent” to mean any person who is required to withhold tax. This definition is expansive and can include, in general, any individual, trust, estate, partnership, corporation, nominee, government agency, association, or tax-exempt foundation (both domestic and foreign) that is required to withhold tax. Withholding agents are personally liable for any tax required to be withheld, as well as interest and applicable penalties.

An “intermediary” means, “a person who acts as a custodian, broker, nominee, or otherwise as an agent for another person, regardless of whether that other person is the beneficial owner of the amount paid, a flow-through entity, or another intermediary.”

When Must Form 1042 Be Filed?

Form 1042 must be filed in a number of different circumstances. As stated by the IRS, an individual or entity must file the form if, “you are required to file or otherwise file Form(s) 1042-S for purposes of either chapter 3 or 4 (whether or not any tax was withheld or was required to be withheld to the extent reporting is required)…; You file Form(s) 1042-S to report to a recipient tax withheld by your withholding agent; You pay gross investment income to foreign private foundations that are subject to tax under section 4948(a); You pay any foreign person specified federal procurement payments that are subject to withholding under section 5000C; You are a qualified intermediary (QI), withholding foreign partnership (WP), withholding foreign trust (WT), participating foreign financial institution (FFI), or reporting Model 1 FFI making a claim for a collective refund under your respective agreement with the IRS.” Note, that the FFI classification may also require other extensive reporting under FATCA.

2014 Form 1042: Due Date and Place of Filing

The 2014 Form 1042 must be filed by March 16, 2015, to the IRS’ Ogden (UT) Service Center, and an extension of time to file may be granted by submitting Form 7004, (“Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns”).

Contact Sherayzen Law Office for Help With International Tax Compliance

US-International tax reporting and planning can involve many complex areas, and you are advised to seek the advice of attorneys practicing in this area. If you have any questions, please contact Sherayzen Law Office, Ltd. for all of your tax and legal needs.

Kentucky Resident Charged for Maintaining Secret Swiss Bank Accounts

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U.S. Attorney Preet Bharara for the Southern District of New York and Acting Special Agent in Charge Shantelle P. Kitchen of the Internal Revenue Service-Criminal Investigation (IRS-CI) New York Field Office announced on November 18, 2014, the unsealing of an indictment against Peter Canale, a U.S. citizen and resident of Kentucky, for conspiring to defraud the IRS and evade taxes by establishing and maintaining secret Swiss bank accounts. Canale was arrested on November 18, 2014, at his residence in Jamestown, Kentucky, and is expected to be presented later today in the US District Court for the Eastern District of Kentucky. Canale is scheduled to be arraigned before US District Judge Katherine B. Forrest in Manhattan federal court on December 3, 2014, at 3:00 p.m.

Facts of the Case With Respect to Secret Swiss Bank Accounts According to Indictment

According to the allegations in the indictment unsealed on November 18, 2014, in Manhattan federal court, Canale conspired with others – including Michael Canale, his brother, Beda Singenberger, a Swiss citizen who ran a financial advisory firm, and Hans Thomann, a Swiss citizen who served as a client adviser at UBS and certain Swiss asset management firms – to establish and maintain secret Swiss bank accounts and to hide those accounts from the IRS. Canale used a sham entity to conceal from the IRS his ownership of the secret Swiss Bank Accounts and deliberately failed to report the accounts and the income generated in the accounts to the IRS.

One of the most surprising facts in this case is the source of money – it was foreign inheritance. In approximately 2000, a relative of Canale’s who held an undeclared bank account in Switzerland died and left a substantial portion of the assets in the undeclared account to Canale and Michael Canale. Canale and his brother met with Thomann and Singenberger and determined they would continue to maintain the assets in the secret Swiss Bank accounts for the benefit of Canale and his brother.

Thereafter, in approximately 2005, Canale, with Singenberger’s assistance, opened secret Swiss Bank Accounts at Wegelin bank (no longer in existence). The account was opened in the name of a sham foundation formed under the laws of Lichtenstein to conceal Canale’s ownership.

Equally surprising is that a criminal case was brought against an account that was under $1,000,000. As of December 31, 2009, the account held assets valued at approximately $789,000.

For each of the calendar years from 2007 through 2010, Canale willfully failed to report on his tax returns his interest in the secret Swiss Bank Accounts and the income generated in those secret Swiss Bank accounts. For each of these years, Canale also failed to file a Report of Foreign Bank and Financial Accounts (FBAR) with the IRS, as the law required him to do.

Canale, 61, is charged with one count of conspiracy to defraud the United States, evade taxes, and file a false and fraudulent income tax return, which carries a statutory maximum sentence of five years in prison. The maximum potential sentence is prescribed by Congress and is provided here for informational purposes only, as any sentencing of the defendant will be determined by the judge.

Secret Swiss Bank Accounts Charges Related to a Client List Obtained from Indicted Swiss Banker

The Canale case is another example of an indictment stemming directly from a misplaced letter mailed by a Swiss financial adviser Singenberger (the same advisor who helped Canale open his secret Swiss Bank Accounts) that ended up in the hands of the US tax authorities. The IRS has been picking off the clients on the list one by one since 2013 (including Jacques Wajsfelner and Michael Reiss).

Lessons to be Learned from Canale Case

As I mentioned in a recent article regarding the Cohen case, there has been a growing trend where the IRS is pursuing criminal prosecutions in cases that involve smaller balances on secret Swiss Bank Accounts as long as the IRS is comfortable with its ability to establish willfulness with respect to FBAR non-reporting.

Canale case is just one more example of this trend. The balances were not large at all – the highest balance was far under $1 million. However, the Canale case also included an aggravating factor of allegedly using a sham foundation to conceal his identity; these cases usually carry a higher than usual probability of an IRS criminal prosecution.

What was unusual about the Canale case is how little weight was given to the source of the funds on the secret Swiss Bank Accounts – inheritance. It appears that, in all likelihood, other circumstances were so negative as to simply overwhelm the positive nature of this factor.

Contact Sherayzen Law Office for Professional Help Regarding Your Undisclosed Foreign Accounts

If you had undisclosed foreign accounts at any point since the year 2006, you should consider your voluntary disclosure options as soon as possible. While the DOJ Program for Swiss Banks makes the maintenance of secret Swiss Bank Accounts extremely dangerous at this point, the implementation of FATCA since July 1, 2014, carries a far more potent chance that you undisclosed foreign accounts will be discovered even if they are outside of Switzerland.

If you need help, contact Mr. Sherayzen, a voluntary disclosure professional and international tax attorney at Sherayzen Law Office. Our team will thoroughly analyze your case, evaluate your current voluntary disclosure options, and proceed to implement your voluntary disclosure plan (including preparation of all legal documents and tax forms).

Contact Us to Schedule Your Confidential Consultation Now.

HSBC FATCA Letter

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In a previous article, I explained why FATCA Letters mark a critical event for the voluntary disclosure process of a US taxpayer with undisclosed foreign accounts. While I mentioned that the content of a FATCA letter is usually more or less the same, I emphasized that the actual format of a FATCA letter may differ dramatically from bank to bank. With this article, I am starting a series of article devoted to various FATCA letter formats adopted by various banks around the world. Today, I wish to concentrate on the HSBC FATCA Letter.

HSBC FATCA Letter: General Format

HSBC FATCA Letter follows what I call a “reference format”. Unlike the “comprehensive format” usually followed by FATCA letters issued by Swiss banks, the reference format of the HSBC FATCA Letter means that the HSBC FATCA Letter is fairly concise but it references (hence the name) various forms that need to be completed by the HSBC customers.

Basically, this means that the HSBC FATCA Letter itself does not ask any questions, but it acts as kind of a checklist for various supplementary forms that need to be completed by the account holder in order to provide the bank with the information necessary for its own FATCA compliance. Failure to provide such information would result in the bank classifying the US taxpayer as a “recalcitrant account holder”.

An interesting aspect about the format that the HSBC FATCA Letter follows is that some (but not all) of the supplementary forms were developed and modified by the bank for the sole purpose of FATCA compliance. Thus, there are two types of supplementary forms that are referenced by HSBC FATCA letter: US standard forms (W-8, W-9, et cetera) and proprietary forms developed by the HSBC itself (SW, S1, S3, et cetera).

HSBC FATCA Letter: US Supplementary Forms

Similar to every FATCA letter issued by other banks around the world, HSBC FATCA letter references the main relevant forms developed by the US government – Form W8 (usually, W8BEN) and Form W9. Form W9 is of course the critical form that must be provided to a foreign bank in order to verify the US taxpayer’s social security number. Form W8, on the other hand, provides the critical information for the foreign bank for the purpose of tax withholding under relevant tax treaties. It also allows the bank to indirectly confirm the account holder’s non-US tax status.

HSBC FATCA Letter: Proprietary Forms Developed by HSBC

HSBC FATCA letter references a variety of forms developed or modified by HSBC according to FATCA requirements. The most common documents are S1, S2 and S3. Form S1 is basically asks for a government-issued ID establishing non-US status. Form S2 is a copy of Individual Certification of Loss of Nationality (again for establishing the Non-US Citizenship status) which is very relevant in the limited 9(though, rapidly growing) situation where a US taxpayer gives up his US citizenship.

Form S3 is one of the most important forms referenced by the HSBC FATCA letter. Officially titled as “Explanation of a US address and/or US Phone Number”, Form S-1 requires a fairly intrusive explanation of whether the account holder has US phone number and US telephone address, and why. What is very interesting about Form S3 issued by HSBC is that it requires the taxpayer to make a detailed determination whether the substantial presence test has been met. It even contains a fairly detailed explanation of the test itself.

Contact Sherayzen Law Office for Help with HSBC FATCA Letter

If you have undisclosed bank accounts with HSBC (whether Hong Kong, India, or any other country except the United States itself), you should immediately begin the exploration of your voluntary disclosure options before HSBC discloses your account to the IRS.

This is why you will need the professional help of Mr. Eugene Sherayzen, an experienced international tax lawyer who already has helped hundreds of US taxpayers around the world with respect to their US tax compliance. We can also help you!

Contact US to Schedule Your Confidential Consultation Now!