Cayman Islands FATCA Registration Portal

/0 Comments/in , /by

On March 20, 2015, the Cayman Islands FATCA Registration Portal was launched by the Department for International Tax Cooperation (which is a department within Cayman Islands Tax Information Authority).

Cayman Islands FATCA Background 

The Cayman Islands FATCA Registration Portal is part of the long process of Cayman Islands FATCA compliance. Cayman Islands FATCA IGA (Model 1) was signed with the United States on November 29, 2013. At the same time, Cayman Islands signed the amended Tax Information Exchange Agreement. Both of these developments led to the creation of the Portal as a way to automatically exchange information required by FATCA between Cayman Islands and the United States.

It is also important to point out that Cayman Islands FATCA compliance was not only driven by the US considerations, but also by the UK considerations. As an overseas territory of the United Kingdom, Cayman Islands had to come to an agreement with the United States that could not have been better the terms negotiated between the UK and Cayman Islands with respect to the exchanges of tax-related information.

Purchase of the Portal

The Portal plays a critical role in Cayman Islands FATCA compliance, because it allows Cayman’s financial institutions (including the investment funds based in Cayman islands) to report information required by FATCA to the Cayman Islands Tax Information Authority, which, as it is mandated by Model 1 FATCA agreement, will turn over the required information to the IRS.

Registration

As part of Cayman Islands FATCA compliance, the Cayman Islands Tax Information Authority warned the island’s financial institutions that they much must register via the Portal by April 30, 2015 and provide their names, FATCA classification, principal point of contact and other information.

Reporting Deadline by May 31, 2015

The deadline for reporting the 2014 (calendar year) information by the Cayman’s financial institutions must be done by May 31, 2015. The information that will have to be submitted through the Portal is the one usually required by FATCA, including:

1. US person’s name, address and tax identification number (and date of birth, where applicable);
2. US person’s account number or its equivalent;
3. Name and ID of the reporting financial institution; and
4. Year-End Balance of the account.

Interestingly enough, the UK FATCA requirement for Cayman Islands is much later – May 31, 2016.

Caymans Islands FATCA Compliance Is Not Unique

Cayman Islands FATCA compliance through a Portal is now a common theme throughout the world. In fact, it is expected that most of the Model 1 FATCA countries around the world have either complied with 2014 US FATCA requirements or will do so soon, and they are likely to be using a Portal of some kind.

For example, it is expected that the following jurisdictions will do their FATCA reporting through an information reporting system (deadlines in parenthesis): Ireland (June 30, 2015), Luxembourg (June 30, 2015), United Kingdom (May 31, 2015), Canada (May 2, 2015), and so on.

What Portal Means for US Persons with Undisclosed Cayman Islands Accounts

If you are a US person with undisclosed foreign accounts in Cayman Islands (any many other jurisdictions around the world), you are very likely to have very little time left before your account will be disclosed to the IRS. The penalties (especially FBAR and Form 8938 penalties) for failure to report foreign accounts can be draconian, including potential incarceration. Moreover, once the IRS learns about the existence of your account and initiates an invest, you may not be able to do a voluntary disclosure to reduce your penalties.

This means that US persons with undisclosed foreign accounts need to immediately contact an experienced international tax lawyer to explore their voluntary disclosure options in order to timely file their request for Preclearance.

Contact Sherayzen Law Office for Professional Help With Disclosing Your Foreign Accounts

Sherayzen Law Office, Ltd. is the experienced international tax firm that can help you with the voluntary disclosure of your foreign accounts. We have already successfully helped hundreds of US taxpayers around the world to conduct various types of voluntary disclosures (SDOP (Streamlined Domestic Offshore Procedures), SFOP (Streamlined Foreign Offshore Procedures), Delinquent Information Returns, Delinquent FBAR Submission, and Noisy/Reasonable Cause disclosures), and We can help You!

Contact Us to Schedule Your Confidential Consultation!

2015 Second Quarter IRS Underpayment and Overpayment Interest Rates

/0 Comments/in , /by

On March 13, 2015, the IRS announced that the underpayment and overpayment interest rates for the calendar quarter beginning April 1, 2015, will remain unchanged. The rates will be:

three (3) percent for overpayments [two (2) percent in the case of a corporation];
three (3) percent for underpayments;
five (5) percent for large corporate underpayments; and
one-half (0.5) percent for the portion of a corporate overpayment exceeding $10,000.

How are the IRS Underpayment and Overpayment Rates Determined?

Under the Internal Revenue Code, the rate of interest 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.

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.

What do the IRS Underpayment and Overpayment Rates Affect?

The most important impact of the IRS underpayment and overpayment rates is felt whenever the tax liability of a US taxpayer changes from the liability indicated on the original tax return. Most often, this happens as a result of an amended tax return filed voluntarily by the taxpayer or as a result of an IRS audit.

If, as a result of an audit or an amended tax return, the taxpayer is assessed with additional tax liability, the underpayment interest rate will be applied from the due date of the original tax return (usually, April 15) through the date of assessment of additional tax liability (or the date the amended tax return is filed). Conversely, if an amended tax return or an IRS audit produces a refund, then, the IRS is obligated to pay the overpayment interest rate on the refund due.

IRS Underpayment Rate and PFIC Calculations

The IRS Underpayment Rate has a surprising additional affect on a taxpayer’s liability. If a taxpayer owns a PFIC that is considered a Section 1291 fund, then, under the default PFIC method, he will need to calculate PFIC interest on the PFIC tax due. This PFIC interest is calculated at the IRS underpayment rates.

Incorrect or Delinquent Form 5471 Penalties

/2 Comments/in , /by

Various Form 5471 penalties are associated with failure to file Form 5471 or the filing of an incorrect Form 5471. In this article, I will describe the most important of these penalties.

IRS Form 5471

The IRS Form 5471 is an extremely complex form that is used to satisfy the reporting requirements of two esoteric sections of the Internal Revenue Code: 26 U.S.C. § 6038 (“Information reporting with respect to certain foreign corporations and partnerships”) and 26 U.S.C. § 6046 (“Returns as to organization or reorganization of foreign corporations and as to acquisitions of their stock”).

As long as Form 5471 requirements are met, the Form must be filed by certain U.S. citizens and residents who are officers, directors, or shareholders in specified foreign corporations with their US tax returns.  Failure to file Form 5471 or failure to file a correct Form 5471, can result in steep penalties.

Form 5471 Penalties: Failure to file information required under section 26 U.S.C. § 6038(a) 

From the outset, it is important to note that 26 U.S.C. § 6038 applies to two different parts of Form 5471: the Form 5471 proper (i.e. the first four pages containing the identifying information and Schedules A through I) and Schedule M of Form 5471.   Failure to file either is enough to trigger a $10,000 penalty for each annual accounting period of each foreign corporation. If the IRS sends the taxpayer a notice of a failure to file, an additional $10,000 penalty (per foreign corporation) will be charged for each 30-day period (or fraction thereof), during which the failure continues after the 90-day period in which the notification occurred, has expired. This additional penalty is limited to a maximum of $50,000 for each failed filing.

Furthermore, there is an income tax penalty associated with the failure to comply with 26 U.S.C. § 6038 in a timely manner – the taxpayer may be subject to a 10% reduction of certain available Foreign Tax Credits. A further 5% reduction may be applied for each 3-month period (or fraction thereof), during which the failure to timely report or file continues after the 90-day period of IRS notification has expired. (26 U.S.C. § 6038(c)(2) places certain limitations on this penalty).

The Second Set of Form 5471 Penalties: Failure to file information required by 26 U.S.C. § 6046 and related regulations (Form 5471 and Schedule O)

In addition to 26 U.S.C. § 6038 Form 5471 penalties, there is also an additional set of Form 5471 penalties associated with 26 U.S.C. § 6046 (Form 5471 and Schedule O).  Failure to comply with 26 U.S.C. § 6046 will subject the taxpayer to another $10,000 penalty for each failure for each reportable transaction. Additionally, if the failure to report or file continues for more than 90 days after the date the IRS mails notice of this failure, an additional $10,000 penalty will apply for each 30-day period (or fraction thereof) during which the failure continues after the 90-day period has expired. This additional penalty is limited to a maximum of $50,000.

Form 5471 Non-Compliance May Result in Criminal Penalties

In addition to civil penalties under 26 U.S.C. § 6038 and 26 U.S.C. § 6046, criminal penalties may apply to Form 5471 filers in certain circumstances. In particular, a willful failure to file an accurate Form 5471 may activate the  broad provisions of 26 U.S.C. § 7203 (“Willful failure to file return, supply information, or pay tax”), 26 U.S.C. § 7206 (“Fraud and false statements”), and 26 U.S.C. § 7207 (“Fraudulent returns, statements, or other documents”).

Form 5471 Penalties and Persons Other Than the Filer

In situations where the filer should have filed Forms 5471 for other persons, but failed to do so, Form 5471 penalties may be extended to these other persons.

Contact Sherayzen Law Office For Help With Form 5471 Penalties and Compliance

If you partially or fully own a foreign corporation, you may be subject to the Form 5471 requirements.  As explained in this article, failure to timely and/or correctly comply with Forms 5471 may result in steep Form 5471 penalties.

This is why you should contact the experienced Form 5471 tax professionals of Sherayzen Law Office.  We can help you  prepare and file your Form 5471 as part of your annual compliance as well as help deal with the Form 5471 voluntary disclosure. So, Call Us Now to Schedule Your Confidential Consultation!

FATCA Tax Lawyers Update: FATCA Financial Institution Definition

/0 Comments/in , /by

One of the key concepts in FATCA compliance is a “financial institution”. The definition of a financial institution (“FATCA Financial Institution”) is contained in the FATCA Model IGAs. In this article, I will explore some of the general concepts central to defining a FATCA Financial Institution.

Four Types of FATCA Financial Institutions

The concept of FATCA Financial Institution is defined in the Model IGA Agreements. Both Model 1 and Model 2 IGAs agree on the definition of FATCA Financial Institution: “The term ‘Financial Institution’ means a Custodial Institution, a Depository Institution, an Investment Entity, or a Specified Insurance Company.” Let’s go over each concept in more detail.

Definition of a FATCA Financial Institution: Custodial Institution

FATCA Model Agreements provide a fairly straightforward definition of a Custodial Institution: “The term ‘Custodial Institution’ means any entity that holds, as a substantial portion of its business, financial assets for the account of others.” In this context “substantial” means that, during the specified period of time, twenty percent or more of the entity’s gross income is derived from holding of financial assets and related financial services.

The specified period of time is defined in Model 1 IGA as “the shorter of: (i) the three-year period that ends on the December 31 (or the final day of a non-calendar year accounting period) prior to the year in which the determination is being made; or (ii) the period during which the entity has been in existence.”

Definition of a FATCA Financial Institution: Depository Institution

According to FATCA Model IGAs, “The term ‘Depository Institution’ means any Entity that accepts deposits in the ordinary course of a banking or similar business.”

This definition is fairly self-explanatory, but it should be noted that interest-paying client money accounts operated by insurance companies are included within the definition of a depository institution.

Definition of a FATCA Financial Institution: Specified Insurance Company

According to FATCA Model IGAs, “the term ‘Specified Insurance Company’ means any entity that is an insurance company (or the holding company of an insurance company) that issues, or is obligated to make payments with respect to, a Financial Account.” This definition basically applies to all insurance companies that issue or must make payments with respect to an Insurance Cash-Surrender Value Contract or Annuity contract (which is similar to an FBAR).

For the purposes of this essay, I am not going to engage in the discussion of a Financial Account definition (this is an issue that I addressed in another article); suffice it to say that the definition of a Financial Account under FATCA closely follows the FBAR definition of the same concept.

Definition of a FATCA Financial Institution: Investment Entity

Finally, FATCA Model IGAs provide a detailed definition of what constitutes an “Investment Entity”. This concept includes any entity that conducts as a business one or more of the following activities or operations for or on behalf of a customer:
“(1) trading in money market instruments (cheques, bills, certificates of deposit, derivatives, etc.); foreign exchange; exchange, interest rate and index instruments; transferable securities; or commodity futures trading;
(2) individual and collective portfolio management; or
(3) otherwise investing, administering, or managing funds or money on behalf of other persons. This subparagraph 1(j) shall be interpreted in a manner consistent with similar language set forth in the definition of “financial institution” in the Financial Action Task Force Recommendations.”

Notice that this definition encompasses any entity that is managed by an Investment Entity. Further note that the definition of an Investment Entity should be interpreted in a manner consistent with the definition of a “financial institution” in the Financial Action Task Force Recommendations.

Implications if FATCA Financial Institution Definition on Undisclosed Foreign Accounts

The broad definition of a FATCA Financial Institution has a profound impact on US taxpayers with undisclosed foreign accounts. The chief reason for this conclusion is the fact that as soon as an entity is classified as a FATCA Financial Institution, the entity must be FATCA compliant (unless it falls within a FATCA exemption) and should report all of its accounts owned (directly or indirectly) by US taxpayers.

Contact Sherayzen Law Office for Help With Undisclosed Foreign Accounts

The consequences of the IRS discovery of an undisclosed foreign account can be disastrous for the US owner of this account, including extremely high monetary willful civil penalties as well as criminal penalties.

This is why, if you have an undisclosed foreign account, please contact Mr. Eugene Sherayzen, an experienced international tax attorney of Sherayzen Law Office as soon as possible. Our team is well versed in FATCA compliance, FBARs and other foreign reporting issues. We have helped hundreds of US taxpayers around the globe and we can help you.

So, Contact Us Now to Schedule Your Initial Consultation!

Costa Rica Corporations and U.S. Tax Reporting

/in , /by

It has become common for U.S. citizens to engage in business abroad through a foreign corporation.  Costa Rica is definitely one of the most favored countries in Central America, partially due to its reputation for stability.  It is important to understand, however, that U.S. citizens who engage in business abroad through a foreign corporation must comply with very important tax reporting requirements.   In this article, I will try to briefly go over some of the most common US tax reporting requirements that may concern U.S. owners of Costa Rica corporations.

Form 5471

IRS Form 5471 is the most direct reporting requirement that U.S. owners of Costa Rica corporations may face.  Form 5471 may undoubtedly be considered as one of the most complex U.S. tax forms, both in its content as well as its scope.

As of the time of this writing, there are four non-exclusive (i.e. a taxpayer can belong to multiple categories at the same time) categories of filers of Costa Rica corporations who must file Form 5471.  Determining the categories, if any, to which a taxpayer belongs is a legal decision and a very important one since the number and severity of the reporting requirements directly depends on the number of  categories applicable to the taxpayer.

If the taxpayer is required to Form 5471 for Costa Rica corporations, then he must do so by attaching the completed Form 5471 with all of the numerous attachments to his tax return.

Failure to file Form 5471 for Costa Rica corporations may have severe consequences.  Explore this article for more information on Form 5471 penalties.

Form 8938

IRS Form 8938 is a newcomer to the world of U.S. tax compliance – in fact, the tax year 2001 is the first year that the form must be filed with the taxpayer’s U.S. tax return.

Form 8938 should be filed only if certain threshold requirements are met.  In case the taxpayer already disclosed the information regarding the specified foreign asset on Form 5471, Form 8938 should be filed to cross-reference Form 5471.  Explore this article to learn more about Form 8938.

FBAR

As long as the basic threshold requirement is met, the Report on Foreign Bank and Financial Accounts (“FBAR”) may be required if the taxpayer is the owner of a foreign corporation and has signatory authority (either as an officer of the corporation or an owner) over the corporate accounts.

It is highly important to comply with the FBAR requirement because the FBAR contains perhaps the most severe penalty structure of any other reporting requirement in the entire Internal Revenue Code (IRC).

Subpart “F” Income

If you are an owner of a Controlled Foreign Corporation (“CFC”) and the CFC has subpart “F” income, then you may be required to report subpart “F” income on your personal tax return (e.g. Form 1040).  This income is likely to be treated in a highly unfavorable way by the IRC.

Other Forms

Other forms may be required to be filed as a result of the your ownership of Costa Rica corporations.   Most of these additional tax reporting requirements are triggered by various transactional activities conducted by the corporation or between you and your corporation.  You should consult an international tax attorney for detailed analysis of your specific situation.

Contact Sherayzen Law Office for U.S. Tax Compliance Requirements if You Own Shares of Costa Rica Corporations

If you own a corporation in Costa Rica or you intend to do so, you should contact Sherayzen Law Office.  Owner Eugene Sherayzen will analyze your particular situation, determine what U.S. tax reporting requirements apply to you and help you comply with them, and offer a rigorous ethical tax plan designed to make sure that you do not overpay your U.S. taxes under the current IRC provisions.