Title 26 Miscellaneous Offshore Penalty under SDOP

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The Title 26 Miscellaneous Offshore Penalty (“Miscellaneous Offshore Penalty”) is one of the most critical aspects of the Streamlined Domestic Offshore Procedures (“SDOP”). In this article, I want to conduct a general overview of how the Miscellaneous Offshore Penalty is calculated.

As a side note, it is important to keep in mind that this is an educational article which aims to provide a general overview of the calculation of the Miscellaneous Offshore Penalty in common situations. In providing this general overview of the SDOP Miscellaneous Offshore Penalty, the article necessarily glosses over some complex issues that may change the determination of Miscellaneous Offshore Penalty in a particular case.  In order to calculate your Miscellaneous Offshore Penalty properly, the readers should contact an experienced international tax attorney for a legal advice based on their specific facts and circumstances.

What is Miscellaneous Offshore Penalty?

A taxpayer who enters SDOP is required to pay a 5% Miscellaneous Offshore Penalty as part of the SDOP requirements. The Miscellaneous Offshore Penalty is paid in lieu of the penalties associated with the delinquent filings of FBARs, Forms 8938 and other information returns.

The calculation of SDOP Miscellaneous Offshore Penalty is very different from 2014 OVDP calculation in terms of the relevant time period and the penalty base. (Note: OVDP is now closed). Let’s explore each of these factors.

Miscellaneous Offshore Penalty: Time Period

Miscellaneous Offshore Penalty is equal to 5 percent of the highest aggregate balance/value of the taxpayer’s foreign financial assets that are subject to the miscellaneous offshore penalty during the years in the covered tax return period and the covered FBAR period. Generally, this means that the Miscellaneous Offshore Penalty is imposed on the past six years covered by the FBAR statute of limitations.

However, there is an exception where the three-year tax covered tax return period does not completely overlap with the six-year covered FBAR period. For example, the SDOP disclosure for tax returns covers years 2012 and 2014 because the due date for the 2014 tax return is passed, but the FBAR period is 2008-2013 because the due date for the 2014 FBAR has not passed. In such cases, the Miscellaneous Offshore Penalty is imposed on the highest aggregate value of the foreign financial assets for the past seven years.

In most cases, six years will be the standard time period for the calculation of the Miscellaneous Offshore Penalty, which is a lot better than the 2014 OVDP eight-year disclosure period.

Miscellaneous Offshore Penalty: Penalty Base

SDOP introduced a new way to calculate Miscellaneous Offshore Penalty which mixed the old FBAR-focused penalty orientation of the 2014 OVDP with the new FATCA-focused Form 8938.

In general, the Miscellaneous Offshore Penalty is imposed on any foreign financial asset in a given year within the covered SDOP time period if one of the following is true:

1. The asset should have been, but was not, reported on an FBAR (FinCEN Form 114) for that year;

2. The asset should have been, but was not, reported on a Form 8938 for that year; or

3. If the asset was properly reported for that year, but gross income in respect of the asset was not reported in that year.

Two important features of this calculation of the penalty base under SDOP must be emphasized. First, the Miscellaneous Offshore Penalty should be calculated not only on the foreign bank and financial accounts listed on the FBAR, but also on “other specified assets” required to be listed on Form 8938. This means that many more assets outside of a foreign financial account can now be subject to the Miscellaneous Offshore Penalty . Examples of such assets include but not limited to: foreign stocks not held in a financial account, a capital or profits interest in a foreign partnership, certain forms of indebtedness issued by a foreign person (such as a note, bond, debenture, an interest in a foreign trust, foreign swaps, foreign options, foreign derivatives and other assets. It should be remembered, though, that this is a generalization and, in certain circumstances, an international tax attorney may except certain such assets from Miscellaneous Offshore Penalty base.

The second critical difference between SDOP Miscellaneous Offshore Penalty and 2014 OVDP Offshore Penalty is the inclusion in the calculation of the penalty base the assets for which no additional income needs to be reported. There are a lot of nuances with respect to the exclusion and inclusion of assets under the 2014 OVDP which are beyond the scope of this article. For the purposes of the present discussion, I will ignore them and concentrate on the general rule only (again, this is an area that should be explored with an international tax attorney based on the specific facts of a client’s case) that if an asset should have been reported on Forms 8938 and FinCEN Form 114 and it was not, then, it should be included in the penalty base.

Miscellaneous Offshore Penalty: Calculation of Highest Aggregate Value of Assets

As it was mentioned above, the Miscellaneous Offshore Penalty is calculated based on the highest aggregate balance/value of the taxpayer’s foreign financial assets that are subject to the miscellaneous offshore penalty during the years in the covered tax return period and the covered FBAR period. The issue is how this “highest aggregate balance/value of assets” is calculated.

For the purposes of SDOP Miscellaneous Offshore Penalty, the highest aggregate balance/value is determined by a two-step process. First, you need to aggregate the year-end account balances and year-end asset values of all the foreign financial assets subject to the miscellaneous offshore penalty for each of the years in the covered tax return period and the covered FBAR period. Then, you select the highest aggregate balance/value from among those years and calculate the 5% value of this balance.

It is the first step that is radically different from the 2014 OVDP Offshore Penalty determination process, and it can produce very interesting results especially in the case of bank accounts. The most surprising result is that an account that was closed in one of the covered years is likely to produce a zero end-of-year balance irrespective of how much money was on it prior to December 31.

This factor can be a very important consideration when one decides to participate in SDOP. For this reason, I highly encourage the readers to consult an experienced international tax lawyer in these matters.

Contact Sherayzen Law Office for Professional Help with Your Undisclosed Foreign Assets

If you have undisclosed foreign accounts and any other assets, contact Sherayzen Law Office for professional legal and tax help. Our team of experienced tax professionals will thoroughly analyze your case, estimate your current penalty exposure, identify the offshore voluntary disclosure options available to you, prepare all legal documents and tax forms (including amended tax returns) needed in your case, rigorously defend your interests in front of the IRS, and guide you through the entire voluntary disclosure process.

Contact Us Today to Schedule Your Confidential Consultation!

Determining the Residency of a Trust in Cross-Border Situations

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One of the most important tax aspects involving trusts in cross-border tax situations is the determination of the residency of a trust- i.e. whether it is a domestic or foreign trust for US tax purposes. This determination of the residency of a trust will have important tax consequences for US taxpayers.

In this article we will do a general exploration of how the residency of a trust in cross-border situations is determined; this article is not intended to convey tax or legal advice. Please contact Eugene Sherayzen an experienced tax attorney at Sherayzen Law Office, Ltd. if you have questions concerning trust planning or compliance.

General Criteria for Determining the Residency of a Trust

The general determination of the residency of a trust is described in the Internal Revenue Code (IRC) Section 7701 and Regulation Section 301.7701-7. Under these tax provisions, a trust will be deemed to be a U.S. person if: “(i) A court within the United States is able to exercise primary supervision over the administration of the trust (court test); and (ii) One or more United States persons have the authority to control all substantial decisions of the trust (control test).” (See explanations of the court test and the control test in the paragraphs below). Under the regulation, a trust will be a U.S. person for the purposes of the IRC on any day that the trust meets both of these tests. If a trust does not satisfy both of these tests, it will be considered to be a foreign trust for U.S. reporting purposes.

Determining the Residency of a Trust: The Court Test

In determining the residency of a trust under the Court Test, we need to consult the Treasury Regulations. Regulation Section 301.7701-7(c)(1) provides a safe harbor in which a trust will satisfy this (i.e. US residency) test if: “(i) The trust instrument does not direct that the trust be administered outside of the United States; (ii) The trust in fact is administered exclusively in the United States; and (iii) The trust is not subject to an automatic migration provision…”. For the purposes of the regulation, the term “court” is defined in the regulation to mean any federal, state, or local court, and the United States is used a geographical manner (thus including only the States and the District of Columbia, and not a court within a territory or possession of the United States or within a foreign country).

The term primary supervision means that a court has or would have the authority to determine substantially all issues regarding the administration of the entire trust.” The term “administration” is defined in the regulation to mean, “the carrying out of the duties imposed by the terms of the trust instrument and applicable law, including maintaining the books and records of the trust, filing tax returns, managing and investing the assets of the trust, defending the trust from suits by creditors, and determining the amount and timing of distributions.” The regulations further provide examples of situations that will cause a trust to fail or satisfy the court test.

Determining the Residency of a Trust: The Control test

The Control Test is often the key area of dispute in determining the residency of a trust. “Control” in the control test is explained in the regulation to mean, “having the power, by vote or otherwise, to make all of the substantial decisions of the trust, with no other person having the power to veto any of the substantial decisions.” Critically important – it is required under the regulation to consider all individuals who may have authority to make “substantial decisions”, and not simply the trust fiduciaries.

Under the regulation, the term “substantial decisions” (see usage in first paragraph) is defined to mean, “those decisions that persons are authorized or required to make under the terms of the trust instrument and applicable law and that are not ministerial.” (Some examples of “ministerial” decisions are provided in the regulation, including, bookkeeping, the collection of rents, and the execution of investment decisions).

The regulation further provides numerous examples of substantial decisions: “(A) Whether and when to distribute income or corpus; (B) The amount of any distributions; (C) The selection of a beneficiary; (D) Whether a receipt is allocable to income or principal; (E) Whether to terminate the trust; (F) Whether to compromise, arbitrate, or abandon claims of the trust; (G) Whether to sue on behalf of the trust or to defend suits against the trust; (H) Whether to remove, add, or replace a trustee; (I) Whether to appoint a successor trustee to succeed a trustee who has died, resigned, or otherwise ceased to act as a trustee…; and (J) Investment decisions; however, if a United States person under section 7701(a)(30) hires an investment advisor for the trust, the investment decisions made by the investment advisor will be considered substantial decisions controlled by the United States person if the United States person can terminate the investment advisor’s power to make investment decisions at will.”

Contact Sherayzen Law Office for Tax and Legal Help With Issues Involving Foreign Trusts

Determination of the residency of a trust is just one of a myriad of highly complex issues than an international tax attorney can help you resolve with respect to U.S. tax compliance, tax planning and estate planning. If you are an owner or a beneficiary of a foreign trust, contact Sherayzen Law Office for professional legal and tax help.

Contact Us Today to Schedule Your Confidential Consultation!

FATCA Attorneys Update: IRS Launches International Data Exchange Service

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On January 12, 2015, the IRS announced the opening of the International Data Exchange Service (IDES) for enrollment. The appearance of IDES is not a surprise to FATCA Attorneys, because most FATCA attorneys knew IDES was the next logical step since its purpose is going to be for foreign financial institutions (FFIs) and host country tax authorities (HCTAs) to securely send their FATCA reports about US account holders under regular FATCA compliance or pursuant to the terms of an intergovernmental agreement (IGA), as applicable.

So far, more than 145,000 financial institutions have registered through the IRS FATCA Registration System. Moreover, the IRS made tremendous progress with IGAs – there are now more than 110 IGAs, either signed or agreed in substance.

FATCA Attorneys Update: How Will IDES Function?

Using IDES, a web application, the sender encrypts the data and IDES encrypts the transmission pathway to protect data transfers. Encryption at both the file and transmission level safeguards sensitive tax information. This means that FFIs and HCTAs can have a high level of confidence in the data about US account holders that they will be transmitted to the IRS.

“The opening of the International Data Exchange Service is a milestone in the implementation of FATCA,” said IRS Commissioner John Koskinen. “With it, comes the start of a secure system of automated, standardized information exchanges among government tax authorities. This will enhance our ability to detect hidden accounts and help ensure fairness in the tax system.”

Where a jurisdiction has a reciprocal IGA and the jurisdiction has the necessary safeguards and infrastructure in place, the IRS will also use IDES to provide similar information to the host country tax authority on accounts in U.S. financial institutions held by the jurisdiction’s residents.

IDES runs on all major browsers, including Chrome, Internet Explorer, Safari, and Firefox and will support application-to-application exchanges through the SFTP transmission protocol enabling a wide variety of users to interact with IDES without building additional infrastructure to support transmission.

FATCA Attorneys Update: IDES and Model 2 IGA Jurisdictions

The IRS encourages HCTAs in Model 2 IGA jurisdictions and FFIs to begin the enrollment process well in advance of their reporting deadline. To begin transmitting information in IDES,an FFI or HCTA will need to first obtain a digital certificate. Digital certificates bind digital information to physical identities and provide data integrity. IDES stores each user’s public key and related digital certificate. All IDES enrollees (including host country tax authorities) must obtain a proper digital certificate in order to enroll (there is a list of approved Certificate Authorities available on irs.gov).

FATCA Attorneys Update: IDES and Model 1 IGA Jurisdictions

For HCTAs in Model 1 IGA jurisdictions, the IRS will directly notify them to let them know when it is time to enroll. FFIs will initiate enrollment online on their own; in order to enroll, the financial institution will need to have registered as a participating financial institution through the IRS FATCA Registration System and have a global intermediary identification number (GIIN) that appears on the IRS FATCA FFI list. The online address for IDES enrollment can be found here.

FATCA Attorneys Update: IDES and Offshore Voluntary Disclosure

The opening of IDES is considered by FATCA attorneys as an important development in FATCA implementation which is likely to affect a very large number of US persons with undisclosed foreign accounts. It should be remembers that if the IRS receives the information about an undisclosed foreign account through IDES, it may prevent the US owner of such an undisclosed foreign account from being able to enter into the IRS Offshore Voluntary Disclosure Program.

FATCA attorneys also should warn their US clients who closed their foreign accounts prior to 2014 that the closure of such accounts prior to the implementation of FATCA does not mean that these accounts will not be reported later. On the contrary, FATCA attorneys should stress to their clients that the IDES is likely to be used by FFIs and HCTAs to report prior non-compliance with respect to closed accounts to the IRS as early as March 31, 2016 if not earlier.

Contact Sherayzen Law Office for Help With Undisclosed Foreign Accounts

Almost all FATCA attorneys stress that time is running out for US persons with undisclosed foreign accounts to start their voluntary disclosure process. With the introduction of IDES, a significant practical hurdle to FATCA implementation has been removed. This means that your undisclosed foreign account may be reported at any point now to the IRS.

If you have undisclosed foreign accounts, you should contact Sherayzen Law Office as soon as possible to explore your voluntary disclosure options. Our experienced FATCA law firm will thoroughly analyze your case, determine your existing exposure to U.S. tax penalties, identify the available voluntary disclosure options, prepare all legal and tax documents for your voluntary disclosure, and vigorously advocate your position against the IRS.

Contact Us Now to Schedule Your Confidential Consultation!

Who Must File Form 1120-F ?

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Form 1120-F (“U.S. Income Tax Return of a Foreign Corporation”) is used to report the income, gains, losses, deductions, credits, and to figure the U.S. income tax liability of a foreign corporation. The form is also used to claim any refund due, to transmit Form 8833 (“Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b)”), or to calculate and pay a foreign corporation’s branch profits tax liability and tax on excess interest, if any, under Internal Revenue Code Section 884.

In this article, we will explain who is required to file Form 1120-F. This article 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 further questions.

Who Must File Form 1120-F?

In general, unless an exception exists or a special return is required, a foreign corporation must file Form 1120-F if any of the following is true:

1. A foreign corporation engaged in a trade or business in the United States, whether or not it had U.S. source income from that trade or business, and whether or not income from such trade or business is exempt from U.S. tax under a tax treaty;

2. A foreign corporation had income, gains, or losses that were treated as if they were effectively connected with the conduct of a U.S. trade or business;

3. A foreign corporation was not engaged in a trade or business in the United States, but it had US-source income and its tax liability has not been fully satisfied by the withholding of tax at source (under chapter 3 of the Internal Revenue Code);

4. Special circumstances require the foreign corporation to file Form 1120-F in certain other instances. For example, if a foreign corporation is claiming the benefit of any deductions or credits, or is making a claim for the refund of an overpayment of tax for the tax year, Form 1120F should be filed (also see below for more detailed description of come of these circumstances when Form 1120-F must be filed); or

5. Certain specific types of entities or individuals may be required to file Form 1120-F. In particular, instructions to Form 5471 state that a Mexican or Canadian branch of a U.S. mutual life insurance company is required to file Form 1120-F if the U.S. company elects to exclude the branch’s income and expenses from its own gross income. Furthermore, a receiver, assignee, or trustee in dissolution or bankruptcy must file Form 1120-F, if that person has or holds title to virtually all of a foreign corporation’s property or business. Note that Form 1120-F is due whether or not the property or business is being operated. Finally, an agent of a foreign corporation in the United States should file Form 1120-F if the foreign corporation has no office or place of business in the United States when the return is due.

Form 1120-F Required for Claiming Treaty or Code Exemption

As mentioned above, even if a foreign corporation does not have any gross income for the tax year because it is claiming a treaty or IRC exemption, it still must demonstrate that the income was properly exempted by filing Form 1120-F to provide the IRS with the identifying information and attaching a statement to Form 1120-F noting the nature and amount of the exclusions claimed. If there was tax withholding at source in such a case, the foreign corporation must complete the Computation of Tax Due or Overpayment section of Form 1120-F in order to claim a refund on the amounts withheld.

Entities that Elect to be Taxed as Foreign Corporations

In general, Form 1120-F must be filed by a foreign eligible entity that elects to be classified as a corporation, and it must attach a copy of Form 8832 (“Entity Classification Election”) with Form 1120-F.

Exceptions to Filing Form 1120-F

Various exceptions may apply for foreign corporations that would otherwise be required to file the form. The most prominent examples of these exceptions to filing Form 1120-F are the following: (i) if the foreign corporation did not engage in a U.S. trade or business during the tax year and its full U.S. tax was withheld at source; (ii) if the foreign corporation’s only U.S. source income is exempt from U.S. taxation under Internal Revenue Code Section 881(c) or (d); or (iii) if the foreign corporation is a beneficiary of an estate or trust engaged in a U.S. trade or business, but it would itself otherwise not be required to file.

Contact Sherayzen Law Office for Help With U.S. Compliance For Foreign Corporations

U.S. tax compliance for foreign corporations can involve many complexities and it is easy to ran afoul of the numerous U.S. tax requirements. This is why, if you have a foreign corporation, you are well-advised to seek help from the experienced international tax professionals of Sherayzen Law Office. Contact Us to Schedule Your Confidential Consultation Now!

BCGE FATCA Letter

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In a previous article, I started the discussion of various FATCA letters issued by banks around the world by concentrating on the HSBC FATCA letter. In this article, I would like to shift focus to a different part of the world and discuss the Swiss format with BCGE FATCA Letter.

BCGE FATCA Letter: General Format

BCGE (Banque Cantonale de Geneve) is determined to comply with FATCA. For this purpose, it developed its own format of a FATCA letter which closely follows the format adopted by most Swiss banks.

BCGE FATCA Letter follows what I call “comprehensive format” (as opposed to the “reference format” followed by HSBC). This means that BCGE FATCA Letter contains all of the main questions within the body of the letter and references only supplementary US forms (like W8BEN and W9). Thus, BCGE FATCA Letter allows BCGE to collect all of the information necessary for its own FATCA compliance in one place and without the need to create any other specialized forms.

It should be noted that the description of the format so far concentrated on the most common BCGE FATCA Letter for individuals, but there are variations in the form for trusts and corporations. Furthermore, there is a variation for the form for certain other circumstances. Since most US account holders who receive a BCGE FATCA are individuals, I will concentrate on the most common format only.

Let’s review each part of the common BCGE FATCA Letter.

BCGE FATCA Letter: Personal Information

The BCGE FATCA Letter commences with the confirmation of the identity and personal information (including place of residence) of the account holder. This section also commences the examination of the account holder’s US tax status by requiring the account holder to list all of his nationalities and the country of birth.

BCGE FATCA Letter: “Per Se” US Status

This is the most critical part of BCGE FATCA Letter because it focuses on the main designations of US person. In particular, this part of BCGE FATCA Letter asks whether the account holder has US national, is a US tax resident (which is asked in two different ways which mean the same thing – lawful permanent resident and the “green card” test), and whether the substantial presence test is satisfied. Definition for the later is provided in a footnote.

If there is at least one affirmative answer to these first four questions, BCGE will automatically classify the account holder as a US person subject to FATCA reporting. Once this determination is made, BCGE FATCA Letter requires the account holder to submit Form W-9 and a special BCGE Form 6387 “Consent to the disclosure of data according to FATCA”. Failure to complete Form 6387 may result in the BCGE designation of the account under FATCA as belonging to a “recalcitrant account holder”.

Please, note that once a status of US person is established, BCGE is very likely to close any securities accounts of a US account holder.

BCGE FATCA Letter Questions 1.5-1.8 on Potential US Status

If the account holder negatively answered the first four questions, the next part of the BCGE FATCA Letter asks a series of questions to see if the account holder if a US person in some other way. Most of these questions also require a submission of Form W-8BEN (with a non-US passport) or W-9.

BCGE FATCA Letter usually contains the following questions. First, whether the account holder was born in the USA or in a US territory (a definition is provided for this term). If the answer is “yes”, but the account holder believes that he is still not a US person, then he must submit Form W-8BEN, a non-US passport or a similar document, and a copy of the certificate of loss of US nationality. If the certificate cannot be produced, BCGE FATCA Letter automatically classifies the account holder as a US person and requires him to submit Form W-9 and a Consent to the disclosure of data under FATCA.

Second, BCGE FATCA Letter asks whether the account holder is a US taxpayer for any other reason – this a “catch all” question to make sure that BCGE does not miss a potential FATCA requirement. BCGE FATCA Letter lists a number of possibilities of how one becomes a US person : joint tax status with a US spouse, in the process of renouncing US nationality or green card, effectively connected income and owner of a US property. Again, supporting documentation or Form W-9 with the Disclosure Consent under FATCA are required.

Finally, BCGE FATCA Letter addresses the remaining potential for the account holder to be a US taxpayer such as US mailing address, care-of address, postbox, and fixed or mobile telephone number. If the account holder has any of these items, then BCGE FATCA Letter asks him to provide Form W-8BEN with a non-US passport (or similar documentation).

BCGE FATCA letter: Confirmation of Beneficial Ownership Status

By signing BCGE FATCA Letter, the account holder affirms that he is the beneficial owner of the bank account.

BCGE FATCA Letter: Treaty Relief Considerations

If it is established that the account holder is NOT a US person, BCGE FATCA Letter contains a fairly unique aspect – discussion of the possibility of claiming a favorable tax status with respect to investments into US Securities. Most other banks usually discuss this important issue in a separate letter, but BCGE FATCA Letter actually incorporates this issue within its body. Form W-8BEN is required to proceed.

BCGE FATCA Letter: Notice and Reimbursement Requirements Imposed on Account Holder

Finally, a BCGE FATCA Letter usually contains another interesting topic – the shift of risk to the account holder through imposition of notice requirements. Since this is a tactic which is adopted increasingly by foreign banks, it is useful to explore this requirement with specificity.

BCGE FATCA Letter states that, by signing the Letter, the account holder “undertakes to inform the Bank of any changes in circumstances resulting in a change of tax status, as the one indicated below and transmit the necessary documents or forms within 30 days after the change in circumstances.” BCGE FATCA Letter sets forth three such changes: change of residence, change of nationality and amendment of the account holder’s tax status (such as receipt of green card, substantial presence in the United States, et cetera).

BCGE FATCA Letter goes on to state that if the declarations made by the account holder in the Letter become invalid for some reason (such as belated discovery of U.S. status), the account holder must transmit to BCGE a new declaration of status with a Form W-9 and FATCA waiver.

The key phrase, however, is with respect to what happens if the information submitted by the account holder within the BCGE FATCA Letter turns out to be incorrect or incomplete. In such a case, the account holder “undertakes to indemnify the Bank for all damages it may suffer” as a result of relying on the incorrect declarations made in the BCGE FATCA Letter. It is unclear whether failure to comply with the Notice requirement is equally subject to this reimbursement requirements, but it seems to be the case.

Thus, it appears that BCGE FATCA Letter decisively shifts all risk of an incorrect declaration (even if non-willful due to belated discovery) from BCGE to the account holder. This is why it is important for the account holder’s attorney to carefully review this document and negotiate the necessary changes.

Contact Sherayzen Law Office for Help With FATCA Compliance

If you received a FATCA letter regarding an undisclosed personal or business account, contact Sherayzen Law Office for professional help. Our team of international experts will thoroughly review your case, analyze your current FBAR and FATCA exposure, recommend the proper voluntary disclosure plan and help you implement it (including preparation of all necessary legal documents and tax forms).

Contact Us to Schedule Your Confidential Consultation Now!