September 17, 2012 Deadline for Estimated Tax Payments and Certain Business Entity Filings

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This year, the usual September deadline for estimated tax payments for the the third-quarter (June 1-August 31) of 2012 moves to September 17 due to the fact that the usual date for the estimated tax payments (September 15) falls on Saturday. This requirements applies individuals who are either not paying their income tax through withholding or will not pay enough income tax through withholding.

September 17 deadline also applies to the 2012 third-quarter estimated tax payments of a corporation.

Furthermore, if a C-Corporation, S-Corporation or a Partnership obtained an automatic six-month (in case of a corporation) or an automatic five-month (in case of a partnership) extension for filing of their income tax returns (Forms 1120, 1120-S and 1065 (with K-1)), these entities must file these extended income tax returns by September 17, 2012.

It is important no note that the September 17 deadline applies only to taxpayers whose tax year is the calendar year. If a taxpayer uses a fiscal year as its tax year, then different dates for the deadlines may apply.

If you have any questions about how to file these forms, please, contact Sherayzen Law Office for help.

2012 OVDP Offers Alternative PFIC Calculation Method

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If your client’s offshore voluntary disclosure involves PFIC (Passive Foreign Investment Company) income, you should be aware that the 2012 OVDP (Offshore Voluntary Disclosure Program) offers an alternative PFIC calculation method. In this article, I intend to outline broad contours of the alternative method and put it in a broader context of voluntary disclosure.

From the outset, I want to emphasize that the calculation of PFIC increase in tax is an extremely complex matter and should be conducted only by international tax professionals; therefore, this article is likely to be more of interest to international tax attorneys and accountants rather than the taxpayers themselves.

When Alternative OVDP PFIC Method Is Usually Elected

Whether to elect an alternative OVDP Method of PFIC calculation is a matter that should be decided by your international tax attorney in charge of your voluntary disclosure case. However, there are four common situations when taxpayers usually (but not always) choose the OVDP method.

First, for obvious reasons, if a PFIC election was already timely made (QEF or Market-to-Market (MTM)) in the past, the OVDP method is usually avoided.

Second, where a lack of historical information on the cost basis and holding period of many PFIC investments makes it difficult for taxpayers to prepare statutory PFIC computations and for the IRS to verify them. This is a very common reason for choosing OVDP method, especially in situations where PFICs were inherited by U.S. taxpayers.

Third, where the OVDP method is more financially beneficial than the statutory § 1291 method. Unfortunately, it is usually not easy to identify whether the OVDP or the statutory method is going to be advantageous; preliminary PFIC calculations will need to be conducted on both methods before a recommendation can be made to a client.

Finally, the fourth type of situations when people choose OVDP over § 1291 method are those where the default statutory PFIC method is so difficult and time-consuming to calculate that the clients simply opt for the OVDP method because it will save them more money in legal and accounting fees than whatever advantage a default statutory method would bring.

I once spoke with an attorney who always recommended OVDP method over § 1291, because the default method is too difficult to calculate. I believe this is an exaggeration and I would caution tax professionals from making such unfounded judgments. I have had situations where the default method was superior over the MTM method, OVDP or otherwise, based on the way the transactions were structured or the violent shifts in the value of PFICs. Therefore, one should always study the special circumstances of a client before laying out the options to the client and making the final recommendation.

OVDP Alternative MTM Method

Once your client selects the OVDP Alternative Method, it is important that you follow the rules of the method. In essence, the OVDP Method utilizes the mark-to-market methodology authorized in Internal Revenue Code § 1296 but without the requirement for complete reconstruction of historical data (which, in situations where are several legitimate places to start, may offer room for planning).

There are other differences between the traditional MTM and OVDP MTM methods. For example, a rate of 7% of the tax computed for PFIC investments marked to market in the first year of the OVDP application will be added to the tax for that year, in lieu of the PFIC interest charges. Also, a tax rate of 20% will be applied to the MTM gain(s), MTM net gain(s) and gains from all PFIC dispositions during the voluntary disclosure period under the OVDP, in lieu of the rate contained in IRC § 1291(a)(1)(B) for the amount allocable to the current year and IRC §1291(c)(2) for the deferred tax amount(s) allocable to any other taxable year.

With respect to limiting losses, the OVDP MTM method does follow the unreversed inclusions rule with very detailed instructions on the post-voluntary disclosure treatment of losses. I will not get into details in this article, but tax professionals should diligently study these instructions.

Once the OVDP Alternative method is selected, it will apply to all of your client’s PFIC investments. The initial MTM computation of gain or loss under this methodology will be for the first year of the OVDP application, but could be made after that year depending on when the first PFIC investment was made.

Election Of the OVDP MTM Method Will Have Tax Consequences On the Post-Disclosure Period

It is important to emphasize that the OVDP MTM method will have tax consequences on your client’s post-OVDP tax situation. For example, any unreversed inclusions at the end of the voluntary disclosure period will be reduced to zero and the MTM method will be applied to all subsequent years in accordance with IRC § 1296 as if the taxpayer had acquired the PFIC stock on the last day of the last year of the voluntary disclosure period at its MTM value and made an IRC § 1296 election for the first year beginning after the voluntary disclosure period.

Other important tax consequences must also be explained to your clients.

Contact Sherayzen Law Office for Help With PFICs In a Voluntary Disclosure Context

This article offers only a very broad outline of the OVDP MTM method and it should not be relied upon in your PFIC calculations. My only intent in this article was to alert the tax professionals to the existence and general contours of the OVDP Alternative PFIC Method. Whether to use it and how to use it requires deep understanding of the various PFIC calculation methods in conjunction with planning for various voluntary disclosure options.

If you or your clients are facing PFIC issues in a voluntary disclosure context, contact Sherayzen Law Office for help. Our experienced international tax firm will thoroughly analyze your client’s situation, propose various voluntary disclosure options, explain how these options affect your PFIC calculation method, and complete all of the required calculations and tax forms.

FBAR Criminal Penalties

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handcuffs

Potentially, a person who willfully fails to file an FBAR or files a false FBAR may be subject to:

  • A prison term of up to 10 years
  • Criminal penalties of up to $500,000
  • or both

When it comes to penalties, FinCEN Form 114 formerly Form TD F 90-22.1, Report on Foreign Bank and Financial Accounts (commonly known as FBAR), is one of the most severe forms ever issued by the U.S. Department of the Treasury.

In addition to a rich arsenal of civil penalties, the FBAR is also armed with criminal penalties that U.S. taxpayers may face in cases of willful non-compliance with the FBAR regulations.  The two most common cases for criminal prosecution are willful failure to file an FBAR and willful filing a false FBAR, especially when combined with potential tax evasion.

The authority for the severe criminal penalties can be found in 31 U.S.C. § 5322.  This means that, potentially, a person who willfully fails to file an FBAR or files a false FBAR may be subject to a prison term of up to 10 years, criminal penalties of up to $500,000 or both potentially, a person who willfully fails to file an FBAR or files a false FBAR may be subject to a prison term of up to 10 years, criminal penalties of up to $500,000 or both

With the mountain of information that the IRS recently accumulated as a result of the 2009 OVDP, 2011 OVDI and, now, 2012 OVDP voluntary disclosure programs, one should expect a dramatic rise in FBAR enforcement. This, of course, means that we are likely to witness the equivalent rise in FBAR audits and criminal prosecutions.

Contact Sherayzen Law Office for FBAR Help

If you have undisclosed foreign accounts and you are subject to the FBAR requirements, contact Sherayzen Law Office immediately.  Our experienced international tax firm will thoroughly review your case, analyze the available options in a responsible and creative way, create a case plan, draft and complete the necessary legal and tax documents and forms, and rigorously represent your case before the IRS.

Don’t Face The IRS Alone! call now! 952-500-8159

IRS Audit of Offshore Accounts and Other Foreign Assets: Potential Penalties

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Failure to do timely voluntary disclosure may expose non-compliant U.S. taxpayers with foreign bank and financial accounts to tremendous amount of audit penalties. In this article, I will describe these penalties which may apply to non-compliant U.S. taxpayers during an IRS audit (remember, the application of these penalties in your particular case will depend on your particular circumstances; this article merely provides an overview of potential penalties that generally exist).

FBAR Civil Penalties

The civil penalty for willfully failing to file the Form 114 (formerly TD F 90-22.1) (Report of Foreign Bank and Financial Accounts, commonly known as an “FBAR”) can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign account per violation. See 31 U.S.C. § 5321(a)(5). Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation. Please, visit our Voluntary Disclosure and FBAR Center for more detailed information.

Form 8938 Penalties

Closely related to the FBAR is Form 8938. This is a new form that is required to be filed beginning with the 2011 tax year by certain taxpayers (see this article for more information). While Form 8938 is the IRS equivalent of the FBAR required to be filed by the U.S. Department of the Treasury, it has it own penalty structure.

Failure to file Form 8938 as required by I.R.C. §6038D is $10,000 per each information return. An additional $10,000 penalty is added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.

Form 3520 Penalties

These penalties are relevant only to the taxpayers who are required to file Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, pursuant to IRC §§ 6048 and 6039F. The penalty for failing to file each one of these information returns, or for filing an incomplete return, is the greater of $10,000 or 35 percent of the gross reportable amount, except for returns reporting gifts, where the penalty is five percent of the gift per month, up to a maximum penalty of 25 percent of the gift.

Form 3520-A Penalties

These penalties are relevant only to the taxpayers who must report ownership interests in foreign trusts, by United States persons with various interests in and powers over those trusts under IRC § 6048(b). A penalty for failing to file each Form 3520-A, Information Return of Foreign Trust With a U.S. Owner, is the greater of $10,000 or 5 percent of the gross value of trust assets determined to be owned by the United States person.

Form 5471 Penalties

Certain categories of U.S. persons who are officers, directors or shareholders in certain foreign corporations (including International Business Corporations) are required to report information under IRC §§ 6035, 6038 and 6046 (see this article for more information).

A penalty for failing to file each Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations, is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.

Form 5472 Penalties

Taxpayers may be required to report transactions between a 25 percent foreign-owned domestic corporation or a foreign corporation engaged in a trade or business in the United States and a related party as required by IRC §§ 6038A and 6038C.

A penalty for failing to file Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business, is $10,000 per form. An additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency.

Form 926 Penalties

Taxpayers are required to report transfers of property to foreign corporations and other information under IRC § 6038B. A penalty for failing to file Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation, is ten percent of the value of the property transferred, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was intentional.

Form 8865 Penalties

United States persons with certain interests in foreign partnerships are required to report interests in and transactions of the foreign partnerships, transfers of property to the foreign partnerships, and acquisitions, dispositions and changes in foreign partnership interests under IRC §§ 6038, 6038B, and 6046A.

A penalty for failing to file Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships, is $10,000 per each return, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return. Furthermore, there is a penalty of ten percent of the value of any transferred property that is not reported, subject to a $100,000 limit.

Civil Fraud Penalties

Pursuant to IRC §§ 6651(f) or 6663, where an underpayment of tax, or a failure to file a tax return, is due to fraud, the taxpayer is liable for penalties that, although calculated differently, essentially amount to 75 percent of the unpaid tax.

Failure to File Penalty: IRC § 6651(a)(1)

Generally, taxpayers are required to file income tax returns. If a taxpayer fails to do so, a penalty of 5 percent of the balance due, plus an additional 5 percent for each month or fraction thereof during which the failure continues may be imposed. The penalty shall not exceed 25 percent.

Failure to Pay Tax Due Penalty: IRC § 6651(a)(2)

If a taxpayer fails to pay the amount of tax shown on the return, he may be liable for a penalty of 0.5 percent of the amount of tax shown on the return, plus an additional 0.5 percent for each additional month or fraction thereof that the amount remains unpaid. The penalty is capped at 25 percent.

Accuracy-Related Penalty: IRC § 6662

An accuracy-related penalty on underpayments may be imposed by the IRS. Depending upon which component of the accuracy-related penalty is applicable, a taxpayer may be liable for a 20 percent or 40 percent penalty.

Other Civil Penalties

Other penalties may be applicable depending on a situation.

Potential Criminal Penalties

In addition to civil penalties, the non-compliant taxpayers also face various potential criminal penalties.

FBAR Criminal Penalties

FBAR penalties are not limited to civil penalties, but also expose non-compliant taxpayers to criminal penalties. Willfully failing to file an FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C. § 5322. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000.

Criminal Penalties Related to Tax Returns

Possible criminal charges related to tax returns include tax evasion (26 U.S.C. § 7201), filing a false return (26 U.S.C. § 7206(1)) and failure to file an income tax return (26 U.S.C. § 7203).

A person convicted of tax evasion is subject to a prison term of up to five years and a fine of up to $250,000. Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000. A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000.

Contact Sherayzen Law Office for Help With IRS Audits Involving Offshore Assets

If you have undisclosed foreign assets and foreign income and you are subject to IRS audit, contact Sherayzen Law Office immediately. An experienced international tax attorney will thoroughly review your case, create a case plan, complete the required forms, and offer rigorous ethical IRS representation.

2012 OVDP vs. 2011 OVDI: Five Key Differences

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On June 26, 2012, the IRS published the instructions for the 2012 Offshore Voluntary Disclosure Program (“OVDP”). The program was originally announced on January 9, 2012, but there were no instructions with respect to the program aside from modifications in the 2011 penalty structure and general references to the 2011 OVDI.

The new 2012 OVDP shares many similarities with 2011 OVDI, but there are specific differences with further implications that go far beyond its appearances.

There are five key differences between the programs that I would like to emphasize here:

1. The highest penalty is increased from 25% under the OVDI to 27.5% under the OVDP;

2. Unlike 2011 OVDI and every other previous voluntary disclosure program, 2012 OVDP is open for an indefinite period of time. This means that it can potentially be closed next week or it may be open far beyond 2012 and other years – the IRS has complete control over the exact expiration time of the OVDP.

3. The IRS may change the terms of the OVDP at any time. While the IRS did amend the 2011 OVDI instructions several times, these amendments (with the exception of June regulations) usually were for the purposes of clarification of the existing terms. It appears that, under 2012 OVDP, the fundamental rules of the program maybe changed at any time (it is debatable whether such changes would have any retroactive impact with respect to persons who already entered the program).

4. The eligibility terms have been modified for certain types of taxpayers. Two changes in particular must be highlighted under FAQ 21 of the 2012 OVDP instructions. First, a taxpayer in ineligible to participate in the 2012 OVDP if the taxpayer (i) appeals a foreign tax administrator’s decision authorizing the supply of account information to the IRS, (ii) does not serve the notice of account information to the IRS and (iii) fails to properly serve (as required under 18 U.S.C. 3506 ) on the Attorney General of the United States the notice of any such appeal and/or other documents relating to the appeal at the time such notice of appeal or other document is submitted.

The second eligibility modification concerns certain groups of taxpayer singled out by the IRS. In essence, a taxpayer is ineligible to participate in the 2012 OVDP if he has or had accounts at specified foreign financial institutions which were subject to U.S. government actions. The IRS may announce such taxpayer groups ineligible at any time; such announcements will be posted on the 2012 OVDP page.

This provision should be of special importance to taxpayers who maintain accounts with high-risk institutions.

5. In conjunction with the OVDP instructions, the IRS also published a new procedure for certain non-resident taxpayers (including dual citizens) seeking to establish a de minimis, low-risk exception to FBAR penalties. While seemingly benign, the new procedure does pose dilemmas for the taxpayers who are not eligible to take advantage of the new procedure and seek to do a modified voluntary disclosure (also known as “noisy voluntary disclosure”). I will explore this subject later in a separate article.

There are other differences between the 2012 OVDP and 2011 OVDI, but they are less pronounced. In order to find out exactly how these differences may affect your case, contact Sherayzen Law Office direct.

Contact Sherayzen Law Office for Professional Help with 2012 OVDP

If you have undisclosed offshore accounts and/or income, contact Sherayzen Law Office immediately. Our experienced voluntary disclosure tax firm will conduct a thorough analysis of your case, explore all options available to you, help you draft all of the required tax documents, amend your tax returns, and offer rigorous professional representation of your interests in IRS negotiations.