Form 8938 Threshold Requirements

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Starting tax year 2011, the IRS imposed a new tax reporting requirement on individual taxpayers who hold specified foreign financial assets with an aggregate value exceeding a relevant threshold. In its instructions to Form 8938, the IRS lists five main categories of taxpayers and assigns distinct reportable threshold to each category. Let’s explore each category.

1. Unmarried Taxpayers Living in the United States

If the taxpayer is not married and lives in the United States, then the applicable reporting threshold is satisfied if the total value of his specified foreign financial assets is more than $50,000 on the last day of the tax year, or more than $75,000 at any time during that tax year.

2. Married Taxpayers Filing a Joint Income Tax Return and Living in the United States

If the taxpayer is married and files joint income tax return with his spouse, then the reporting threshold is satisfied if the value of his specified foreign financial assets is either more than $100,000 on the last day of the tax year, or more than $150,000 at any time during the tax year.

3. Married Taxpayers Filing Separate Income Tax Returns and Living in the United States

If the taxpayer is married and lives in the United States, but files a separate income tax return from his spouse, then the reporting threshold is satisfied if the total value of his specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year. Therefore, this category is very similar to that of the unmarried taxpayer who resides in the United States.

4. Married Taxpayers Living Abroad and Filing a Joint Income Tax return

If the taxpayer has a tax home is abroad (a special test applies to determine whether this is the case), satisfies the presence abroad test, and files a joint tax return with his spouse, then the reporting threshold is satisfied if the value of all specified foreign financial assets that you or your spouse owns is either more than $400,000 on the last day of the tax year, or more than $600,000 at any time during the tax year.

5. Married Taxpayers Living Abroad and Filing Any Return Other Than Joint Tax Return

If the taxpayer has a tax home is abroad, satisfies the presence abroad test, and does not file a joint income tax return (instead he files a different type of tax return such as married filing separately or unmarried), then the reporting threshold is satisfied if the value of all specified foreign financial assets is either more than $200,000 on the last day of the tax year, or more than $300,000 at any time during the tax year.

Presence Abroad Tests

There are two “presence abroad” tests for the purposes of categories 4 and 5 above.

First, the presence abroad test is satisfied if the taxpayer is a U.S. citizen who has been a bona fide resident of a foreign country or countries for an uninterrupted period of an entire tax year.

Second, the presence abroad test is satisfied if the taxpayer is a U.S. citizen or residence who is present in a foreign country or countries at least 330 full days during any period of twelve consecutive months that needs in the tax year being reported.

Contact Sherayzen Law Office For Help With IRS Form 8938

The reporting requirements under Form 8938 can be very complex. Moreover, in case of prior non-compliance with the FBAR or other reporting requirements (Form 5471, 8865, 8891, et cetera), filing of Form 8938 should often be done in conjunction with a voluntary disclosure process in order to reduce or avoid additional tax penalties.

For legal advice with respect to Form 8938, determination whether its requirements apply to you, help with completing the form properly, and coordination of the Form 8938 filing with other U.S. tax compliance as part of the voluntary disclosure process, contact Sherayzen Law Office. Our experienced tax compliance firm will help you resolve any issues related to Form 8938 and guide you toward proper compliance with its requirements.

Final Regulations and Guidance Issued on Reporting Interest Paid to Nonresident Aliens under FATCA

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The Foreign Account Tax Compliance Act (FATCA), was enacted in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act, and mandates new reporting requirements, and amends existing IRC Sections.  Recently, the IRS issued final regulations and guidance regarding the reporting interest paid to nonresident aliens by certain financial institutions, as well as revenue procedure specifying foreign countries with which the U.S. has a information exchange agreement.  Nonresident aliens should be especially aware of these new rules, as many individuals will likely be affected by these rules.

TD 9584 (Guidance on Reporting Interest Paid to Nonresident Aliens), effective April 19, 2012, has the final regulations concerning the reporting requirements for commercial banks, savings institutions, credit unions, securities brokerages, and insurance companies that pay interest on deposits.

In general, beginning with interest payments made on, or after, January 1, 2013, covered financial institutions will be required to report deposit interest paid to certain nonresident alien individuals.  The IRS may then exchange information relating to tax enforcement with the officials of foreign countries.  Under the new Treas. Reg. §§ 1.6049-4(b)(5) and 1.6049-8(a), interest paid to nonresident aliens must be reported if the amount in aggregate is $10 or more.

The IRS views this ability to share such information as important to its goal of gathering information from other jurisdictions about US taxpayers who may be evading US tax by hiding assets offshore.  Additionally, the IRS enacted the new reporting requirements to limit US taxpayers with US deposit accounts from falsely claiming to be nonresident aliens in order to avoid paying US taxes on interest they receive from deposits.

Taxation of Prizes and Awards

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A lot of taxpayers are still unaware that awards and prizes may be potentially subject to U.S. federal income taxation.

In general, prizes and awards (other than certain types of fellowship grants and scholarships) should be included in gross income and subject to federal taxation.

Awards for religious, charitable, scientific, educational, artistic, literary or civic achievement are excluded from gross income only if the award is transferred unused by the payor to a governmental unit or a tax-exempt organization (charitable, religious, or educational) designed by the recipient.

The recipient of the award must be selected for the contest or proceeding without any of his action (or any action on his behalf).  Moreover, the recipient cannot be required to render substantial future services as a condition to receiving the prize or award.

Employee achievement awards are excludable from gross income only to the extent that the cost of the award is deductible by the employer.  It is important the awards do not represent disguised compensation.  The amounts subject to exclusion from gross income cannot be more than $400 for non-qualified awards and $1,600 for qualified awards (see IRC Sections 74 and 274(j) for further details).

Taxation of Restricted Stock Units

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Restricted Stock Units (RSUs) have become prominent in the news recently as a result of the Facebook IPO. Many of Facebook’s employees received RSUs in addition to their wages, and will soon be paying a heavy tax bill. Facebook has estimated that its employees’ total tax liability will be approximately $4 Billion dollars. In fact, many startup companies, especially tech companies, are turning towards RSUs to reward their employees. Therefore, if you are an employee of such a company, you may want to read about the basics of RSUs, and how they are taxed in this article.

RSUs

In general, RSUs differ from traditional stock options in that RSUs are only transferred when the certain conditions are met, and the shares have vested. Whereas stock options may be taxed when a holder exercises or sells the options, RSUs are taxable (as explained below) once they vest. This means of course, that employees may face a significant tax once the RSUs vest, even if they haven’t actually sold a single share of the stock.

Taxation of RSUs

Once RSUs initially vest, the shares are not eligible to be treated as capital gains under the Internal Revenue Code. Instead, RSUs are treated as compensation, to be taxed as ordinary income. Additionally, no section 83(b) election will be available.

The amount of ordinary income to be reported is the fair market value price of the stock as of the vesting date times the numbers of shares vested, minus the original purchase or exercise price, if any. Additionally, because of the treatment of the vesting of RSUs as compensation income, withholding taxes may also apply. For US employees, this means that Federal and any applicable state taxes, as well as Social Security and Medicare taxes, will be withheld (special rules may apply for non-US taxpayers, depending upon foreign taxation regimes).

Once a shareholder does sell the stock after the vesting date, capital gain or loss treatment will then be available. The capital gain or loss will be the difference between the fair market price on the date of vesting and the final sales price of the stock.

RSUs and US Employees of Foreign Subsidiaries

US taxpayers working abroad for foreign subsidiaries of U.S.-based multinational companies face special obstacles. Unfortunately, in the past, despite having large compliance departments, some companies failed to fully comply with the RSU reporting requirements regarding U.S. taxpayers employed by these companies’ foreign subsidiaries.

This may result in placing additional burden on these employees, including going back and amending their prior tax returns to properly reflect the tax liability that resulted from RSUs. Therefore, employees in this situation should be especially concerned regarding the proper treatment of RSUs by their employer.

Contact Sherayzen Law Office for Questions Regarding RSUs

If you have any questions about the taxation of RSUs, or other stock option plans, or if you seek to minimize your taxation through proper tax planning, you should contact Sherayzen Law Office today.

IRS Investigation of Tax Crimes

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This article will explain the basics of criminal tax investigations. It is extremely important if you find yourself under such an investigation, or believe that the potential for a criminal investigation exists in your case, that you obtain an experienced attorney to represent you.

Internal Revenue Code (IRC) Section 7608(b) grants the right to the criminal investigators of the IRS’ Intelligence Division to investigate tax crimes. There are various means by which the IRS may decide to begin a criminal investigation, including audits that indicate potential fraud, informant’s tips, or other credible reports, such as newspaper articles about fraudulent behavior. An IRS agent will begin to collect more information at this point as part of the procedures of the Internal Revenue Manual in order to establish a “firm indication of fraud.” Once such an indication can be demonstrated, the taxpayer’s civil audit will be suspended, and referred to the Criminal Investigation Division (CID).

The Criminal Investigation Division (CID) of the IRS is empowered under IRC Sections 7622 and 7602 to examine records, books and other supporting documents regarding information contained in tax returns, to take testimony and to administer oaths.

Taxpayers and their representatives will not be informed of the reasons for the suspension once their case is referred to the CID. It is thus crucial that taxpayers be careful regarding any statements they may make to an IRS agent, as the potential exists for such information to be used against them in a criminal proceeding.

After a case is referred to the CID, it will be reviewed by the CID Chief. The Chief will then assign a Special Agent to investigate if it is felt that the case clearly indicates possible fraud. The Special Agent, accompanied by another agent serving as a witness, may then contact the taxpayer, without prior notice. The agent is required to give the taxpayer a Miranda-type warning. An agent may also, in certain circumstances, obtain a search warrant, as well as the summons power under IRC Section 7602.

If an agent determines after the investigation that a prosecution should be in order, the case will then be forwarded to the IRS attorneys. Under the criminal standard of proof, it must be demonstrated that the evidence against the taxpayer is sufficient to prove guilt beyond a reasonable doubt, and that it is a reasonable probability that the taxpayer will be convicted of the crimes alleged.

Once the case is transferred, the taxpayer will then usually have the opportunity to present any defenses at a special conference with the IRS. If the IRS counsel agrees that the taxpayer should be prosecuted after the evidence and arguments presented at the conference, the case will then be referred to the Tax Division of the Department of Justice for review. If the DOJ attorney decides that the taxpayer should be prosecuted, the case may be then transferred to the U.S. Attorney (the DOJ attorney may also give the U.S. Attorney discretion of whether to prosecute, or not, in certain cases). The U.S. attorney may in some circumstances receive the case with an authorization for a grand jury investigation to be conducted.

As can be seen from the information above, criminal tax investigations are a serious matter. There are numerous potential pitfalls that may arise at any step of a tax investigation that may lead a taxpayer to ultimately wind up being convicted for a tax crime.

The taxpayers are advised to obtain experienced tax attorneys to represent them if they believe, at any point in their civil investigation that the potential for a criminal investigation exists.

Contact Sherayzen Law Office for Legal Advice Regarding Criminal Tax Matters

If you believe that you may be subject to a criminal IRS investigation, contact Sherayzen Law Office. Our experienced tax law firm will analyze the facts of your case, offer defense options and rigorously represent your interests during the IRS investigation and any court proceedings.