Coronavirus Offshore Voluntary Disclosure: Problems & Opportunities

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The advancement of coronavirus in the United States and around the world has significantly disrupted the normal conditions and assumptions for a US taxpayer who engages in an offshore voluntary disclosure of his unreported foreign income and foreign assets. I will refer to a voluntary disclosure conducted in this context of the coronavirus disruptions as Coronavirus Offshore Voluntary Disclosure. In this essay, I would like to discuss the most unique problems and opportunities that arise in the context of a Coronavirus Offshore Voluntary Disclosure.

Coronavirus Offshore Voluntary Disclosure: Most Important Problems

The spread of coronavirus created two important problems to conducting an offshore voluntary disclosure of foreign assets and foreign income.

The first and most significant problem is the ability of taxpayers to obtain the information necessary for the correct completion of US international information returns such as FBAR (FinCEN Form 114), Form 8938, Form 8865, Form 5471, et cetera. Oftentimes, in order to complete these returns, taxpayers have to retrieve information from many years ago.

This is a difficult task even without the coronavirus, because electronic access is often limited to just a few years. In cases that involve small and regional banks, the electronic access to information may simply not exist. Hence, a taxpayer often has to engage in a long process of mailing letters to banks requesting information; it is also a standard practice for taxpayers to personally travel to a foreign financial institution to obtain the necessary information.

The coronavirus prohibitions have made such travel virtually impossible due to cancellation of flights between countries. Even traveling within a country has been severely impacted. Moreover, there have been significant disruptions to ability of taxpayers to access financial institutions in the quarantined areas, such as northern Italy. Many financial institutions have simply closed their branches and ceased to operate in a normal way.

The combination of all of these factors has significantly curtailed taxpayers’ ability to collect the vital information necessary for the completion of an offshore voluntary disclosure.

The second most important problem caused by the coronavirus panic are communication disruptions. During a voluntary disclosure, taxpayers need to have access to their financial advisors and their international tax attorney. I’ve already explained above how the coronavirus bank closures have affected such communications.

The most significant communication issue between a taxpayer and his international tax attorney has been limited to mailing documents, particularly securing an original signature for Certifications of Non-Willfulness, Reasonable Cause Statements, amended tax returns and certain other IRS documents (such as Extension of Statute of Limitations in the context of an IRS audit). The coronavirus containment procedures have affected the flow of regular mail around the world and have caused significant delays in obtaining signed documents from clients.

It should mentioned that the normal communications between a client and his attorney were not significantly impacted. If there were any communication problems, this is most likely the result of the attorney’s failure to take advantage of modern means of communication.

Sherayzen Law Office’s usage of email, phone, Skype, Viber and certain other platforms for information exchange and other modern means of communication has assured continuous and uninterrupted communication between our firm and our clients. We have also encouraged and helped our clients to adopt certain procedures to mitigate other problems that have risen as a result of the coronavirus panic.

Coronavirus Offshore Voluntary Disclosure: Unique Opportunities

The coronavirus panic created not only unusual problems, but also unique opportunities for taxpayers with undisclosed foreign assets and foreign income. I will discuss here the two most important coronavirus opportunities.

First, the spread of this virus has given more time for noncompliant US taxpayers to bring their tax affairs into compliance with US tax laws. Not only has the IRS ability to pursue new international tax cases has been impacted by the virus, but the IRS moved the tax filing deadline to July 15, 2020. This means that taxpayers suddenly have three more months to work on their offshore voluntary disclosures without any interruption with respect to current tax compliance.

Second, more time means that taxpayers now can plan for and adopt more complex and beneficial strategies with respect to their offshore voluntary disclosures. For example, taxpayers who were planning to file extensions can now adopt a strategy to shift their voluntary disclosure period by timely filing their 2019 tax returns and 2019 FBARs.

Contact Sherayzen Law Office for Professional Help With Your Offshore Voluntary Disclosure

If you have undisclosed foreign bank accounts and other foreign assets, contact Sherayzen Law Office for professional help. We have successfully helped hundreds of US taxpayers to bring their tax affairs into full compliance with US tax laws, and we can help you!

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New July 15 Deadline for 2019 Tax Compliance | International Tax News

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On March 21, 2020, the IRS moved the federal income tax filing and tax payment due date from April 15, 2020, to July 15, 2020. Let’s discuss the new July 15 deadline in more detail.

July 15 Deadline: Why the IRS Moved the Tax Deadline to July 15, 2020?

The IRS moved the deadline because of the huge logistical problems that have arisen as a result of the spread of the coronavirus pandemic in the United States. The coronavirus panic as well as the imposition of what can be described as curfew and other restrictive safety measures in many states have dramatically reduced the ability of tax professionals to effectively and timely help their clients.

It would have been unfair and unreasonable to require taxpayers to file their tax returns by April 15 during this unprecedented national crisis. Hence, President Trump and the IRS decided to prevent this injustice and moved the tax filing and tax payment deadlines to July 15, 2020. This was the right move to make and it is applauded by tax professionals around the country.

The legal authority for the deferral of the April 15 deadline came from President Trump’s emergency declaration last week pursuant to the Stafford Act. The Stafford Act (enacted in 1988) is a federal law designed to bring an orderly and systematic means of federal natural disaster and emergency assistance for state and local governments in carrying out their responsibilities to aid citizens.

July 15 Deadline: What Returns Are Affected?

The deferment of the April 15 deadline applies to all taxpayers – individuals, corporations, trusts, estates and other non-corporate filers, including those who pay self-employment tax. In other words, all Forms 1040, 1041, 1120, et cetera are now due on July 15.

All international information returns which are filed separately or together with the income tax returns are also now due on July 15, 2020. This includes FBAR, Forms 8938, 3520, 5471, 5472, 8865 and other US international information returns.

July 15 Deadline: When are the Tax Payments Due?

All tax payments which are generally due on April 15 are now due on July 15, 2020.

July 15 Deadline: Do I Need to Do Anything Else to Obtain Tax Return Deferral?

Taxpayers do not need to file any additional forms or call the IRS to qualify for this federal tax filing and payment relief. This deferral to July 15, 2020, automatically applies to all of the aforementioned taxpayers.

July 15 Deadline: Is Extension to October Still Possible?

This automatic deferral does not affect the ability of taxpayers to request extension of the July 15 deadline to October 15. Individuals will need to file a Form 4868 in order to request such an extension. Businesses will need to file a Form 7004 to request this extension.

July 15 Deadline: Can I file Before July 15, 2020?

Taxpayers can still file their tax returns prior to July 15, 2020. The IRS promises to issue most refunds within 21 days if returns are e-filed.

New IRS Updates Possible

The IRS will continue to monitor issues related to the COVID-19 virus. New updates will be posted on a special coronavirus page on IRS.gov.

Contact Sherayzen Law Office for Professional Help With Your US International Tax Compliance

The extended July 15 deadline is especially welcome for US taxpayers with foreign assets. The delays caused by coronavirus now become irrelevant and there is plenty of time to finalize both, 2019 US international tax compliance forms and offshore voluntary disclosures.

If you have undisclosed foreign assets and foreign income, contact Sherayzen Law Office for professional assistance. We have successfully helped hundreds of US taxpayers around the world to bring their US tax affairs into full compliance with US tax laws, and we can help you!

Contact Us Today to Schedule Your Confidential Consultation!

Coronavirus & Chinese Offshore Voluntary Disclosures | SDOP Tax Law Firm

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The ongoing coronavirus pandemic has disrupted many areas of human activity around the planet. The coronavirus even affected the IRS offshore voluntary disclosures concerning US taxpayers’ unreported financial assets and income in China (“Chinese Offshore Voluntary Disclosures”). In fact, the impact of coronavirus on the Chinese Offshore Voluntary Disclosures has been severe and extremely disruptive. Let’s look at the top three ways in which coronavirus has disrupted the Chinese Offshore Voluntary Disclosures.

Coronavirus & Chinese Offshore Voluntary Disclosures: Access to Information

The first and most important disruption caused by coronavirus is reduced access to information necessary to complete offshore voluntary disclosures. As a result of the quarantine measures, many financial institutions in China are either closed or work only limited hours. Hence, it has become much harder to obtain relevant information from the Chinese financial institutions, particularly with respect to certain complex investment products and investment insurance policies.

Moreover, as a result of the suspension of travel between China and the United States, many taxpayers are unable to travel to China to obtain the necessary documents. In many cases, internet access to financial data in China is limited to only a few years, whereas taxpayers often need to go back at least six years to obtain the necessary information to accurately complete their delinquent FBARs. In most instances, a taxpayer needs to personally visit his financial institution to collect this older data. At this point, this is almost impossible.

Coronavirus & Chinese Offshore Voluntary Disclosures: Mailing of Signed Documents

With respect to US taxpayers who are currently in China, many of them have limited ability to execute the documents necessary to complete offshore voluntary disclosures and mail them to their international tax attorneys in the United States.

Coronavirus & Chinese Offshore Voluntary Disclosures: Case Schedule

As a result of the two factors above as well as the current communication disruptions in the United States, the coronavirus has caused long delays in the voluntary disclosures that involve undisclosed financial assets in China. The schedule disruptions can last from weeks to months; in fact, in some cases, it is too early to be able to fully assess the impact of coronavirus on an offshore voluntary disclosure schedule.

While Sherayzen Law Office has been able to minimize the impact of coronavirus on the Chinese Offshore Voluntary Disclosures, certain delays still exist due to clients’ inability to obtain the necessary information.

Contact Sherayzen Law Office for Help With Chinese Offshore Voluntary Disclosures

If you have undisclosed financial accounts or foreign businesses in China, contact Sherayzen Law Office for professional help as soon as possible. While the disruptions caused by coronavirus have been severe, by employing careful planning, we can still help you maximize your ability to complete your offshore voluntary disclosure in an accurate and timely manner.

We have already helped hundreds of US taxpayers like you, including in China, to successfully bring their financial and business affairs in full compliance with US tax laws. We can help you!

Contact Us Today to Schedule Your Confidential Consultation!

Family Re-Attribution Limitation Under §318 | International Tax Lawyers

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This article explores the second limitation on the IRC (Internal Revenue Code) §318 re-attribution rule – family re-attribution limitation.

Family Re-Attribution Limitation: General §318 Re-Attribution Rule

The general §318 re-attribution rule states that a constructively-owned corporate stock should be treated as actually owned for the purpose of further re-attribution of stock to other persons. §318(a)(5)(A). This re-attribution should occur with respect to other persons considered related persons under §318.

As I stated in another article, unless checked, the general §318 re-attribution rule may ultimately cause persons completely unrelated to the actual owners of corporate stock to be considered as constructive owners of this stock. For this reason, the IRS imposed a number of limitations on this re-attribution rule. One of the limitations concerns specifically §318 family attribution rules.

Family Re-Attribution Limitation: No Family Re-Attribution

Under §318(a)(5)(B), corporate stock constructively owned by a person pursuant to the §318 family attribution rules is not considered as owned by this person for the purpose of re-attributing stock ownership to another family member.

This rule is clear: stock attributed to one family member cannot be re-attributed for the second time to another family member. The idea of this rule is also very clear – to prevent re-attribution of stock to remote family members.

Family Re-Attribution Limitation: Examples

Let’s look at a couple of hypothetical examples to gain deeper understanding of the family re-attribution limitation.

First hypothetical: grandfather GF owns 100 shares of X corporation. Under the family attribution rules, this ownership is attributed to GF’s son, A. However, due to §318(a)(5)(B), this constructively-owned stock cannot be attributed for the second time to A’s wife and A’s son.

Second hypothetical: X, a C-corporation has 200 shares outstanding; A owns 100 shares, S (A’s son) owns 40 shares and D (A’s daughter) owns 60 shares. Under §318(a)(1)(A)(ii): A actually owns 100 shares and constructively owns his children’s 100 shares; S actually owns 40 shares and constructively owns his mother’s 100 shares; D actually owns 60 shares and constructively owns her mother’s 100 shares.

However, due to the re-attribution limitations under §318(a)(5)(B), the shares A constructively owns are not re-attributed from one child to another. Hence, 40 shares of S are not re-attributed to D through their father’s constructive ownership of shares actually owned by S. Similarly, D’s 60 shares are not re-attributed to S through A’s constructive ownership of D’s shares.

Family Re-Attribution Limitation: Interaction with the §318 Option Attribution Rule

It is important to understand that §318(a)(5)(B) does not per se prohibit the re-attribution of stock to another family member. Rather, this re-attribution limitation only applies to stock constructively owned under the §318 family attribution rules. However, the stock may still be re-attributed to another family member through the operation of another rule such as the §318 option attribution rule.

The most prominent example of such a situation is situations where ownership of stock is imputed under both §318 family attribution rule and §318 option attribution rule at the same time. Under §318(a)(5)(D), if a stock is attributed under both, §318 family attribution rules and §318 option attribution rules, then the option rules take priority. This means that, if both rules apply, the option rule governs and the person is deemed to own stock under the option rule rather than under the family rule.

In situations where corporate stock is deemed to be owned under both, family and option attribution rules, the option rule will allow the re-attribution of stock to another family member. In such cases, §318(a)(5)(B) is powerless to stop the application of re-attribution due to the precedence of the option rules.

Family Re-Attribution Limitation: Example of the Option Rule Family Re-Attribution

Let’s look at an example to illustrate the §318 option attribution rule and the §318 family attribution rules interaction with respect to family re-attribution limitation. Let’s suppose that S, son of F, directly owns 100 shares of X, a C-corporation; F has an option to buy all 100 shares from S; D, F’s daughter and S’ sister, does not actually own any shares of X or a contract to buy any shares of X. The issue is whether D is deemed to own any shares of X.

F constructively owns all of his son’s shares of X under the family attribution rules and the option attribution rules. Normally, no shares would be attributed to D due to the family re-attribution limitations, but, in this case, F actually owns an option to buy all 100 shares. The option attribution rule holds preeminence over the family re-attribution limitation. Hence, F is deemed to own S’ shares under the option rule first and foremost; as a consequence, these shares are then re-attributed to D. Thus, D is treated as an owner of all of S’ 100 shares of X.

Family Re-Attribution Limitation: Advanced Summary of Family Attribution Rules

Now that we have a more advanced understanding of the family attribution rules and the limits placed on the family re-attribution limitations, we can modify our earlier definition of the §318 family attribution rules in the following manner: where A and B are family members within the meaning of §318(a)(1), A is deemed to own: (1) all corporate stocks actually owned by B; (2) all corporate stocks constructively owned by B under the §318 option attribution rules; and (3) all stocks constructively owned by B pursuant to §318(a)(2) – i.e. due to the fact that he is a beneficiary of a trust, a partner in a partnership or a shareholder of a corporation.

Contact Sherayzen Law Office for Professional Help With US International Tax Law Compliance

US international tax law is incredibly complex and the penalties for noncompliance are severe. This means that an attempt to navigate through the maze of US international tax laws without assistance of an experienced professional will most likely produce unfavorable and even catastrophic results.

Contact Sherayzen Law Office for professional help with US international tax law. We are a highly experienced, creative and ethical team of tax professionals dedicated to helping our clients resolve US international tax compliance issues. Led by our founder, Mr. Eugene Sherayzen (an international tax attorney), we have helped hundreds of clients with assets in over 70 countries around the world, and we can help you!

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Hindu Undivided Family (HUF) US Tax Classification | Foreign Trust Lawyer

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This article continues a series of articles concerning US tax classification of unusual foreign entities; our focus is on the determination whether these entities should be classified as foreign business entities or foreign trusts. Today’s topic is the Hindu Undivided Family, the preferred legal entity for managing family estates for a large number of wealthy Indian families.

A word of caution, the description of the Hindu Undivided Family (“HUF”) provided below is necessarily a general one. This article sacrifices detail for the sake of clarity.

Hindu Undivided Family: Purpose

The main purpose of HUF is to manage family-owned property. I want to emphasize that this is not a property owned by one or two members individually or jointly; rather, the entire family owns the property.

Hindu Undivided Family: Lineal Descendants From a Common Ancestor

HUF is an entity that applies to and gives rights only to lineal descendants from a common ancestor as well as their wives and unmarried daughters. Married daughters are not considered members of their fathers’ families; instead, upon marriage, they become members of their husbands’ families.

These lineal descendants are called coparceners. They have the right to enjoy distributions from HUF and even have a right to demand partition in the HUF property.

Hindu Undivided Family: Management

The head of the family (called “karta”) manages the HUF property on behalf of the family. Usually, karta is a senior male, but recently women also started to occupy this role. Karta is prohibited from contributing property to HUF.

Hindu Undivided Family: Legal Classification Under Indian Law

HUF exists as a separate juridical entity for Indian tax purposes. It is defined on the basis of Hindu personal law. The Hindu personal law states that the joint and undivided family is a normal condition of Hindu society where all members of a Hindu family are living in a state of union.

It is important to emphasize this special legal position of HUF, because all other Indian entities are defined in the Indian company law. HUF is an exception in having Hindu personal law as its legal basis.

Hindu Undivided Family: Potential US Tax Classification

As of the time of this writing, the IRS has not ruled on the proper US tax classification of HUF. Therefore, at this time, we can only speculate about how the IRS will treat HUF under US tax law.

Under 26 CFR §301.7701-4(a) “trust” is defined as an arrangement created by will or by an inter vivos declaration whereby trustees take title to property for the purpose of protecting or conserving it for the beneficiaries under the ordinary rules provided in chancery or probate courts. Usually the beneficiaries of such a trust do no more than accept the benefits thereof and are not the voluntary planners or creators of the trust arrangement. However, the beneficiaries of such a trust may be the persons who create it and it will be recognized as a trust if it was created for the purposes of protecting or conserving the trust property for beneficiaries who stand in the same relation to the trust as they would if the trust had been created by others for them. Generally, an arrangement will be treated as a trust if it can be shown that the purpose of the arrangement is to vest in trustees responsibility for the protection and conservation of property for beneficiaries who cannot share in the discharge of this responsibility and, therefore, are not associates in a joint enterprise for the conduct of business for profit.

Thus, if it is established that HUF was created for the purpose of vesting trustees responsibility for the protection and conservation of property for beneficiaries and not to carry out business, then, it should be classified as a foreign trust under US tax law. If, however, the facts and circumstances in a particular case indicate that a HUF was established primarily for commercial purposes as opposed to the purpose of protecting or conserving property on behalf of the beneficiaries, then this HUF will most likely be classified as a business entity under §301.7701-2(a).

Additionally, there are certain additional features of HUF that may further support its classification as a foreign trust. For example, the role of karta appears to be analogous to a trustee in most cases, whereas coparceners are likely to be considered beneficiaries for US tax purposes (especially if they do not take any active role in the management of HUF property).

Thus, based on the analysis above, it appears that, in most cases, the IRS is likely to rule that HUF is a trust under US tax law. I want to emphasize the limitation “in most cases”; I believe that a US tax treatment of HUF will depend on the specific facts and circumstances concerning a specific HUF.

Hindu Undivided Family: US International Tax Compliance Implications

The precise US tax classification of HUF may have far-reaching consequences for US international tax compliance of coparceners who are US tax residents (i.e. green card holders or persons who satisfied the substantial presence test) and US citizens (collectively “US Persons”). A whole host of US international tax reporting requirements as well income tax requirements will apply to such individuals.

For example, if HUF is classified as a trust, then coparceners who are US persons may have to file Forms 3520 and 8938 as well as FBARs. Moreover, they may have to deal with the onerous consequences of the “throwback tax” on distributions of accumulated trust income. Other requirements may also apply in this situation.

If, however, HUF is classified as a corporation, then such coparceners may have to file Form 5471 and 8938. If this is a Controlled Foreign Corporation (“CFC”), they will have to deal with all kinds of anti-deferral regimes, including GILTI tax. If this is not a CFC, then the PFIC regime may be a problem. Again, additional requirements may apply in such situations.

If HUF is classified as a partnership, then Form 8865 will have to be filed every year and income from 8865 Schedule K-1 will have to be reported on such a coparcener’s US federal income tax return. Once again, additional requirements may apply in such situations.

Contact Sherayzen Law Office for Professional Help With Your US International Tax Obligations Concerning Hindu Undivided Family

If you are a coparcener who is a US Person, contact Sherayzen Law Office for professional help concerning your US international tax compliance. Sherayzen Law Office is a US-based tax law firm dedicated to helping clients in the United States and throughout the world with their US international tax compliance issues.

We have successfully helped hundreds of Indian clients with their US income tax compliance issues, and we can help you!

Contact Us Today to Schedule Your Confidential Consultation!