July 2019 IRS Compliance Campaigns | International Tax Lawyer & Attorney

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On July 19, 2019, the IRS Large Business and International division (LB&I) announced the approval of another six compliance campaigns. Let’s discuss in more detail these July 2019 IRS compliance campaigns.

July 2019 IRS Compliance Campaigns: Background Information

In the mid-2010s, after extensive tax planning, the IRS decided to restructure LB&I in a way that would focus the division on issue-based examinations and compliance campaign processes. The idea was to let LB&I itself decide which compliance issues presented the most risk and required a response in the form of one or multiple treatment streams to achieve compliance objectives. The IRS came to the conclusion that this was the most efficient approach that assured the best use of IRS knowledge and appropriately deployed the right resources to address specific noncompliance issues.

The first thirteen campaigns were announced by LB&I on January 13, 2017. Then, the IRS added eleven campaigns on November 3, 2017, five campaigns on March 13, 2018, six campaigns on May 21, 2018, five campaigns on July 2, 2018, five campaigns on September 10, 2018, five campaigns on October 30, 2018 and three campaigns on April 16, 2019. With the additional six July 2019 IRS compliance campaigns, the IRS has created a total of fifty-nine total IRS compliance campaigns.

Six New July 2019 IRS Compliance Campaigns

The six new campaigns are: S-Corporations Built-in Gains Tax, Post-OVDP Compliance, Expatriation, High Income Non-Filers, US Territories – Erroneous Refundable Credits and Section 457A Deferred Compensation Attributable to Services Performed before January 1, 2009. As you can see, the new campaigns continue to maintain the IRS focus on US international tax compliance. Let’s discuss each campaign in more detail.

July 2019 IRS Compliance Campaigns: S-Corporations Built-in Gains Tax

This campaign actually focuses on a C-corporation that converted to S-corporation. The main issue here is the Built-in Gains (“BIG”) tax. If a C-corporation has a net unrealized built-in gain, converts to S-corporation and sells assets within five years after the conversion, then it will likely be subject to the BIG tax. The BIG tax is assessed to the S-corporation (this is why the campaign is named in this manner).

LB&I has found that S corporations are not always paying this tax when they sell the C-corporation’s assets after the conversion. LB&I has developed comprehensive technical content for this campaign that will aid revenue agents as they examine the issue. The goal of this campaign is to increase awareness and compliance with the law as supported by several court decisions. Treatment streams for this campaign will be issue-based examinations, soft letters, and outreach to practitioners.

July 2019 IRS Compliance Campaigns: Post-OVDP Compliance

This is an IRS campaign of an especially high interest for international tax lawyers, because it targets specifically taxpayers who went through the IRS Offshore Voluntary Disclosure Program (“OVDP”). The IRS noticed that some taxpayers again became noncompliant after they went through the OVDP.

The campaign will specifically target post-OVDP taxpayers who failed to remain compliant with their foreign income and asset reporting requirements. The IRS will address tax noncompliance through soft letters and examinations.

July 2019 IRS Compliance Campaigns: Expatriation

This is another IRS campaign of high interest to international tax attorneys. US citizens and long-term residents (defined as lawful permanent residents in eight out of the last fifteen taxable years) who expatriated on or after June 17, 2008, may not have met their filing requirements or tax obligations. The Internal Revenue Service will address noncompliance through a variety of treatment streams, including outreach, soft letters, and examination.

July 2019 IRS Compliance Campaigns: High Income Non-Filers

This campaign again focuses on US international tax law. In particular, the campaign targets high-income US citizens and resident aliens who receive compensation from overseas that is not reported on a Form W-2 or Form 1099. IRS audits are going to be the main treatment stream for this campaign.

July 2019 IRS Compliance Campaigns: US Territories – Erroneous Refundable Credits

Some bona fide residents of US territories are erroneously claiming refundable tax credits on Form 1040. This campaign will address noncompliance through a variety of treatment streams including outreach and traditional examinations.

July 2019 IRS Compliance Campaigns: Section 457A Deferred Compensation Attributable to Services Performed before January 1, 2009

This campaign addresses compensation deferred from nonqualified entities attributable to services performed before January 1, 2009. In general, IRC Section 457A requires that any compensation deferred under a nonqualified deferred compensation plan shall be includible in gross income when there is no substantial risk of forfeiture of the rights to such compensation. The campaign objective is to verify taxpayer compliance with the requirements of IRC Section 457A through issue-based examinations.

Contact Sherayzen Law Office for Professional Tax Help

If you have been contacted by the IRS as part of any of its campaigns, contact Sherayzen Law Office for professional help. We have helped hundreds of US taxpayers around the world with their US tax compliance issues, and we can help you!

Contact Us Today to Schedule Your Confidential Consultation!

Child’s FBAR Requirements | FBAR Tax Lawyer & Attorney

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I often receive questions concerning a child’s FBAR requirements. Many taxpayers automatically assume that, if their children are below the age of majority, these children do not have to file FBARs. Unfortunately, this is not the case – a child’s FBAR requirements are every bit as extensive of those of his parents.

Child’s FBAR Requirements: FBAR Background Information

A US Person must file FinCEN Form 114, the Report of Foreign Bank and Financial Account, commonly known as “FBAR”, if he has a financial interest in or a signatory authority or any other authority over a foreign financial account and the highest value of this account (in the aggregate with any other foreign accounts of this US person) is in excess of $10,000. FBAR is filed separately from the tax return.

Failure to file FBAR can lead to very high penalties. In fact, FBAR has the most severe penalty system in comparison to any other forms related to foreign accounts; it includes even criminal penalties. Even when a person was not willful in his non-filing of FBAR, he may still be subject to FBAR non-willful civil penalties of up to $10,000 (as adjusted for inflation) per account per year.

Child’s FBAR Requirements: Age Does Not Matter

The gruesome consequences of a failure to file FBAR make the determination of who is required to file FBARs one of the most important tasks of an international tax lawyer. This is why understanding a child’s FBAR requirements is so important. Let’s clarify this issue right now.

The rule is that a US Person is subject to the FBAR filing requirement regardless of his age. In other words, even an infant must file an FBAR.

Hence, it is important for an international tax lawyer (and his clients) to always check whether minor children have any foreign accounts. A typical fact pattern in this context involves situations where grandparents set up foreign savings accounts for their US grandchildren.

It is especially important to keep this in mind during an offshore voluntary disclosure. Oftentimes, a voluntary disclosure is focused on parents; children’s accounts are often neglected.

Child’s FBAR Requirements: FBAR Filing

Generally, a child is responsible for filing his own FBAR. Again, this responsibility arises irrespective of the age of the child.

The IRS understands, however, that a child would normally be unable to file his own FBARs. In such cases, the responsibility for filing FBARs is placed on the legally responsible person (such as parents, guardians, et cetera). The legally responsible person will be allowed to sign and file FBARs on behalf of the child.

Contact Sherayzen Law Office With Respect to Your Child’s FBAR Requirements

If your child has foreign accounts, contact Sherayzen Law Office for professional FBAR help. We have helped hundreds of US taxpayers around the world with their FBAR obligations, and We Can Help You!

Contact Us Today to Schedule Your Confidential Consultation!

2019 Fourth Quarter IRS Interest Rates | PFIC Tax Lawyers

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On August 28, 2019, the Internal Revenue Service (“IRS”) announced that the 2019 Fourth Quarter IRS underpayment and overpayment interest rates will not change from the 3rd Quarter of 2019. This means that, the 2019 Fourth Quarter IRS underpayment and overpayment interest rates will be as follows:

  • five (5) percent for overpayments (four (4) percent in the case of a corporation);
  • two and one-half (2.5) percent for the portion of a corporate overpayment exceeding $10,000;
  • five (5) percent for underpayments; and
  • seven (7) percent for large corporate underpayments.

Under the Internal Revenue Code, the rate of interest is determined on a quarterly basis. The IRS used the federal short-term rate for July of 2019 to determine the 2019 Fourth Quarter IRS interest rates The IRS interest is compounded on a daily basis.

2019 Fourth Quarter IRS interest rates are important for many reasons. These are the rates that the IRS uses to determine how much interest a taxpayer needs to pay on an additional tax liability that arose as a result of an IRS audit or an amendment of his US tax return. The IRS also utilizes these rates with respect to the calculation of PFIC interest on Section 1291 tax.

As an international tax law firm, Sherayzen Law Office keeps track of the IRS underpayment interest rates on a regular basis. We often amend our client’s tax returns as part of an offshore voluntary disclosure process. For example, both Streamlined Domestic Offshore Procedures and Streamlined Foreign Offshore Procedures require that a taxpayer amends his prior US tax returns, determines the additional tax liability and calculates the interest on this liability.

Moreover, we very often have to do PFIC calculations for our clients under the default IRC Section 1291 methodology. This calculation requires the usage of the IRS underpayment interest rates in order to determine the amount of PFIC interest on the IRC Section 1291 tax.

Finally, it is important to point out that the IRS will use the 2019 Fourth Quarter IRS overpayment interest rates to determine the amount of interest that needs to be paid to a taxpayer who is due a tax refund as a result of an IRS audit or amendment of the taxpayer’s US tax return. Surprisingly, we often see this scenario arise in the context of offshore voluntary disclosures.

Sherayzen Law Office Successfully Completes its 2019 Fall Tax Season

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On October 15, 2019, Sherayzen Law Office, Ltd., successfully completed its 2019 Fall Tax Season. It was a challenging and interesting tax season. Let’s discuss it in more detail.

2019 Fall Tax Season: Sherayzen Law Office’s Annual Compliance Clients

Annual tax compliance is one of the major services offered by Sherayzen Law Office to its clients. The majority of our annual compliance clients are individuals and businesses who earlier retained our firm to help them with their offshore voluntary disclosures. They liked the quality of our services so much that they preferred our firm above all others to assure that they stay in full compliance with US tax laws.

It is natural that this group of clients is the largest among all other groups, because the unique specialty of our firm is conducting offshore voluntary disclosures.

A smaller group of our annual compliance clients consists of tax planning clients who also asked Sherayzen Law Office to do their annual compliance for them.

Finally, the last group of our annual compliance clients consists of businesses and individuals who were referred to our firm specifically for help with their annual compliance. These are usually foreign businesses who just expanded to the United States and foreign executives and professionals who just arrived to the United States to start working here.

2019 Fall Tax Season: Sherayzen Law Office’s Annual Compliance Services

Virtually all of our clients have exposure to foreign assets and international transactions. Hence, in addition to their domestic US tax compliance, Sherayzen Law Office prepares the full array of US international tax compliance forms related to foreign accounts (FBAR and Form 8938), PFIC calculations (Forms 8621), foreign business ownership and Section 367 notices (Forms 926, 5471, 8858, 8865, et cetera), foreign trusts (Form 3520 and Form 3520-A), and other relevant US international tax compliance issues.

2019 Fall Tax Season: Unique Challenges and Opportunities

The 2019 Fall Tax Season was especially challenging because of the record number of deadlines that needed to be completed. During the season, Sherayzen Law Office filed hundreds of FBARs, US income tax returns and US international tax returns such as Forms 3520, 5471, 8865, 8621 and 926.

The great time pressure created opportunities for our firm to further streamline our tax preparation and scheduling processes, ultimately creating an even more efficient yet still comprehensive and detail-oriented organization.

The 2019 Fall Tax Season was unique in one more aspect – the implementation of the 2017 tax reform changes. The 2017 Tax Cuts and Jobs Act (“TCJA” or “2017 tax reform”) introduced the most radical changes to the Internal Revenue Code since 1986. Form 1040 was greatly modified and numerous other US domestic tax laws and forms were affected.

The greatest change, however, befell the US international tax law, particularly US international corporate tax law. The introduction of GILTI (Global Intangible Low-Taxed Income) tax, FDII (Foreign-Derived Intangible Income) deduction, full participation exemption and many other rules and regulations has profoundly modified this area of law.

No form felt these changes greater than Form 5471. Due to the 2017 tax reform, it has almost tripled in size and has acquired a qualitatively new level of complexity. Many new questions appeared and only some of them were definitely resolved by the IRS in the summer of 2019 when it issued new regulations.

Since Sherayzen Law Office has a lot of clients who own partially or fully foreign corporations, Forms 5471 were a constantly-present challenge during the 2019 Fall Tax Season. Nevertheless, we were able to timely complete all Forms 5471 for all of clients. We were even able to develop and incorporate important strategic and tactical tax planning techniques, such as IRC Section 962 election, helping our clients lower their tax burden.

Looking Forward to Completing Offshore Voluntary Disclosures, End-of-Year Tax Planning and 2020 Spring Tax Season

Having completed such a difficult 2019 Fall Tax Season, Sherayzen Law Office now looks forward to working on the offshore voluntary disclosures and IRS audits through the end of the year. We also have a sizeable portfolio of end-of-year tax planning cases. Finally, we look forward to the 2020 Spring Tax Season for the tax year 2019.

If you have foreign assets or foreign income, contact Sherayzen Law Office for professional help. Our firm specializes in US international tax compliance. We have helped hundreds of US taxpayers to bring themselves into full compliance with US tax laws, and We Can Help You!

Contact Us Today to Schedule Your Confidential Consultation!

Fundamental Form 5471 Concepts | Form 5471 Tax Lawyer & Attorney

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Form 5471 is the most important information return that the IRS uses to collect information about foreign corporations with substantial US ownership. US taxpayers must file a Form 5471 with their US tax returns; failure to do so may result in the imposition of significant IRS penalties. In order to identify whether the IRS requires them to file Form 5471, US taxpayers must at the very least understand the following three fundamental Form 5471 concepts: “US Person”, “US Shareholder” and “Controlled Foreign Corporation” (“CFC”). This article introduces readers to these fundamental Form 5471 concepts.

Fundamental Form 5471 Concepts: US Person

The definition of “US Person” is crucial to understanding your Form 5471 filing requirements. Generally, the definition of a US person includes the following categories of taxpayers: US citizens, US tax residents, a domestic partnership, a domestic corporation, certain trusts and certain estates. It should be pointed out that tax-exempt entities can also be US persons.

In order for a trust to be a US Person, it must not be a foreign trust; in other words, it must satisfy the legal tests set forth in the Internal Revenue Code (“IRC”) §7701(a)(30). The first test is that a court within the United States is able to exercise primary jurisdiction over the trust’s administrative issues. The second test is that a US person has authority to make all important discretionary decisions which cannot be vetoed by a non-US person.

In order for an estate to be a US person, it must not be a foreign estate as defined in the IRC §7701(a)(31).

Fundamental Form 5471 Concepts: US Shareholder

The concept of US shareholder is also very important for understanding one’s Form 5471 obligations. The definition of a US shareholder was recently modified by the 2017 Tax Cuts and Jobs Act (“TCJA”).

A “US shareholder” is a US Person who owns either: (a) 10% or more of the total combined voting power of all classes of voting stock of a foreign corporation; or (b) 10% or more of the value of all the outstanding shares of a foreign corporation. The latter rule (10% ownership of the total value of shares) is applicable starting a tax year of a foreign corporation that begins after December 31, 2017.

It is important to point that “ownership” can be direct, indirect or constructive within the meaning of IRC §958(a) and §958(b).

Fundamental Form 5471 Concepts: Controlled Foreign Corporation

Owners of shares in a CFC face a far greater Form 5471 compliance burden than owners of shares in foreign corporations which are not CFCs. Hence, the concept of CFC is extremely important to identifying your Form 5471 obligations.

A CFC is a foreign corporation with US shareholders that own on any day of its tax year, more than 50% of either (1) the total combined voting power of all classes of its voting stock, or (2) the total value of its stock. Again, the “ownership” can be direct, indirect or constructive within the meaning of IRC §958(a) and §958(b).

The 2017 tax reform made profound changes to the definition of CFC. Many foreign corporations which were not CFCs under the pre-TCJA rules have been re-classified as CFCs starting tax year 2018.

Contact Sherayzen Law Office for Professional Help With Your Form 5471 Compliance

If you are a US person with an ownership interest in a foreign corporation of 10% or more, you may have extensive Form 5471 reporting obligations. Given the extreme complexity of the form and the high penalties associated with Form 5471 noncompliance, it is important secure the professional and experienced help of Sherayzen Law Office.

Contact Us Today to Schedule Your Confidential Consultation!