New 11 IRS Compliance Campaigns | International Tax Lawyer & Attorney

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On November 3, 2017, the IRS Large Business and International Division (“LB&I”) announced the rollout of additional 11 IRS Compliance Campaigns in addition to the 13 already existing campaigns. Most of these campaigns directly address the IRS concerns with respect to US international tax law compliance. Let’s explore these new 11 IRS Compliance Campaigns.

New 11 IRS Compliance Campaigns: What Does This Mean for Taxpayers?

The issue-based IRS Campaigns is the brand-new strategy of the IRS to maximize the utility of its strained resources. Unlike previous efforts, a Campaign basically focuses on a specific issue that may carry a significant non-compliance risk and, then, applies a variety of solutions (called “treatment streams”) to increase the compliance with respect to this issue. The treatment streams range from development of an externally published practice unit, potential published guidance to issue-based examinations.

From a taxpayer point of view, the new strategy means that, if the IRS announces a new campaign, US taxpayers associated with the risk issue at the heart of a new campaign are at increased audit risk.

New 11 IRS Compliance Campaigns: General Emphasis on International Tax Compliance

Seven out of total eleven campaigns are focused on international tax compliance. This means that the IRS continues to give priority to international tax enforcement. Hence, US taxpayers who own foreign assets or are involved in international business transactions are likely to be affected by the IRS campaigns and should make sure they are in full US tax compliance.

Let’s briefly describe each of the new 11 IRS Compliance Campaigns.

New 11 IRS Compliance Campaigns: 1120-F Chapter 3 and Chapter 4 Withholding

This campaign focuses upon verification of the withholding credits before the claim for refund or credit is allowed. To make a claim for refund or credit to estimated tax with respect to any U.S. source income withheld under chapters 3 or 4, a foreign entity must file a Form 1120-F. Before a claim for credit (refund or credit elect) is paid, the IRS must verify that withholding agents have filed the required returns (Forms 1042, 1042-S, 8804, 8805, 8288 and 8288-A).

In other words, this campaign is designed to verify withholding at source for 1120-Fs claiming refunds.

New 11 IRS Compliance Campaigns: Swiss Bank Program

A non-surprising new addition to campaigns that will focus on tax and FBAR noncompliance of US beneficial owners of Swiss bank and financial accounts. The IRS will draw on the materials supplied to the DOJ by Swiss Banks as part of the Swiss Bank Program.

New 11 IRS Compliance Campaigns: Foreign Earned Income Exclusion

This campaign is likely to affect US taxpayers who reside overseas. The campaign will focus on taxpayers who claimed Foreign Earned Income Exclusion, but did not meet the requirements for claiming them. The IRS will address noncompliance through a variety of treatment streams, including examination.

New 11 IRS Compliance Campaigns: Verification of Form 1042-S Credit Claimed on Form 1040NR

The campaign’s goal is to ensure the amount of withholding credits or refund/credit elect claimed on Forms 1040NR is verified and whether the taxpayer has properly reported the income reflected on Form 1042-S.

New 11 IRS Compliance Campaigns: Agricultural Chemicals Security Credit

The first of the new four domestic campaigns. The Agricultural chemicals security credit is claimed under Internal Revenue Code Section 45O and allows a 30 percent credit to any eligible agricultural business that paid or incurred security costs to safeguard agricultural chemicals. The credit is nonrefundable and is limited to $2 million annually on a controlled group basis with a 20-year carryforward provision. In addition, there is a facility limitation as outlined in Section 45O(b). The goal of this campaign is to ensure taxpayer compliance by verifying that only qualified expenses by eligible taxpayers are considered and that taxpayers are properly defining facilities when computing the credit. The treatment stream for this campaign is issue-based examinations.

New 11 IRS Compliance Campaigns: Deferral of Cancellation of Indebtedness Income

This is an interesting addition and a correct one to the campaigns; I also believe that this area suffers from high rate of noncompliance. This issue stems from the Great Recession of 2008; in 2009 and 2010, a lot of US taxpayers elected to defer their cancellation of indebtedness (“COD”) income incurred as a result of reacquisition of debt instruments at an issue price less than the adjusted issue price of the original instrument. Such taxpayers should have reported their COD income ratably over a period of five years beginning in 2014 through 2018.

Furthermore, whenever a taxpayer defers his COD income, any related original issue discount (OID) deductions on the new debt instrument, resulting from debt-for-debt exchanges that triggered the original COD must also be deferred ratably and in the same manner as the deferred COD income.

The goal of this campaign is to ensure taxpayer compliance by verifying that taxpayers (who properly deferred COD income in 2009 and 2010) actually properly reported it in subsequent years beginning in 2014. The campaign will also look at situations where an accelerating event occurred and required earlier recognition of income under IRC § 108(i). The treatment stream for this campaign is issue-based examinations. The use of soft letters is under consideration.

New 11 IRS Compliance Campaigns: Energy Efficient Commercial Building Property

The goal of this campaign is to ensure taxpayer compliance with the section 179D (Energy Efficient Commercial Building Deduction). Section 179D allows taxpayers who own or lease a commercial building to deduct the cost or portion of the cost of installing energy efficient commercial building property (EECBP). If the equipment is installed in a government-owned building, the deduction is allocated to the person(s) primarily responsible for designing the EECBP. The treatment stream for this campaign is issue-based examinations.

New 11 IRS Compliance Campaigns: Economic Development Incentives Campaign

The goal of this campaign is to ensure taxpayer compliance with respect to a variety of government economic incentives. These incentives include refundable credits (refunds in excess of tax liability), tax credits against other business taxes (for example, payroll tax), nonrefundable credits (refunds limited to tax liability), transfer of property and grants. The common problems targeted by this campaign are situation where taxpayers improperly treat government incentives as non-shareholder capital contributions, exclude them from gross income and claim a tax deduction without offsetting it by the tax credit received. The treatment stream for this campaign is issue-based examinations.

New 11 IRS Compliance Campaigns: Section 956 Avoidance

This campaign focuses on situations where a CFC loans funds to a US Parent (USP), but nevertheless does not include a Section 956 amount in income. The goal of this campaign is to determine to what extent taxpayers are utilizing cash pooling arrangements and other strategies to improperly avoid the tax consequences of Section 956. The treatment stream for this campaign is issue-based examinations.

New 11 IRS Compliance Campaigns: Corporate Direct (Section 901) Foreign Tax Credit

Domestic corporate taxpayers may elect to take a credit for foreign taxes paid or accrued in lieu of a deduction. The goal of the Corporate Direct Foreign Tax Credit (“FTC”) campaign is to improve return/issue selection (through filters) and resource utilization for corporate returns that claim a direct FTC under IRC section 901. This campaign will focus on taxpayers who are in an excess limitation position. The treatment stream for the campaign will be issue-based examinations. The IRS emphasized that this is just the first of several FTC campaigns. The IRS further specified that future FTC campaigns may address indirect credits and IRC 904(a) FTC limitation issues.

New 11 IRS Compliance Campaigns: Individual Foreign Tax Credit (Form 1116)

This campaign addresses taxpayer compliance with the computation of the foreign tax credit (“FTC”) limitation on Form 1116. Due to the complexity of computing the FTC and challenges associated with third-party reporting information, some taxpayers face the risk of claiming an incorrect FTC amount. The IRS will address noncompliance through a variety of treatment streams including examinations.

Sale of Russian Real Estate by US Residents | International Tax Lawyer

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Sale of Russian Real Estate by US permanent residents was the subject of a recent guidance letter from the Russian Ministry of Finance (“MOF”). Guidance Letter 03-04-05/66382 (dated October 11, 2011, but released only earlier this week) provides a thorough analysis of questions concerning the sale of real estate in Russia by a US resident and, eventually, comes to conclusion such a sale should be subject to a 30% tax rate. Let’s explore this recent MOF analysis in more detail.

Sale of Russian Real Estate: What is MOF Guidance Letter?

The closest US equivalent to the Russian MOF Guidance Letter is the IRS Private Letter Ruling (“PLR”). Similarly to PLR, the MOF Guidance Letters usually address a fairly specific situation and, generally, have a suggestive rather than normative value. A Guidance Letter does not have a precedential value (again similar to PLR). Nevertheless, the MOF Guidance Letters are good indicators of how the MOF would view similar situations and have a very strong persuasive value.

Sale of Russian Real Estate: Fact Pattern Addressed by Guidance Letter 03-04-05/66382

Guidance Letter 03-04-05/66382 specifically addresses a situation where an individual is a Russian citizen who has resided in the United States since 1996. It is not clear whether the individual actually received his green card in 1996 or he simply commenced to reside in the United States on a permanent basis in 1996. This individual wishes to dispose of (or already sold) a real property in Russia.

Sale of Russian Real Estate: Is the Sale Done by a Russian Taxpayer Who Is Subject to Russian Taxation?

The MOF begins its analysis by establishing that, in accordance with Section 1 of Article 207 of the Russian Tax Code (“Tax Code”), individuals who receive Russian-source income are Russian taxpayers for the purposes of the Russian income tax irrespective of whether they are Russian tax residents or not. Since Article 208, Section 1(5) states that income earned from the sale of Russian real estate is considered to be Russian-source income, an individual selling Russian real estate is considered to be a Russian taxpayer who is subject to Russian taxation.

Sale of Russian Real Estate: Is the Sale Done by a Russian tax resident?

The MOF then continued its analysis to determine whether, in the situation described in the Guidance Letter 03-04-05/66382, the individual is a Russian tax resident. I believe that this was the key reason why the individual in question requested the MOF Guidance letter: he was hoping that he would be found a Russian tax resident under the Russia-US tax treaty due to the fact that he had real estate in Russia (and, hence, subject to lower tax on the proceeds from sale).

The MOF analysis involved two steps: the determination of tax residency under the tax treaty between the United States and the Russian Federation (because the individual in question has resided permanently in the United States since 1996) and, then, the determination of tax residency under the domestic Russian tax laws.

First, the MOF stated that, pursuant to paragraph 1 of Article 4 of the Russia-US Tax Treaty, a person should be recognized as a permanent resident of a contracting state in accordance with the provisions of the national law of that state. In other words, the determination of who is a tax resident of the Russian Federation should be done under the Russian domestic tax law.

Here, the MOF also addressed the critical part of this Guidance Letter – does the ownership of Russian real estate matter for the purposes of establishing the Russian tax residency under the Treaty. The MOF determined that the factor of ownership of real estate matters only in cases where the owner of real estate is recognized as a resident of both contracting states in accordance with the national legislation of both, the United States and Russia. This is the most important part of the MOR Guidance Letter 03-04-05/66382.

Having made this determination, the MOF went into the second half of its analysis – those considered to be Russian tax residents under the Russian laws. According to Section 2 of Article 207 of the Tax Code, individuals are considered Russian tax residents if they are physically present in Russia for at least 183 calendar days within a period of 12 consecutive months. Since the individual in question did not satisfy the residency requirement of Article 207, the MOF determined that he was not a tax resident of the Russian Federation.

Sale of Russian Real Estate: Can Russia Tax the Proceeds from the Sale under the Russia-US Tax Treaty?

Having determined that the owner of the Russian Real Estate was not a Russian tax resident, the next issue was whether Russia can still tax the proceeds from the sale. The MOF stated that, under paragraph 3 of Article 19 of the Treaty, the gains from the sales of real estate located in one contracting state received by a permanent resident of the other contracting state can be taxed in accordance with the domestic tax legislation of the state where the property is located. Hence, Russia can tax the sale of Russian Real Estate made by a US permanent resident.

As a side note, Russia can also tax a disposition of shares or other rights of participation in the profits of a company in which Russian real estate makes up at least 50 percent of the assets.

Sale of Russian Real Estate: What is the Applicable Tax Rate?

The final point addressed by the MOF was the applicable tax rate for the sale of Russian real estate by a US permanent resident and a nonresident of Russia. Pursuant to Section 3 of Article 224 of the Tax Code, the MOF decided that tax rate in this situation should be 30 percent.

Contact Sherayzen Law Office for Professional International Tax Help

If you are looking for a professional advice concerning US international tax law, contact Sherayzen Law Office. Our legal team, headed by attorney Eugene Sherayzen, is highly experienced in US international tax law, including international tax compliance filing requirements, international tax planning and offshore voluntary disclosures.

Contact Us Today To Schedule Your Confidential Consultation!

2018 OVDP Changes Imminent | International Tax Lawyer & Attorney Update

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On October 26, 2017, the IRS sent a clear signal that OVDP changes are coming soon. The signal that the 2018 OVDP changes are imminent came from Mr. Daniel Price, an attorney with the IRS Office of Chief Counsel, Small Business/Self-Employed Division, who participated in a panel discussion of offshore accounts and compliance at the University of San Diego School of Law (at a Procopio International Tax Institute Annual Conference).

What Are the Main Reasons for the 2018 OVDP Changes?

There are four main reasons for the upcoming 2018 OVDP changes. First, the OVDP program has been heavily criticized for lack of transparency by tax lawyers and the National Taxpayer Advocate’s Nina Olson. Ms. Olson’s report in June of 2017 and the Freedom of Information Act requested from Tax Analysts forced the IRS to recently release its OVDP hotline guide.

Second, there is a very specific but painful and largely unaddressed issue of the relationship between bankruptcy and the ability to participate in the OVDP. As a reminder to readers, the OVDP FAQs currently require the payment of all liabilities, including the miscellaneous offshore penalty, with the submission of the OVDP voluntary disclosure package. Mr. Price stated that a new FAQ will be added to OVDP to specifically address whether taxpayers in bankruptcy or contemplating bankruptcy will be able to use the OVDP process.

Third, the value of the OVDP as an information collection tool has greatly diminished as a result of FATCA and other automatic information exchange mechanisms.

Finally, fewer and fewer taxpayers are participating in the OVDP. Between 2015 and 2016, only about 1,800 OVDP disclosures were made. At the same time, there were almost 18,000 Streamlined submissions made by US taxpayers in the United States and overseas.

Potential 2018 OVDP Changes: Could the OVDP Program End in 2018?

There is a possibility of the OVDP program ending in 2018. Such a dramatic development, however, may cut off any voluntary disclosure possibilities for willful taxpayers who wish to bring their US tax affairs into full compliance, but are too afraid to do so without a guarantee that they will not be criminally charged. For this reason, I believe that it is more likely that the OVDP program will be modified, but not cancelled.

Sherayzen Law Office Will Continue to Follow Any Potential 2018 OVDP Changes

Sherayzen Law Office will continue to monitor any new developments with respect to changes to the current OVDP. OVDP currently constitutes an integral part of our practice of international tax law and it remains one of the main voluntary disclosure options that every US taxpayer with past noncompliance should consider.

2018 FBAR Audits Set to Increase | IRS FBAR Audit Lawyer & Attorney

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2018 FBAR audits are set to increase at a dramatic pace. In this article, I would like to discuss what the FBAR audits are and why 2017-2018 will be the period of time when we believe that the FBAR audits will gain as a percentage of the overall IRS audits compared to earlier years.

2018 FBAR Audits and Sherayzen Law Office Predictions

As early as 2011, Sherayzen Law Office predicted that the FBAR audits would become more commonplace than ever a few years after FATCA was implemented. Once FATCA was implemented in July of 2014, we confirmed our prediction and refined it to specifically identify 2017 and 2018 FBAR audits as the years of larger than average increases. Obviously, the increase in FBAR audits will go hand in hand with the jump in FBAR litigation by the US Department of Justice.

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2018 FBAR Audits: How Do FBAR Audits Differ from Regular IRS Audits?

The public is generally familiar to a certain degree with regular IRS Audits of US tax returns. In general, in a regular audit, the IRS contacts the taxpayer or his representative and conducts a thorough review of the taxpayer’s tax returns selected for examination.

So, are FBAR Audits different from the regular US tax return audits? The answer is: “yes” and “no”. In terms of the actual procedure (i.e. the IRS contacting the taxpayer and the taxpayer’s representative and doing a thorough examination), there are no large differences, though, the fact that FBARs come under Title 31 does affect certain procedures.

However, in terms of issues involved, the FBAR audits can be vastly different, because they would involve not only the issues that are a concern during a regular IRS audit of a tax return, but also FBAR-specific issues. In other words, the FBAR audit will likely involve all of the features of the audit concerning US tax returns (especially, with respect to verification that all foreign income was properly disclosed) and FBAR -specific issues concerning the accuracy of the reported foreign account and foreign income information.

Moreover, it should be remembered that FBAR has a draconian penalty system. Hence, the stakes in the FBAR audit are much higher than those of a regular IRS audit.

Finally, FBAR audits may often lead to FATCA compliance issues, particularly Form 8938 compliance. FBAR audits may also trigger the audit of other information returns, including Form 3520 with respect to foreign gifts and inheritance.

Thus, while FBAR audits may seem procedurally similar to regular IRS audits (though, as I had pointed out above, this similarity is superficial to a large degree), the scope of the FBAR audit, the issues involved, the “expansion” effect and the stakes involved (in terms of potential penalties) make FBAR audits far more dangerous to US taxpayers than regular IRS audits of US tax returns.

Why Should We Expect to See An Increase in 2017 and 2018 FBAR Audits?

The increase in 2017 and 2018 FBAR audits is driven primarily by FATCA and other automatic information exchange mechanisms (including those provided for in bilateral treaties). Since the UBS case in 2008, the IRS has seen a steady increase of data inflow from overseas concerning foreign accounts owned and/or controlled by US taxpayers.

This stream of data became a torrential river after the implementation of FATCA in 2014 and the increase in the bilateral and multilateral automatic information exchange mechanisms since 2011. In fact, the IRS has received so much data that it has not even been able to properly process and organize it yet.

However, even with the small percentage of the data that was actually properly processed, the IRS received a treasure trove of information concerning unreported foreign accounts and noncompliant US taxpayers. This new data has already led to a steady increase of IRS investigations during the years 2015-2016. Given the fact that a much larger amount of data will be processed in 2017 and 2018, the number of IRS investigations and FBAR audits should increase dramatically in 2017-2019.

An indirect confirmation of this conclusion is the recent surge in the US Department of Justice FBAR litigation. We fully expect the FBAR audits to follow the same path of intensification in 2017-2019.

What Should You Do If the IRS Selects You for FBAR Audit?

If the IRS contacts you concerning examination of your FBARs or your US tax returns with Forms 8938 and/or foreign income, you should contact Sherayzen Law Office for professional help as soon as possible. Our firm specializes in helping taxpayers like you with the IRS audits of any US international information returns, including FBARs and Forms 8938.

The owner of Sherayzen Law Office, Mr. Eugene Sherayzen, is an international tax attorney with an almost unique experience of helping US taxpayers at all stages of US international tax compliance: annual compliance, offshore voluntary disclosures, FBAR Audits and FBAR litigation in federal courts. This experience has allowed Mr. Sherayzen to have a unique perspective on FBAR Audits which allows him to be a highly effective advocate of his clients’ positions before the IRS.

Contact Us Today to Schedule Your Confidential Consultation!

FBAR Safe Deposit Box Reporting | FBAR Tax Lawyer & Attorney

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One of the most common questions that US taxpayers have is regarding FBAR Safe Deposit Box reporting requirements. While the general answer is clear, there may be complications in certain cases.

General FBAR Safe Deposit Box Reporting Requirements

In general, a safe deposit box is not considered to be a financial account and, therefore, not reportable on FBAR.

This is a general rule and it is important to understand that it applies only to a safe deposit box – i.e. an individually secured container, usually held within a larger safe or bank vault. It is important to understand that the bank vault itself is NOT a safe deposit box. In fact, if you were to store gold in a bank vault with bank employees able to directly and legally access the contents of your storage, you would create a reportable account.

The most common example of accounts created by storing items in a bank vault are precious metals, particularly gold and silver (but also any other similar accounts, such as rare minerals accounts).

Exception: FBAR Safe Deposit Box Reporting May Arise If Custodial Relationship Is Established With Respect to the Safe Deposit Box

The great majority of cases are easily resolved under the general rule. However, as I hinted at above, an FBAR safe deposit box reporting requirement may arise if the owner of a safe deposit box enters into a custodial relationship with respect to this safe deposit box.

In such situations, a foreign financial institution is usually given direct legal access to the safe deposit box, is responsible for the safety of its contents and may change the contents according to the instructions from the box’s owner. Of course, in such a case, a safe deposit box can hardly be called in such a way and becomes very similar to a regular bank vault account.

This exception is very rare. I have personally encountered such exceptions only in the context of precious metals accounts.

Contact Sherayzen Law Office for Professional Help With Your FBAR Reporting Requirements

If you need professional help with your FBAR filings, or if you have not timely filed your FBARs for past years and need to resolve your past tax noncompliance, please contact Sherayzen Law Office. Our experienced legal team of tax professionals, headed by our international tax attorney Eugene Sherayzen, will thoroughly analyze your case, determine the US tax reporting requirements that may apply to your case, develop your voluntary disclosure plan and implement it.

Contact Us Today to Schedule Your Confidential Consultation!