International Tax Attorney Minnesota Minneapolis

FATCA at Home: Crackdown on Foreigners’ Accounts in U.S. banks

/in , /by

As the IRS engages in negotiations with foreign governments to implement FATCA (Foreign Account Tax Compliance Act) overseas, there is a rising pressure from some countries for reciprocity – the implementation of FATCA-like disclosure of foreign clients’ U.S. accounts to those clients’ home governments.

FATCA Background

FATCA was enacted in 2010 and set to begin taking effect at the end of 2013. FATCA is the mother of many new international tax requirements. One of the most unique features of FATCA (and most relevant for the purposes of this article) is requiring foreign banks to disclose information about the accounts of U.S. persons to the IRS. The goal of this provision is, of course, to expose U.S. persons who are trying to avoid the payment of U.S. taxes through undisclosed offshore accounts.

IRS Engages In Negotiations With Foreign Governments to Implement FATCA

In order to effectively implement FATCA requirements, the Department of the Treasury has to secure the cooperation of foreign governments (especially since disclosure of information required by FATCA may constitute a violation of some countries’ privacy laws). This is why the IRS is engaged in negotiations with a broad range of foreign governments (actually, over 50 foreign jurisdictions) to implement the information reporting and withholding tax provisions of FATCA.

The Department of the Treasury pursues the policy of concluding a series of bilateral tax agreements based on the model treaty developed by the Treasury.

The Treasury Department has already concluded a bilateral agreement with the United Kingdom, Ireland, Denmark and Mexico. Additional jurisdictions with which Treasury is in the process of finalizing an intergovernmental agreement and with which Treasury hopes to conclude negotiations by year end include: France, Germany, Italy, Spain, Japan, Switzerland, Canada, Denmark, Finland, Guernsey, Ireland, Isle of Man, Jersey, Mexico, the Netherlands, and Norway.

Jurisdictions with which Treasury is actively engaged in a dialogue towards concluding an intergovernmental agreement include: Argentina, Australia, Belgium, the Cayman Islands, Cyprus, Estonia, Hungary, Israel, Korea, Liechtenstein, Malaysia, Malta, New Zealand, the Slovak Republic, Singapore, and Sweden. Treasury expects to be able to conclude negotiations with several of these jurisdictions by year end.

The jurisdictions with which Treasury is working to explore options for intergovernmental engagement include: Bermuda, Brazil, the British Virgin Islands, Chile, the Czech Republic, Gibraltar, India, Lebanon, Luxembourg, Romania, Russia, Seychelles, Sint Maarten, Slovenia, and South Africa.

Push for Reciprocity from Foreign Governments

As the implementation of FATCA begins, however, the ancient Roman principle of “quid pro quo” seems to have become the theme of the IRS negotiations with foreign governments. It appears that some countries, possibly including France, Germany and China, are demanding reciprocity in the disclosure – i.e. if their banks have to disclose to the IRS the foreign accounts of U.S. persons, then U.S. banks should also disclose U.S. accounts of foreign nationals.

U.S. Positively Responds to Reciprocity Requests

It appears that the general trend in the Obama administration is to agree with the foreign governments and engage in partial or even full reciprocity. The Department of the Treasure spokesman stated that: “the United States is committed to a policy of transparency and equivalence, where appropriate, in furtherance of international cooperation to combat offshore tax evasion.”

Actually, according to an October 2012 letter to members of Congress from the Assistant Secretary for Tax Policy, Mark Mazur, the completed FATCA pacts already include commitments “to pursue equivalent levels of reciprocal automatic exchange in the future.” Moreover, the United States appears to have already shared some taxpayer information with foreign countries with which it has a tax treaty or a formal information-sharing agreement. The IRS this year started disclosing to some foreign governments information about bank interest payments earned by their citizens with U.S. bank accounts.

Mexican Nationals Maybe Impacted First, but Europeans May Follow Soon

Despite the impression that reciprocity is mainly a demand of the European government, it appears that Mexican nationals may be the first to feel the impact of disclosure, especially since, as mentioned above, the IRS already started disclosing bank interest payments to some foreign governments, including possibly Mexico.

However, while Mexicans may be the first affected by the reciprocity disclosures, it appears that it will be only a matter of time before the European nationals will be affected. This particularly concerns the French and German nationals.

FBAR Filing: FinCEN’s Third Extension for Certain Signatory Authority Filers

/in , /by

In FinCEN Notice 2012-2, the Financial Crimes Enforcement Network (FinCEN) announced a third extension of time for certain Report of Foreign Bank and Financial Accounts (FBAR) filings in light of ongoing consideration of questions regarding the filing requirement and its application to individuals with signature authority over but no financial interest in certain types of accounts. The new extended deadline is set for June 30, 2014.

This extended filing deadline applies only to the following classes of individuals:

1). An employee or officer of a covered entity (see 31 C.F.R. § 1010.350(f)(2)(i)-(v)) who has signature or other authority over and no financial interest in a foreign financial account of another entity more than 50 percent owned, directly or indirectly, by the entity (a “controlled person”). For this purpose, a “controlled person” is a U.S. or foreign entity that is more than 50% owned (directly or indirectly) by an excepted entity.
2). An employee or officer of a controlled person of a covered entity (see 31 C.F.R. § 1010.350(f)(2)(i)-(v)) who has signature or other authority over and no financial interest in a foreign financial account of the entity or another controlled person of the entity.
3). An employee or officer of an investment advisor registered with the Securities and Exchange Commission who has signature or other authority over and no financial interest in a foreign financial account of persons that are not investment companies registered under the Investment Company Act of 1940.

Notice that categories 1 and 2 do not apply to companies that are not publicly traded or not SEC-registrants.

This extension comes after a series of earlier extensions by FinCEN. On February 14, 2012, FinCEN issued Notice 2012-1 to extend the filing date for FinCEN Form 114 Formerly TD F 90-22.1, FBAR, for certain individuals with signature authority over but no financial interest in one or more foreign financial accounts to June 30, 2013. This Notice was preceded by two earlier extensions: on May 31, 2011, FinCEN issued Notice 2011-1 (revised on June 2, 2011) to extend to June 30, 2012, the due date for filing the FBAR for certain individuals with signature authority over but no financial interest in one or more foreign financial accounts, specifically individuals whose FBAR filing requirements may be affected by the signature authority filing exceptions in 31 CFR § 1010.350(f)(2)(i)-(v). On June 17, 2011, FinCEN issued Notice 2011-2 similarly extending the FBAR filing due date to June 30, 2012, for certain employees or officers of investment advisers registered with the Securities and Exchange Commission who have signature authority over but no financial interest in certain foreign financial accounts.

The extension contained in FinCEN Notice 2012-2 is the third filing extension for individuals with signature authority over but no financial interest in certain types of accounts. It covers not only the reporting of signature authority held by such persons for 2012, but also for all other years for which filing was previously extended to June 30, 2012, under FinCEN Notices 2011-1 and 2011-2.

It is important to note, however, that all other taxpayers who are required to file an FBAR must still do so by June 30, 2013.

Retiring in Panama – Tax Traps for U.S. taxpayers

/in , /by

In recent years, a new retirement trend emerged among U.S. citizens – retirement abroad in relatively peaceful countries of Latin America. Panama appears to be one of the preferred destinations. Retirement is a process, though, and it takes time to set up properly. Therefore, U.S. citizens typically start their preparation for retirement abroad in theirs 50s, before they actually retire. In this article, I wish to discuss some of the most prominent U.S. tax issues that these potential retirees may face.

Typical Retirement Process

At lot of U.S. citizens who make the decision to retire in Panama start the process by retaining a local attorney to acquire land. They open up an account in Panama to finance the deal. Then, they sign a contract with a construction company to build a house. At that point, most Panamanian lawyers typically advise to organize a Panamanian corporation and put the house into the corporation for the purported reasons of liability and privacy. The house construction is then financed by the owner’s funds through new Panamanian corporate accounts. After the house is built, the lawyers will then attempt to obtain an exoneration of the property from Panamanian taxation for a fixed number of years allowed by law.

Throughout the process, the U.S. citizens are advised by Panamanian tax advisors that there are not tax consequences for structuring the retirement home purchase and construction through a corporation.

Tax Problems with this Process

Despite the apparent innocence of this project, there are potentially large problems with it if the U.S. tax citizens are not independently advised of the U.S. tax consequences of structuring their retirement in this manner.

Let’s take this scenario apart and focus on the three most common problems here. First, the opening of the bank accounts. If the aggregate balance on these accounts exceeds $10,000, then the Report on Foreign Bank and Financial Accounts must be filed by U.S. taxpayers. Failure to do so may bring tremendous IRS penalties, civil and criminal.

The interesting point here is that, in calculation of the aggregate $10,000 balance, a U.S. taxpayer should take into account the corporate accounts over which he has signature authority if owns more than 50% of the corporation (directly or constructively).

Second, organizing a Panamanian corporation owned by U.S. taxpayers may bring forth another highly-complicated U.S. tax compliance feature – Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations. Depending on the asset valuation (under US GAAP) and some other features of the corporation, Form 5471 can become a truly monstrous compliance requirement for this seemingly simple transaction of buying a retirement house through a corporation. Failure to file Form 5471 can lead to substantial penalties depending on circumstances.

Third, there is a new Form 8938 that requires U.S. taxpayers to disclose information with respect to specified foreign assets as long as these assets exceed a certain threshold. The Form has its own penalty structure.

The truly tragic aspect of this scenario is that a large number of Panamanian attorneys are completely oblivious to these U.S. tax reporting requirements as well as the penalties associated with them. Therefore, they fail to advise their U.S. clients about these IRS requirements and that the clients should consult a U.S. tax attorney experienced in these matters.

This is why it is highly important that you consult with a U.S.-based international tax attorney regarding U.S. tax consequences of your particular foreign retirement plan.

Contact Sherayzen Law Office to Learn About U.S. Tax Consequences of Your Foreign Asset Ownership and Retirement

The above article does not summarize all of the tax forms that should be filed in such situations, but merely points out the most prominent ones.  The exact U.S. tax compliance requirements will also depend on your particular situation.

If you are a U.S. citizen who is planning to retire in Panama or you wish own a property or do business there, you should contact Sherayzen Law Office. Our experienced international tax firm will analyze your situation in depth and offer professional legal advice with respect to your particular situation.

IRS Revenue Procedure 92-70 (1992-2 C.B. 435)

/1 Comment/in , /by

SECTION I. PURPOSE

This revenue procedure provides a summary filing procedure for filing Form 5471 with respect to dormant foreign corporations described in section 3 below. Persons complying with this revenue procedure satisfy their Form 5471 filing obligations under sections 6038(a)(1), 6038(a)( 4), and 6046(a)(3) with respect to dormant foreign corporations and will not be subject to penalties related to the failure to timely file a complete Form 5471 and to timely furnish information requested thereon.

SEC. 2. BACKGROUND

.01 Section 6038(a)(l) imposes information reporting requirements on any United States person who controls a foreign corporation. Pursuant to section 6038(a)(4), the information reporting requirements prescribed in section 6038 (a)( 1) also are imposed on any United States person who is treated as a United States shareholder of any foreign corporation that is treated as a controlled foreign corporation for any purpose under subpart F.

.02 Section 6046(a)(3) imposes reporting requirements on each person who is treated as a United States shareholder of a controlled foreign corporation under section 953(c).

.03 Section 1.6038-2 of the Income Tax Regulations requires a United States person controlling a foreign corporation to file an annual information return on Form 5471 specifying certain identifying information, stock, shareholder, earnings and profits, and financial information about the foreign corporation, as well as transactions between the foreign corporation, the filer, certain other shareholders, and entities related to the filer or the foreign corporation.

.04 Section 1.6038-2(j)(1) of the regulations allows two or more U.S. persons who are required to furnish information with respect to the same foreign corporation and for the same period to satisfy this obligation by filing a joint return. Pursuant to section 1.6038-2(j)(2) of the regulations, a U.S. person required to furnish information solely by reason of stock ownership attribution from another U.S. person is excepted from furnishing information if he does not directly own an interest in the corporation and all such required information otherwise is furnished by the person from whom the ownership is attributed. Section 1.6038-2(j)(3) of the regulations requires any U.S. person relying on section 1.6038-2(j)(1) or (2) to file a statement with his income tax return indicating that his filing liability will be satisfied by another return, identifying that return, and identifying the place of return filing.

.05 Section 1.6046-1(e)(1) of the regulations allows two or more U.S. persons who are required by section 1.6046-l(c) of the regulations to file a return with respect to the same corporation to satisfy this obligation by filing a joint return. Under section 1.6046-l(e)(4)(iii) of the regulations, a U.S. person required to file a return under section 1.6046-1(c) is excepted from this filing requirement if he is required to file solely by reason of stock ownership attribution from another U.S. person, he does not directly own an interest in the foreign corporation, and the information required by section 1.6046-1(c) is otherwise furnished by the U.S. person from whom the ownership is attributed. Pursuant to section 1.6046-1(e)(5) of the regulations, any U.S. person required by section 1.6046-1(c) to furnish information regarding a foreign corporation may, if such information is furnished by another person having an equal or greater stock interest (measured in terms of value of such stock) in such corporation, satisfy such requirement by filing a statement with his return on Form 5471 indicating that such liability has been satisfied and identifying the return in which such information was included .

.06 Section 6038(b)(l) imposes monetary penalties for a failure to timely furnish any information required by section 6038(a)(l) with respect to a foreign corporation (including entities treated as controlled foreign corporations under sections 957 and 953). Additional penalty amounts may apply under section 6038(b)(2) where the failure to furnish information continues for more than 90 days after notification by the Secretary.

.07 Section 6038(c) mandates a reduction in certain foreign tax credits for a failure to timely furnish information required by section 6038(a)(l) absent a showing of reasonable cause for the delay. Additional credit reductions may apply where such failures continue for more than 90 days after notice by the Secretary.

.08 Section 6679 imposes monetary penalties for a failure to timely file a return or to provide information specified in any return required by section 6046 absent a showing of reasonable cause for the failure.

. 09 Criminal penalties (fines and imprisonment) are imposed by section 7203 for a willful failure to file a return, including an information return required by section 6038 or 6046.

SEC. 3. SCOPE

This revenue procedure applies to persons required under section 6038(a)(1), 6038(a)(4) or 6046(a)(3) to file a Form 5471 with respect to a foreign corporation that is a dormant foreign corporation. For purposes of this revenue procedure, a foreign corporation is a dormant foreign corporation if, at all times during the foreign corporation’s annual accounting period (within the meaning of section 6038(e)(2)):

(1) the foreign corporation conducted no business and owned no stock in any other corporation other than another dormant foreign corporation;

(2) no shares of the foreign corporation (other than directors’ qualifying shares) were sold, exchanged, redeemed, or otherwise transferred, nor was the foreign corporation a party to a reorganization;

(3) no assets of the foreign corporation were sold, exchanged, or otherwise transferred, except for de minimis transfers described in (4) and (5) below;

(4) the foreign corporation received or accrued no more than $5,000 of gross income or gross receipts;

(5) the foreign corporation paid or accrued no more than $5,000 of expenses;

(6) the value of the foreign corporation’s assets as determined pursuant to U.S. generally accepted accounting principles (but not reduced by any mortgages or other liabilities) did not exceed $100,000;

(7) no distributions were made by the foreign corporation; and

(8) the foreign corporation either had no current or accumulated earnings and profits or had only de minimis changes in its beginning and ending accumulated earnings and profits balances by reason of income or expenses specified in (4) or (5) above.

SEC. 4. GENERAL PROCEDURE

.01 In lieu of filing a complete Form 5471 for each dormant foreign corporation, the filer may use the summary filing procedure described in this section. A filer may not use this summary filing procedure to report an interest in a foreign corporation that was a dormant foreign corporation in a prior year but that does not meet the requirements of section 3 above in the current filing year.

.02 To elect the summary filing procedure, the filer must attach and file Page One of the Form 5471 (the summary return) for each dormant foreign corporation with its regularly filed income tax return. The filer also must file a copy of each summary return with the Internal Revenue Service Center, Philadelphia, PA, along with the filer’s other Forms 5471 (if any). The top margin of each summary return must be labeled “Filed Pursuant to Rev. Proc. 92-70 for Dormant Foreign Corporations.”

.03 The summary return must be completed for the following filer items: the filer’s name and address, identifying number, filing category, stock ownership percentage, and tax year.

.04 The summary return must be completed for the following corporate items: the dormant foreign corporation’s annual accounting period (within the meaning of section 6038(e)(2)), name and address, employer identification number (if any), country of incorporation, and date of incorporation.

.05 By using the summary filing procedure, the filer agrees that it will provide any information required by sections 6038 and 6046, the regulations thereunder, or on Form 5471 and not specified in sections 4.03 or 4.04, within 90 days of being asked to do so on audit.

SEC. 5. RELIEF

.01 Persons complying with the summary filing procedure described in section 4 satisfy their Form 5471 filing obligations arising under sections 6038(a)(1), 6038(a)(4), and 6046(a)(3) as to the specified dormant foreign corporations. Accordingly, sections 6038(b)(1), 6038(c), 6679, and 7203 will not apply to a filer properly employing the procedure. However, penalties and foreign tax credit reductions under sections 6038(b)(2) and 6038(c)(1) can be imposed (pursuant to sections 1.6038-2(k)(l)(ii) and l.6038-2(k)(2)(iv) of the regulations) for a failure to timely furnish information under section 4.05 of this revenue procedure.

.02 To the extent that a Form 5471 filing by a filer could satisfy the filing obligation of another person (the “other person”) under section 1.6038-2(j) of the regulations, such other person may use the provisions of section 1.6038-2(j) if the other person satisfies the requirements of section 1.6038-2(j)(3) and the filer complies with this revenue procedure and attaches a statement providing the name, address, identifying number, and corporate status of the other person. If the provisions of section 1.6038-2(j) are used as provided in this section 5.02, the other person on whose behalf the Form is filed satisfies his Form 5471 filing obligations arising under sections 6038(a)(1) and 6038(a)(4) as to the specified dormant foreign corporations and is not liable for penalties as specified in section 5.01 above.

.03 Persons described in section 6046(a)(3) are treated, for purposes of this revenue procedure, as described in section 1.6046-1(c)(1) of the regulations. Therefore, to the extent that a Form 5471 filing by a filer could satisfy the filing obligation of another person (the “other person”) under section 1.6046-1(e) of the regulations, such other person may use the provisions of section 1.6046-1(e) if the other person satisfies the filing requirement of section 1.6046-1(e)(5) (if applicable) and the filer complies with this revenue procedure and attaches a statement providing the name, address, identifying number, and corporate status of the other person. If the provisions of section 1.6046-l(e) are used as provided in this section 5.03, the other person on whose behalf the Form is filed satisfies his Form 5471 filing obligations arising under section 6046(a)(3) as to the specified dormant foreign corporations and is not liable for penalties as specified in section 5.01 above.

.04 The relief afforded by this revenue procedure relates solely to a filer’s information reporting obligations and does not affect a filer’s liability for tax on income distributed or deemed distributed from a dormant foreign corporation. Thus, for example, de minimis amounts of subpart F income derived by a controlled foreign corporation that qualifies as a dormant foreign corporation under section 3 above are taxable to the corporation’s United States shareholders to the extent provided in sections 951 and 952 and should be reported on each shareholder’s federal income tax return.

SEC. 6. EFFECTIVE DATE

This revenue procedure is effective for Forms 5471 required to be filed (including extensions) on or after September 15, 1992.