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US Income Tax Obligations of Green Card Holders: General Overview

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There is a common misconception among Green Card Holders (a common name for US permanent residents) that their US income tax obligations are limited in nature in comparison to US citizens. In this article, I seek to dispel this erroneous myth and provide some general outlines of the US income tax obligations of Green Card Holders.

US Income Tax Obligations of Green Card Holders: Worldwide Income Reporting

I receive a lot of phone calls from Green Card holders who believe that their US income tax reporting obligations are limited only to US-source income (sourcing of income, by the way, is also a very complex subject and I often see egregious mistakes committed even by experienced accountants).

This is not correct. In fact, US permanent residents and US citizens are both considered to be “tax residents of the United States.” US tax residents are required to report their worldwide income on US tax returns and pay US income taxes on foreign-source income (and, obviously, US-source income).

Thus, if you have a Green Card and you have foreign assets (such as foreign bank and financial accounts, foreign businesses, foreign trusts, et cetera), you must report the income from such foreign assets on your US tax returns.

Be careful! You must remember that all foreign income must be reported in US dollars and according to US tax laws. Leaving aside the issue of currency conversion (which is a topic for another article), the reporting of foreign income under US tax laws may be extremely challenging because foreign tax laws may treat this income in a different manner. Let me emphasize this point – the treatment of income under foreign local tax rules may not actually be the same as the treatment of the same income under US tax rules.

For example, Assurance Vie accounts in France may be completely tax-exempt if certain conditions are met. However, the annual income from these accounts must be reported on US tax returns.

Moreover, to make matters worse, these accounts may contain PFIC (Passive Foreign Investment Company) investments which are treated in a very complex and generally unfavorable manner under US tax laws. The calculation of US tax liability in this case may be extremely complex (especially since the French banks are not required to keep the kind of information that is necessary to properly calculation PFIC tax and interest).

US Income Tax Obligations of Green Card Holders: Reporting of Foreign Bank and Financial Accounts

As US tax residents, the Green Card holders are also required to disclose their ownership of certain foreign bank and financial accounts to the IRS. Many US permanent residents are shocked to learn about these requirements and the draconian penalties associated with failure to file the required information reports.

The top two bank and financial account reporting requirements are FinCEN Form 114 (known as “FBAR” – the Report of Foreign Bank and Financial Accounts) and Form 8938 (which was born out of FATCA). Other forms, such as Form 8621, may apply.

It is beyond the scope of this article to discuss these requirements in detail. However, it is impossible to overstate their importance, especially the FBAR, due to potentially astronomical non-compliance penalties (including criminal penalties). You can find more information about these requirements at sherayzenlaw.com.

US Income Tax Obligations of Green Card Holders: Reporting of Foreign Business Ownership

Many US permanent residents are surprised to find out that they may be required to provide detailed reports about their foreign businesses – corporations, partnerships and disregarded entities. Indeed, Green Card holders may be subject to burdensome and expensive US reporting requirements on Forms 5471, 8865, 926, 8938, et cetera. These forms may require Green Card holders to provide foreign financial statements translated under US accounting standards, including US GAAP (Generally Accepted Accounting Practices).

Again, you can find more information about these requirement at sherayzenlaw.com.

US Income Tax Obligations of Green Card Holders: Reporting of Foreign Trusts

Another complex trap for Green Card Holders is reporting of an ownership or a beneficiary interest in a foreign trust (generally, on Form 3520). This complicated topic is beyond the scope of this article, but you can find more information about these requirements at sherayzenlaw.com.

US Income Tax Obligations of Green Card Holders: Other Reporting Requirements

There are numerous other US income tax obligations of Green Card Holders that may apply. Moreover, US has multiple income tax treaties with various countries which may modify your particular tax situation. In order to fully determine your US tax obligations as a Green Card holder, it is best to consult with an experienced international tax attorney.

Contact Sherayzen Law Office for Help With Your US Income Tax Obligations

Sherayzen Law Office is a specialized international tax law firm which is highly experienced in helping US Permanent Residents with their US income tax obligations and reporting requirements. One of the unique features of our firm is that our tax team provides both legal and accounting services to our clients throughout the world.

Contact Us Now To Secure Professional Help and Avoid (or Rectify) Costly Mistakes!

US Tax Consequences of the New Indian Gold Monetisation Scheme

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A recent article from Reuters discusses the appearance of the new Indian Gold Monetisation Scheme. The idea is to allow Indians to deposit gold into the banks in return for interest payments; in return, the Indian government is hoping to utilize the gold hoarded by its citizens to reduce gold imports.

While the idea is that the Indian Gold Monetisation Plan will be open to resident Indians only, it is likely that at least some US tax residents will be able to participate in the scheme either as US citizens and US permanent residents (who are US tax residents irrespective of where they live) or as Indian non-residents who never declared their non-residency status in India.

This article intends to explore some of the potential US tax problems that may arise as are result of participation in the Indian Gold Monetisation Scheme. The conclusions drawn in this article are preliminary and they may or may not reflect the actual IRS position in the future; the conclusions are and also should be treated simply as general discussion of the subject, not as a legal advice.

2015 Indian Gold Monetisation Scheme

In October 25, 2015, Indian Prime Minister Narendra Modi announced that a new Indian Gold Monetisation Scheme will be in place by the time of an ancient Hindu festival – Diwali (November 11, 2015). Under the scheme, Indian residents (as well as mutual funds and ETFs) will be able to use gold to open an essentially a fixed-deposit bank account (based on a gold certificate) with an Indian bank; in return, they will receive a gold certificate valued at the “prevailing gold price” at the time the account is opened and they will further receive interest on these gold deposits.

The gold will be collected by the Collection and Purity Testing Centers (CPTCs) certified by the Bureau of Indian Standards. The banks will issue the gold certificates against these gold deposits.

The new bank accounts will start earning interest after the deposited gold is refined into tradable gold bars or 30 days after the receipt of gold at the CPTCs or the bank’s designated branch – whichever is earlier.

There will be three types of fixed-deposit accounts under the Indian Gold Monetisation Scheme: short-term (1-3 years), medium term (5-7 years) and long-term (12-15 years). The banks will determine any premature withdrawal penalties.

Upon the maturity of the fixed-deposit account, the depositor will receive either the gold or the equivalent amount in rupees. The choice of receiving the gold or the rupees needs to be made at the time the account is opened.

Indian Tax Treatment of Interest and Capital Gains Earned As a Result of the Indian Gold Monetisation Scheme

In this Indian Gold Monetisation Scheme, there are three potential points of tax recognition by the participating depositors: capital gain on the original gold deposit, interest earned on the gold deposit at maturity and capital gain at the point of gold redemption (or principal redemption) at the then-current market prices.

The Indian government does not tax any of these three tax recognition events – i.e. neither capital gains nor the interest earned.

Potential US Tax Treatment of Interest Earned As Part of Indian Gold Monetisation Scheme

Despite the fact that Indian government does not tax the interest return on the gold certificates and absent any tax treaty changes, I believe that the most likely outcome is that this interest will be taxed as ordinary income in the United States. There is some marginal potential for the interest to be treated as collectible gain, but I just do not see this as a likely scenario when the IRS has a chance to make a ruling on it.

Potential Problems in US Tax Treatment of the Initial Deposit of Gold to Obtain Gold Certificates under the Indian Gold Monetisation Scheme

Generally, in the United States, any gain on the sale of gold bars and gold jewelry is treated as a capital gain from the sale of a collectible subject to 28% tax gain. There is a potential additional 3.8% Net Investment Income Tax as a result of Obamacare.

The question really becomes whether the opening of the gold account under the Gold Monetisation Scheme, where the gold is being melted into bars and the depositor receives a gold certificate with a rupee account at fair market value, should be considered as a sale or exchange of gold or is this just a 1031 exchange of the like properties?

The answer cannot be given with any certainty at this point, because the IRS has made no rulings on this very subject. However, it is possible that such an even will be treated by the IRS as a taxable exchange, because the gold is transformed into a rupees-based deposit account based on its market value – i.e. the number of rupees given to the depositor is equivalent to the fair market value, not the cost-basis that the depositor has at the point the gold is given to CPTCs.

On the other hand, the IRS could agree with an argument that, under the Indian Gold Monetisation Scheme, the gold is nothing but a guarantee for the rupee deposit account. Since the depositor receives a Gold Certificate and can get the same gold back upon the maturity of the account, it does not seem fair to tax the gain on the gold at this point (this argument, may not work if the deposit chooses to receive the original deposit back in rupees). If the 1031 rules are used to analyze this situation, the majority of secondary sources (such as EFT law firm opinions) seem to indicate that there may not be a taxable exchange for US tax purposes in this case. I tend to agree with this position in most situations, but it is too early to make the final determination at this point.

There is actually merit to both arguments and, until the gold certificates are actually issued and all facts can be analyzed, it is difficult to state what the IRS position will be.

Potential US Tax Treatment of the Gold/Rupee Redemption Based on Gold Certificates Issued under the Indian Gold Monetisation Scheme

There are two issues here: (1) is the gold redemption considered to be a taxable event; (2) is the rupee redemption under the gold certificates considered to be a taxable and how should it be taxed.

1. Gold Redemption

Let’s analyze the physical gold redemption first. It appears that the deposit will be able to obtain the same amount of gold irrespective of the changes in value since the original gold was melted into bars at CPTCs. This means that, if the 1 gram of gold is originally melted at 2,500 rupees, and rises in price to 3,000 rupees within three years, the deposit will still get one gram of gold. There seems to be a gain here of 500 rupees, but there is no actual monetization of gain. This is a hypothetical gain on the conversion of the gold certificate into physical gold.

The taxation of gain in a situation where one form of gold is transformed into another form of gold is one of the most complex topics in the US taxation of collectibles. Often times, even the same certificates may be taxed in a different manner.

Due to the fact that this topic is heavily fact-dependent with little IRS official guidance, it is best to delay the answer of this question until the time when these certificates are issued and can be analyzed in the actual factual context. At that time, if you have any questions regarding taxation of your gold certificate, contact Sherayzen Law Office directly.

2. Rupee Redemption

Unlike the gold redemption (which, depending on the circumstances, may not be taxable at all), the issue of taxability of the rupee redemption of the gold is fairly straightforward – this is a taxable event where gold is exchanged for rupees. Most likely, this exchange will be taxed in the United States as a collectible capital gain rate of 28% percent.

However, there are a couple of complications with respect to calculating the collectible gain. First, it should be remembered that the collectible gain should be calculated in US dollars (contact Sherayzen Law Office directly for more information). Second, the cost-basis of the gold will depend on whether the conversion of gold into a Gold Certificate is considered to be a taxable gain. If it is, then, the cost basis would be the fair market value at the time the gold is submitted by the depositor to be melted into bars at CPTCs. If it is not, then the original cost-basis (i.e. what the gold was actually acquired for) will be used in the determination of the collectible gain.

Other Issues Regarding 2015 Indian Gold Monetisation Scheme

In addition to US collectible and interest tax issues discussed above, investing through Indian Gold Monetisation Scheme may bring forth other US tax requirements. In particular, I wish to emphasize here that accounts opened through Indian Gold Monetisation Scheme are most likely reportable accounts for FBAR and Form 8938 purposes.

Contact Sherayzen Law Office for Help With US Tax Compliance

If you are a US person who has foreign accounts, foreign assets and/or foreign income, you should contact Sherayzen Law Office for professional help with your US tax compliance. Our experienced legal team, headed by the firm’s founder, attorney Eugene Sherayzen, will thoroughly analyze your case, identify your current and past US international tax compliance issues, develop a compliance plan for you (whether for current-year compliance or as part of your voluntary disclosure), and implement this plan, including preparation of all legal documents and tax forms.

US international tax laws are complex and should be handled by professionals with deep knowledge of the subject matter. This why You should contact Sherayzen Law Office Now!

Swiss Bank Program Update: Bank Zweiplus and Banca Stato del Cantone Ticino

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On August 20, 2015, the US Department of Justice announced another Swiss Bank Program update – Bank Zweiplus AG (Bank Zweiplus) and Banca dello Stato del Cantone Ticino (Banca Stato) have reached resolutions under the department’s Swiss Bank Program.

The Swiss Bank Program, which was announced on August 29, 2013, provides a path for Swiss banks to resolve potential criminal liabilities in the United States. Swiss banks eligible to enter the program were required to advise the department by December 31, 2013, that they had reason to believe that they had committed tax-related criminal offenses in connection with undeclared U.S.-related accounts. Banks already under criminal investigation related to their Swiss-banking activities and all individuals were expressly excluded from the program.

Swiss Bank Program Update: Bank Zweiplus Background and Non-Prosecution Agreement

As part of its Swiss Bank Program Update, the DOJ provided various background information regarding Bank Zweiplus. The Bank was founded in July 2008 as a retail bank based in Zurich. Offices located in Geneva and Basel, Switzerland, were closed in 2008 and 2012, respectively. Since Aug. 1, 2008, Bank Zweiplus maintained and serviced 44 U.S.-related accounts with an aggregate value of approximately $12.1 million.

Bank Zweiplus was aware that U.S. taxpayers have a legal duty to report to the Internal Revenue Service (IRS) their ownership of bank accounts outside the United States and to pay taxes on income earned in such accounts. Nevertheless, in disregard of U.S. laws, the bank provided a variety of traditional Swiss banking services that assisted some U.S. taxpayers in concealing their undeclared accounts. For example, Bank Zweiplus maintained numbered accounts and accounts held in the name of structures which were effectively owned or controlled by U.S. persons, including structures in the British Virgin Islands and the Bahamas.

Bank Zweiplus cooperated with the department during its participation in the Swiss Bank Program and encouraged its U.S. clients to enter the IRS Offshore Voluntary Disclosure Program (nowclosed). Bank Zweiplus will pay a penalty of $1.089 million.

Swiss Bank Program Update: Banca Stato Background and Non-Prosecution Agreement

As part of its Swiss Bank Program Update, the DOJ provided various background information regarding Banca Stato. Banca Stato was established in 1915 and is headquartered in Bellinzona, Switzerland. Banca Stato was aware that U.S. taxpayers had a legal duty to report to the IRS and pay taxes on the basis of all of their income, including income earned in accounts that the U.S. taxpayers maintained at the bank. Despite this, the bank opened and serviced accounts for U.S. clients who the bank knew or had reason to know were not complying with their U.S. income tax obligations.

During the applicable period, Banca Stato maintained and serviced 187 U.S.-related accounts with an aggregate maximum balance of approximately $137 million. Banca Stato will pay a penalty of $3.393 million.

Impact of this Swiss Bank Program Update on US Taxpayers

Starting August 20, 2015, noncompliant U.S. accountholders at Bank Zweiplus and Banca Stato must now pay that 50 percent penalty to the IRS if they wish to enter the IRS Offshore Voluntary Disclosure Program.

Follow this link to the DOJ website for more information on this Swiss Bank Program Update.

The IRS Onslaught Against Bank Leumi Clients Continues: The Fogel Case

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On February 2, 2015, one of Bank Leumi clients, Dr. Baruch Fogel of Laguna Beach, California, pleaded guilty today in the U.S. District Court for the Central District of California to willfully failing to file a Report of Foreign Bank and Financial Accounts (FBAR) for tax year 2009. In this article, I would like to explore some of the most pertinent facts of the Fogel Case and analyze this case in the context of the continuous IRS onslaught against Bank Leumi clients.

The Facts and Outcome of the Fogel Case

According to court documents, Fogel, a U.S. citizen, maintained an undeclared bank account held in the name of a foreign corporation at the Luxembourg branch of Bank Leumi. The undeclared foreign bank account and foreign corporation were set up with the assistance of David Kalai, a tax return preparer who owned United Revenue Service (URS). In December 2014, David Kalai and his son, Nadav Kalai, were convicted in the Central District of California of conspiracy to defraud the United States for helping certain URS clients set up foreign corporations and undeclared bank accounts to evade U.S. income taxes and for willfully failing to file FBARs for an undeclared foreign account that they controlled.

According to court documents and evidence introduced at the trial of David and Nadav Kalai, Fogel was a doctor who operated several managed health care businesses. David Kalai suggested to Fogel that he could reduce his taxes by transferring money to a foreign bank account held in the name of a foreign corporation. David Kalai advised Fogel to open up the bank account that was set up in the name of a British Virgin Islands corporation. At a meeting facilitated and attended by David Kalai at the Beverly Hills branch of Bank Leumi, Fogel executed documents to open his Luxembourg bank account at Bank Leumi, becoming one of the many Bank Leumi clients to do so. According to court documents, Fogel diverted at least $8 million to his undeclared bank account at Bank Leumi’s branch in Luxembourg.

Fogel has agreed to pay a civil penalty in the amount of approximately $4.2 million to resolve his civil liability with the IRS for failing to file FBARs. Fogel faces a statutory maximum sentence of five years in prison and a maximum fine of $250,000 or twice the gross gain or loss to any person, whichever is greater.

IRS Recent Onslaught Against Bank Leumi Clients Continues

The Fogel Case is another example of the recent IRS series of victories against former Bank Leumi clients. It is also a direct fallout of the Kalai Case (David Kalai worked with a number of Bank Leumi clients). Bank Leumi itself already admitted late last year to helping its US customers evade income taxes and hide assets.

Bank Leumi Clients and Clients from Other Israeli Banks Should Expect Continuous Pressure from the IRS

With the information already disclosed by other Bank Leumi clients to the IRS as part of their voluntary disclosures through 2011 OVDI, 2012 OVDP and 2014 OVDP, it becomes clear that the IRS has gathered sufficient evidence to investigate and successfully prosecute other Bank Leumi clients, current and former. Bank Leumi itself also agreed to help DOJ efforts against its Bank Leumi clients. It appears that this IRS onslaught against Bank Leumi clients is likely to affect disproportionately the Jewish communities in New York, California and Florida.

However it is not only the Bank Leumi clients that should be worried; as part of its deal with the US Department of Justice, Bank Leumi is required to help the DOJ investigations of other Israeli banks. Given the fact that Bank Leumi is the second largest bank in Israel, one can expect that the information provided by Bank Leumi and Bank Leumi clients is likely to affect all major banks in Israel.

Voluntary Disclosure Options Should Be Explored by Bank Leumi Clients and Clients of Other Israeli Banks

The Fogel case is a somber reminder to Bank Leumi clients that time is running out. For Bank Leumi clients with undisclosed foreign accounts, there is now a high chance of an IRS investigation, imposition of civil penalties and even of criminal prosecution.  Hence, it appears that the best course of action of the Bank Leumi clients and customers of other Israeli banks is to explore their voluntary disclosure options as soon as possible.

Contact Sherayzen Law Office for Help With Your Undisclosed Israeli Accounts

If you have undisclosed foreign financial accounts and other foreign assets in Israel or through an Israeli bank (and especially if you are one of the Bank Leumi clients), contact Sherayzen Law Office for professional legal and tax help as soon as possible.

Once our experienced international tax law firm will review the facts of your case and recommend the voluntary disclosure options available in your case; you will be able to choose the voluntary disclosure option that best appeals to you. We will then prepare all of the necessary legal documents and tax forms, and Mr. Sherayzen will personally negotiate the final settlement of your case with the IRS, bringing you into full US tax compliance.

So, Contact Us Now to Schedule Your Confidential Consultation!

Abusive Tax Shelters on the IRS “Dirty Dozen” List of 2015

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On February 3, 2015, the IRS said using abusive tax shelters and structures to avoid paying taxes continues to be a problem and remains on its annual list of tax scams known as the “Dirty Dozen” for the 2015 filing season.

“The IRS is committed to stopping complex tax avoidance schemes and the people who create and sell them,” said IRS Commissioner John Koskinen. “The vast majority of taxpayers pay their fair share, and we are warning everyone to watch out for people peddling tax shelters that sound too good to be true.”

Compiled annually, the “Dirty Dozen” lists a variety of common scams that taxpayers may encounter anytime but many of these schemes peak during filing season as people prepare their returns or hire people to help with their taxes.

Abusive tax shelters are classified as illegal scams and can lead to significant penalties and interest and possible criminal prosecution. IRS Criminal Investigation works closely with the Department of Justice (DOJ) to shutdown scams and prosecute the criminals behind them.

Abusive Tax Shelters

Abusive tax shelters have evolved from simple structuring of abusive domestic and foreign trust arrangements into sophisticated strategies that take advantage of the financial secrecy laws of some foreign jurisdictions and the availability of credit/debit cards issued from offshore financial institutions.

IRS Criminal Investigation (CI) has developed a nationally coordinated program to combat these abusive tax shelters. CI’s primary focus is on the identification and investigation of the promoters of the abusive tax shelters as well as those who play a substantial or integral role in facilitating, aiding, assisting, or furthering the abusive tax shelters, such as accountants or lawyers. Just as important is the investigation of investors who knowingly participate in abusive tax shelters.

What are these abusive tax shelters? The Abusive Tax Schemes program encompasses violations of the Internal Revenue Code (IRC) and related statutes where multiple flow-through entities are used as an integral part of the taxpayer’s scheme to evade taxes. These abusive tax shelters are characterized by the use of Limited Liability Companies (LLCs), Limited Liability Partnerships (LLPs), International Business Companies (IBCs), foreign financial accounts, offshore credit/debit cards and other similar instruments. The abusive tax shelters are usually complex involving multi-layer transactions for the purpose of concealing the true nature and ownership of the taxable income and/or assets.

Whether something is “too good to be true” is important to consider before buying into any arrangements that promise to “eliminate” or “substantially reduce” your tax liability. If an arrangement uses unnecessary steps or a form that does not match its substance, then that arrangement may be classified as abusive tax shelter. Another thing to remember is that the promoters of abusive tax shelters often employ financial instruments in their schemes; however, the instruments are used for improper purposes including the facilitation of tax evasion.

Abusive Tax Shelters: Misuse of Trusts

Trusts also commonly show up in abusive tax shelters. They are highlighted here because unscrupulous promoters continue to urge taxpayers to transfer large amounts of assets into trusts. These assets include not only cash and investments, but also successful on-going businesses. There are legitimate uses of trusts in tax and estate planning, but the IRS commonly sees highly questionable transactions. These transactions promise reduced taxable income, inflated deductions for personal expenses, reduced (even to zero) self-employment taxes, and reduced estate or gift transfer taxes.

These transactions commonly arise when taxpayers are transferring wealth from one generation to another. Questionable trusts rarely deliver the tax benefits promised and are used primarily as a means of avoiding income tax liability and hiding assets from creditors, including the IRS.

IRS personnel continue to see an increase in the improper use of private annuity trusts and foreign trusts to shift income and deduct personal expenses, as well as to avoid estate transfer taxes. As with other arrangements, taxpayers should seek the advice of a trusted professional before entering a trust arrangement.

Abusive Tax Shelters: Captive Insurance

Another abuse involving a legitimate tax structure involves certain small or “micro” captive insurance companies. Tax law allows businesses to create “captive” insurance companies to enable those businesses to protect against certain risks. The insured claims deductions under the tax code for premiums paid for the insurance policies while the premiums end up with the captive insurance company owned by same owners of the insured or family members.

The captive insurance company, in turn, can elect under a separate section of the tax code to be taxed only on the investment income from the pool of premiums, excluding taxable income of up to $1.2 million per year in net written premiums.

In the abusive tax shelters, unscrupulous promoters persuade closely held entities to participate in this scheme by assisting entities to create captive insurance companies onshore or offshore, drafting organizational documents and preparing initial filings to state insurance authorities and the IRS. The promoters assist with creating and “selling” to the entities oftentimes poorly drafted “insurance” binders and policies to cover ordinary business risks or esoteric, implausible risks for exorbitant “premiums,” while maintaining their economical commercial coverage with traditional insurers.

Total amounts of annual premiums often equal the amount of deductions business entities need to reduce income for the year; or, for a wealthy entity, total premiums amount to $1.2 million annually to take full advantage of the Code provision. Underwriting and actuarial substantiation for the insurance premiums paid are either missing or insufficient. The promoters manage the entities’ captive insurance companies year after year for hefty fees, assisting taxpayers unsophisticated in insurance to continue the charade.