international tax lawyer st paul

Automatic 5471 Penalties Submitted With Form 1120

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In an earlier article, I discussed various penalties generally associated with late or inaccurate filing of Form 5471 (this form is required under IRC Section 6038(a) to provide information with respect to certain US shareholders of foreign corporations). These penalties are generally subject to “reasonable cause” exception and are not imposed in every case.

Since 2009, however, this is not the case. Starting January 1, 2009, the IRS automatically assesses a $10,000 penalty (under IRC Section 6038(b)(1)) for each late filed Form 5471 if the related Form 1120 is not filed timely. Note, the automatic assessment of penalty results in this case even if there is no tax due.

Furthermore, IRC Section 6038(c) provides for a 10% reduction of the foreign taxes available for credit under IRC Sections 901, 902 and 960. Per IRC Section 6038(c)(3), this reduction to the foreign taxes can be applied in addition to the monetary penalty. It is important to realize that the automatic assessment of the $10,000 penalty does not preclude a later assessment under IRC Section 6038(c).

In addition, the IRS will also assess the penalty for the failure to file income tax returns (i.e. Form 1120) under IRC Section 6651(a)(1). The penalty is 5% of the tax required to be shown on the income tax return for each month (or fraction thereof) during which such failure continues. The amount of the penalty shall not exceed 25%. No penalty is applicable under IRC Section 6651(a)(1) if no underpayment of tax is shown on the return.

There is an interesting procedural twist with respect to automatic assessment of penalties – the IRS does not want you to include the reasonable cause statement together with Form 5471 filed late together with Form 1120. Rather, the IRS Service Centers will first send the taxpayer a Notice to Respond and the taxpayer can respond with a reasonable cause statement.

Whether or not to follow this procedural suggestion will depend on the individual case and such decision should be made by your tax attorney.

Of course, the situation is radically different if Form 1120 has already been timely filed. In this case, the taxpayer must file Form 1120X with the late Form 5471 and he should include his reasonable cause statement.

Contact Sherayzen Law Office For Help with Form 5471 Penalties

If you have not filed your Form 5471 yet or if you are facing a penalty for the already filed Form 5471, contact Sherayzen Law Office for legal help. Our experienced international tax firm will thoroughly analyze your case, present options for proceeding forward, prepare all of the required documentation and tax forms, and rigorously represent your interests during your negotiations with the IRS.

Dormant Foreign Corporation

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Certain categories of US shareholders of a foreign corporation are required to file Form 5471 with the IRS. Form 5471, however, is one of the most complex forms in the Internal Revenue Code and the compliance costs for such a corporation can be very high. Such costs can be especially disproportionate for an inactive corporation that does not do any business but merely exists.

In order to alleviate the compliance costs in these cases, the IRS allows certain foreign corporations, that satisfy the required criteria for being considered as “dormant foreign corporations”, to make a limited filing that does not include a detailed financial statements and supporting schedules. IRS Revenue Procedure (Rev. Proc.) 92-70 (1992-2 C.B. 435) details the requirements for the classification of dormant foreign corporation.

Under the Rev. Proc. 92-70, eight conditions must be met in order for a foreign corporation to be considered dormant:

(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.

If all eight conditions are met, the filer only needs to fill-out and complete the first page of Form 5471 (which includes: filer information, such as name and address, Items A through C, and tax year; corporate information, such as the dormant corporation’s annual accounting period (below the title of the form) and Items 1a, 1b, 1c, and 1d), and label the top margin of the first page of Form 5471 with this exact phrase “Filed Pursuant to Rev. Proc. 92-70 for Dormant Foreign Corporations.”

The form should be filed in the manner described in “When and Where To File on page 1 of the Instructions for Form 5471“. For the tax year 2011, this means that it should be attached to and filed together with your income tax return by the relevant due date.

Contact Sherayzen Law Office for Help With U.S. Tax Compliance Regarding U.S. Ownership of a Foreign Corporation

If you own shares in a foreign corporation, contact Sherayzen Law Office for help with U.S. tax compliance. Our experienced international tax firm will thoroughly review the facts of your case, identify your U.S. tax compliance requirements, and complete the required forms and filings (including Form 5471).

If you only now became aware of your potential Form 5471 filing requirements and you have not filed the form with the IRS previously, our tax firm will assist you with finding the right type of voluntary disclosure and vigorously represent your interests during IRS negotiations.

IRS Increases Criminal Prosecutions for Willful Failure to File FBARs: U.S. v. Jacques Wajsfelner

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In U.S. v. Jacques Wajsfelner, the IRS’s criminal prosecution of the defendant for willful failure to file FBARs was completed when the defendant, Mr. Jacques Wajsfelner, decided to plead guilty. Mr. Wajsfelner pled guilty to willful failure to file the FBAR in Manhattan federal court and he now faces civil penalties of $2.84 million and restitution of $419,940. Under advisory guidelines, he faces 30 months to 37 months in prison at sentencing scheduled for December 20, 2012.

Basic Facts

Mr. Wajsfelner, an 83-year old Holocaust survivor, fled the Nazis as a teenager and became a U.S. citizen, working in real estate and advertisement in New York and Boston. He admitted that he held an account in his own name at Credit Suisse in 1995. In 2006, his advisor helped him open an account in the name of Ample Lion Ltd. At the end of 2007, the account held almost $5.7 million. In 2008, as Credit Suisse started to wind down its U.S. cross-border banking business, Mr. Wajsfelner opened an account with Wegelin and transferred the money from Credit Suisse to the new account. In the later years, the value on this account went down to only $4 million.

In addition to moving money among two accounts, Mr. Wajsfelner also made a huge error of not telling the truth to the IRS about the account, Ample Lion Ltd. (A Hong Kong corporation), and his advisor (Beda Singenberger’s corporation Sinco Treuhand AG) during an interview conducted by the IRS after the investigation commenced. As part of his plea agreement, the IRS agreed not to prosecute him for these statements.

In the end, Mr. Wajsfelner plead guilty to knowing and willful failure to file the FBARs from 2006 through 2011 with the IRS.

Additional Considerations

It is possible that the misleading and untruthful statements to the IRS alone may have been the cause for Mr. Wajsfelner to plead guilty. However, there was another highly unfavorable fact – moving the money between the accounts would have been considered as circumstantial evidence of conspiracy to conceal the money from U.S. government. Also, Mr. Wajsfelner maintained very close contact with the account and directed various transactions to and from the accounts.

Another important consideration is to understand that this is a case of pure willful failure to file the FBARs; there was no associated pleading with respect to tax evasion. This is a very important because it shows that the IRS is willing to prosecute FBAR cases criminally even without tax evasion charges.

US v. Jacques Wajsfelner is Part of a Wave of Prosecutions

U.S. v. Jacques Wajsfelner is not an isolated case or limited only to specific facts of Mr. Wajsfelner.

In addition to Mr. Wajsfelner, the IRS also indicted his former Swiss adviser, Beda Singenberger, on a charge of conspiring to help more than 60 U.S. taxpayers hide $184 million from the Internal Revenue Service in offshore accounts. Wegelin, the 270-year-old Swiss bank, was also indicted February 2, 2012, on charges of helping U.S. taxpayers hide money from the IRS. Also, Credit Suisse said in July of 2011 that it was a target of a U.S. criminal probe. On July 21, 2011, seven of Credit Suisse’s bankers were indicted on charges of helping U.S. clients evade taxes through secret accounts.

In fact, since 2009, U.S. prosecutors have criminally charged about fifty U.S. taxpayers and more than twenty offshore bankers, lawyers and advisers.

FBAR Criminal Prosecutions Will Increase Due to Voluntary Disclosure Programs

It is critically important for non-compliant U.S. taxpayers to understand that, instead of subsiding, this wave of IRS criminal prosecutions regarding the FBARs will only increase.

The primary reason for this growth of FBAR prosecutions are the voluntary disclosure programs, like 2009 OVDP, 2011 OVDI AND 2012 OVDP. For many years now, the IRS has been collecting detailed information from the participating taxpayers regarding their advisors, banks and other U.S. taxpayers. This mountain of information allows the IRS to identify high-risk banks, advisors as well as specific taxpayers who are likely to be non-compliant with U.S. tax rules. The end-product of this analysis are targeted investigation and, ultimately, criminal prosecutions of non-compliant U.S. taxpayers and their advisors.

Contact Sherayzen Law Office for Legal Help With FBARs

If you have undisclosed foreign financial accounts that should have been reported to the IRS, contact Sherayzen Law Office as soon as possible. Our experienced tax firm will analyze the facts of your case, identify you potential FBAR liability and propose a specific course of action to deal with your specific situation. Sherayzen Law Office will guide you though your entire voluntary disclosure, including the preparation of all of the necessary tax documents and rigorous IRS representation.

Foreign Earned Income Exclusion: 2013

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If a qualified individual meets certain requirements of I.R.C. §911, he may exclude part or all of his foreign earned income from taxable gross income for the U.S. income tax purposes. This income may still be subject to U.S. Social Security taxes.

The IRS recently announced that the maximum foreign income exclusion amount for 2013 will be increased to $97,600 (currently, in 2012, it is $95,100).

Remember, if your overseas earnings are above $97,600 for the tax year 2013, then you may be subject to U.S. income taxation on the excess amount. For example, if you earned $105,000 in 2011, then you will have to pay U.S. income taxes on $ 7,400.

It is also important to note, despite the income tax exclusion, your tax bracket will still be the same as if you were taxed on the whole amount (i.e. as if you had not claimed the foreign earned income exclusion). For most U.S. expatriates, this means that the tax bracket is likely to start at 25% or higher. If you are self-employed, however, your situation may differ from this description.

Furthermore, it is worth noting that additional amount of earnings may also be excluded under the foreign housing exclusion.

Contact Sherayzen Law Office For Foreign Earned Income Exclusion Legal Help

If you are a U.S. taxpayer living abroad or you are planning to accept a job overseas, contact us to discuss your tax situation. Our experienced tax firm will guide you through the complex maze of U.S. tax reporting requirements, help you make sure that you are in full compliance with U.S. tax laws, and help you take advantage of the relevant provisions of the Internal Revenue Code to make sure that you do not over-pay your taxes in the United States.

2012 OVDP Offers Alternative PFIC Calculation Method

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If your client’s offshore voluntary disclosure involves PFIC (Passive Foreign Investment Company) income, you should be aware that the 2012 OVDP (Offshore Voluntary Disclosure Program) offers an alternative PFIC calculation method. In this article, I intend to outline broad contours of the alternative method and put it in a broader context of voluntary disclosure.

From the outset, I want to emphasize that the calculation of PFIC increase in tax is an extremely complex matter and should be conducted only by international tax professionals; therefore, this article is likely to be more of interest to international tax attorneys and accountants rather than the taxpayers themselves.

When Alternative OVDP PFIC Method Is Usually Elected

Whether to elect an alternative OVDP Method of PFIC calculation is a matter that should be decided by your international tax attorney in charge of your voluntary disclosure case. However, there are four common situations when taxpayers usually (but not always) choose the OVDP method.

First, for obvious reasons, if a PFIC election was already timely made (QEF or Market-to-Market (MTM)) in the past, the OVDP method is usually avoided.

Second, where a lack of historical information on the cost basis and holding period of many PFIC investments makes it difficult for taxpayers to prepare statutory PFIC computations and for the IRS to verify them. This is a very common reason for choosing OVDP method, especially in situations where PFICs were inherited by U.S. taxpayers.

Third, where the OVDP method is more financially beneficial than the statutory § 1291 method. Unfortunately, it is usually not easy to identify whether the OVDP or the statutory method is going to be advantageous; preliminary PFIC calculations will need to be conducted on both methods before a recommendation can be made to a client.

Finally, the fourth type of situations when people choose OVDP over § 1291 method are those where the default statutory PFIC method is so difficult and time-consuming to calculate that the clients simply opt for the OVDP method because it will save them more money in legal and accounting fees than whatever advantage a default statutory method would bring.

I once spoke with an attorney who always recommended OVDP method over § 1291, because the default method is too difficult to calculate. I believe this is an exaggeration and I would caution tax professionals from making such unfounded judgments. I have had situations where the default method was superior over the MTM method, OVDP or otherwise, based on the way the transactions were structured or the violent shifts in the value of PFICs. Therefore, one should always study the special circumstances of a client before laying out the options to the client and making the final recommendation.

OVDP Alternative MTM Method

Once your client selects the OVDP Alternative Method, it is important that you follow the rules of the method. In essence, the OVDP Method utilizes the mark-to-market methodology authorized in Internal Revenue Code § 1296 but without the requirement for complete reconstruction of historical data (which, in situations where are several legitimate places to start, may offer room for planning).

There are other differences between the traditional MTM and OVDP MTM methods. For example, a rate of 7% of the tax computed for PFIC investments marked to market in the first year of the OVDP application will be added to the tax for that year, in lieu of the PFIC interest charges. Also, a tax rate of 20% will be applied to the MTM gain(s), MTM net gain(s) and gains from all PFIC dispositions during the voluntary disclosure period under the OVDP, in lieu of the rate contained in IRC § 1291(a)(1)(B) for the amount allocable to the current year and IRC §1291(c)(2) for the deferred tax amount(s) allocable to any other taxable year.

With respect to limiting losses, the OVDP MTM method does follow the unreversed inclusions rule with very detailed instructions on the post-voluntary disclosure treatment of losses. I will not get into details in this article, but tax professionals should diligently study these instructions.

Once the OVDP Alternative method is selected, it will apply to all of your client’s PFIC investments. The initial MTM computation of gain or loss under this methodology will be for the first year of the OVDP application, but could be made after that year depending on when the first PFIC investment was made.

Election Of the OVDP MTM Method Will Have Tax Consequences On the Post-Disclosure Period

It is important to emphasize that the OVDP MTM method will have tax consequences on your client’s post-OVDP tax situation. For example, any unreversed inclusions at the end of the voluntary disclosure period will be reduced to zero and the MTM method will be applied to all subsequent years in accordance with IRC § 1296 as if the taxpayer had acquired the PFIC stock on the last day of the last year of the voluntary disclosure period at its MTM value and made an IRC § 1296 election for the first year beginning after the voluntary disclosure period.

Other important tax consequences must also be explained to your clients.

Contact Sherayzen Law Office for Help With PFICs In a Voluntary Disclosure Context

This article offers only a very broad outline of the OVDP MTM method and it should not be relied upon in your PFIC calculations. My only intent in this article was to alert the tax professionals to the existence and general contours of the OVDP Alternative PFIC Method. Whether to use it and how to use it requires deep understanding of the various PFIC calculation methods in conjunction with planning for various voluntary disclosure options.

If you or your clients are facing PFIC issues in a voluntary disclosure context, contact Sherayzen Law Office for help. Our experienced international tax firm will thoroughly analyze your client’s situation, propose various voluntary disclosure options, explain how these options affect your PFIC calculation method, and complete all of the required calculations and tax forms.