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Foreign Real Estate US Taxpayer Definition | International Tax Lawyer

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This essay seeks to identify those considered to be a “US Taxpayer” with respect to reporting foreign real estate or income from it to the IRS. In other words, today, I will discuss the foreign real estate US Taxpayer definition.

Foreign Real Estate US Taxpayer Definition: IRC §7701(a)

The definition of “US taxpayer” for the purposes of foreign real estate is equivalent to the definition of US tax resident or “US Person” in IRC §7701(a). “US Persons” are equivalent to “US taxpayers” for the purposes of this article.

Note that, under §7701(a)(1), a person “shall be construed to mean and include an individual, a trust, estate, partnership, association, company or corporation”. In other words, a “person” may mean not only an individual, but also a business entity, trust or estate.

Foreign Real Estate US Taxpayer Definition: General Definition

Under §7701(a)(30), a “US Person” means a US citizen, US resident alien, domestic partnership, domestic corporation, any estate that is not a foreign estate and a trust that satisfies both conditions of §7701(a)(30)(E). Let’s discuss each of these categories of US Persons in more detail.

Foreign Real Estate US Taxpayer Definition: Individuals Who Are US Persons

As I stated above, all US citizens and US resident aliens are considered US Persons. In the vast majority of cases, it is fairly easy to determine who a US citizen is; most complications occur with respect to “accidental Americans” and Americans with only one parent who is a US citizen.

A US resident alien is a more complex term. It includes US Permanent Residents (i.e. “green card” holders) as well as all persons who satisfied the Substantial Presence Test (unless an exception applies) and all persons who declared themselves as US tax residents. This means that a person may be a US resident for tax purposes, but not for immigration purposes. This situation creates a lot of confusion among people who marry US persons or who come to the United States to work; many of them believe themselves to be Non-US Persons, but in reality they are US tax residents.

Foreign Real Estate US Taxpayer Definition: Domestic Corporations & Partnerships

Under §7701(a)(4), corporations and partnerships are considered US Persons if they are created or organized in the United States or under the laws of the United States or any of its states. In the case of partnerships, the IRS may issue regulations that provide otherwise, but the IRS has not done so yet. Conversely, a corporation or a partnership is a Non-US Person if it is not organized in the United States.

Pursuant to §7701(a)(9), the definition of the United States for the purposes of §7701(a)(4) includes only the 50 States and the District of Columbia. In other words, §7701(a)(9) excludes all US territories and possessions from the definition of the United States. For example, a corporation formed in Guam is a Non-US Person!

The biggest complication that one would encounter in this area of law is with respect to common-law partnerships. The determination of their US tax residency may be a lot more complex, because they are not officially organized under the laws of any state.

Foreign Real Estate US Taxpayer Definition: Domestic Trust

A trust is a US Person if it satisfies both tests contained in §7701(a)(30)(E). The first test is a “court test”: a court within the United States must be able to exercise primary supervision administration. The second test is a “control test”: one or more US persons must have the authority to control all substantial decisions of the trust. Failure to meet either test will result in the trust being a Non-US Person with huge implications for US tax purposes.

Foreign Real Estate US Taxpayer Definition: Domestic Estate

While all other definitions described above define a domestic entity and state that a foreign entity is not a domestic one, it is exactly the opposite with estates. Under §7701(a)(30)(D), an estate is a US Person if it is not a foreign estate described in §7701(a)(31).

§7701(a)(31)(A) defines foreign estate as estate “the income of which, from sources without the United States which is not effectively connected with the conduct of a trade or business within the United States, is not includible in gross income under subtitle A”.

Contact Sherayzen Law Office for Professional Help with Your Foreign Real Estate Reporting Obligations in the United States

If you are a US person who owns foreign real estate and you have questions concerning your US tax compliance concerning owning foreign real estate, selling real estate or reporting income generated by foreign real estate, contact Sherayzen Law Office for professional help. We have helped US taxpayers around the world with their foreign real estate US tax obligations, and we can help you!

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Brazilian Mutual Funds: US Tax Obligations | International Tax Lawyer & Attorney

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It is a common, almost default practice in Brazil to invest in Brazilian mutual funds. While this practice is perfectly innocent for majority of Brazilians, it may present a huge compliance issue for Brazilians who are also US taxpayers. The problem is that this type of an investment draws at least two important US tax reporting requirements – FBAR and Form 8621. In this article, I will provide a broad overview of each of these requirements concerning Brazilian mutual funds.

Brazilian Mutual Funds: FBAR Reporting

FinCEN Form 114, the Report of Foreign Bank and Financial Accounts, commonly known as “FBAR”, is undoubtedly the most important requirement that applies to US taxpayers with Brazilian mutual funds. As long they meet the filing threshold, US taxpayers are required to disclose all of their Brazilian mutual funds on FBAR.

The threshold is very easy to meet for two reasons. First, it is very low, just $10,000. Second, this threshold is determined by taking the calendar-year highest balances of all of the taxpayer’s foreign accounts and adding them all up. Sometimes, this results in significant over-reporting of a person’s actual balances, which easily satisfies the FBAR reporting threshold.

What makes FBAR compliance so important is its draconian penalty system. FBAR noncompliance may result in severe noncompliance penalties, even criminal penalties. The 2024 Civil FBAR Penalties and the IRS FBAR Tax Lawyer & Attorney willful penalties are huge and are imposed on a per-account basis. Even if the taxpayer did not know about the existence of FBAR, the IRS may still impose large non-willful FBAR penalties.

Brazilian Mutual Funds: Form 8621 PFIC Reporting

The biggest practical problem with Brazilian mutual funds, however, lies in the fact that all of these funds are classified as Passive Foreign Investment Companies or PFICs under US international tax law. This is bad news for US taxpayers, because being an owner of a PFIC means a substantial tax compliance burden, especially under the default IRC Section 1291 rules.

There are four PFIC problems that make PFIC tax compliance so burdensome to US owners of foreign mutual funds. First, the PFIC tax and PFIC interest can be substantial. Moreover, since PFIC tax and PFIC interest are calculated independent of a taxpayer’s actual tax bracket, a taxpayer with Brazilian mutual funds may see a significant rise in his US tax liability. It may occur even in a situation where a taxpayer may not otherwise owe any tax to the IRS. This fact may also be significant in the context of an offshore voluntary disclosure.

Second, PFIC calculations may be very complex and expensive. The professional fees for PFIC calculations may easily outstrip all other professional fees related to other aspects of your US tax compliance.

Third, the actual disclosure of PFIC income occurs on Form 8621 before it is entered into your personal or business tax return. This information return must be filed with your US tax return. Unfortunately, since the vast majority of tax software programs (consumer and professional) do not support Form 8621 compliance, it is very likely that you will not be able to e-file your US tax return; rather, you may have to mail it.

Finally, Form 8621 is a very obscure requirement known mostly to a handful of US tax professionals who specialize in US international tax compliance (such as Sherayzen Law Office). This means that your local tax accountants are unlikely to be able to do PFIC calculations. Rather, in order to stay in full US tax compliance, you will have to secure help from someone among a very small number of PFIC specialists, like Mr. Eugene Sherayzen of Sherayzen Law Office, that exist in the United States.

Contact Sherayzen Law Office for Professional Help With US Tax Reporting of Your Brazilian Mutual Funds

If you are a US owner of Brazilian mutual funds, contact Sherayzen Law Office for professional assistance. We have helped hundreds of US taxpayers resolve their US tax compliance issues concerning foreign mutual funds, including Brazilian mutual funds, and we can help you!

Contact Us Today to Schedule Your Confidential Consultation!

Indian Mutual Funds & US Person’s Tax Obligations | International Tax Attorney

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After having handled so many offshore voluntary disclosures for my Indian and Indian-American clients, I can clearly see that US tax reporting obligations concerning Indian mutual funds is one of the most troublesome areas for my clients. In this article, I will focus on the three most important US tax reporting requirements that may be applicable to US taxpayers with Indian mutual funds – FBAR, FATCA Form 8938 and Form 8621.

Indian Mutual Funds: FBAR Reporting

The first and most important requirement that applies to US taxpayers with Indian mutual funds is FinCEN Form 114, the Report of Foreign Bank and Financial Accounts, commonly known as “FBAR”. As long they meet the filing threshold, US taxpayers are required to disclose all of their Indian mutual funds on FBAR.

FBAR is a very dangerous form. On the one hand, it is very easy to fall into noncompliance with this form due to its very low filing threshold – just $10,000. Moreover, this threshold is determined by taking the calendar-year highest balances of all of the taxpayer’s foreign accounts (even if these accounts are located in another country in addition to India) and adding them all up. Sometimes, this results in significant over-reporting of a person’s actual balances, which easily satisfies the FBAR reporting threshold.

On the other hand, FBAR has the most severe noncompliance penalties among all information returns concerning foreign asset disclosure. Its penalties range from non-willful penalties (i.e. potentially a situation where a person simply did not know about FBAR’s existence) to extremely high civil willful penalties and even criminal penalties. In other words, in certain circumstances, FBAR noncompliance may result in actual jail time.

Indian Mutual Funds: FATCA Form 8938

When it comes to the FATCA Form 8938 compliance, a taxpayer with Indian mutual funds will find it fairly easy as long as he correctly files his Forms 8621 (see below) and indicates on Form 8938 how many of these forms were filed with the tax return. This ease of reporting is meant to alleviate double-reporting of foreign mutual funds on a US tax return.

It is important to emphasize three points with respect to Form 8938 compliance for taxpayers with Indian mutual funds. First, even if you file Forms 8621, Form 8938 must still be attached to your tax return as long as you meet the relevant filing threshold (and the assets listed on Forms 8621 must be counted toward the threshold). Failure to file a Form 8938 may still draw a penalty in these circumstances and keep the statute of limitations open on your entire US tax return.

Second, Form 8938 and Form 8621 compliance does not in any way affect your obligation to file FBARs. This is the case even if this means that the same assets are reported three times.

Third, unlike FBAR, Form 8938 comes with a third-party FATCA verification mechanism. Under FATCA, the IRS should receive foreign-account information not only from taxpayers who file Forms 8938, but also from their foreign financial institutions. This means that it is much easier for the IRS to identify Form 8938 (and thereby Form 8621) noncompliance than that of FBAR. It also means that a Form 8938 noncompliance may have a higher chance to be investigated and penalized by the IRS.

Indian Mutual Funds: Form 8621 PFIC Reporting

We now come to the most critical difference in US tax compliance between foreign mutual funds and most other foreign assets. All foreign mutual funds, including the funds incorporated in India, are classified as PFICs or Passive Foreign Investment Companies under US international tax law.

While I will not explain here the complex PFIC calculations and the various PFIC elections that may be available to a US taxpayer with foreign mutual funds, I wish to discuss four most important points concerning PFIC compliance.

First, pursuant to the worldwide income reporting requirement, all US tax residents must calculate and disclose their PFIC income on their US tax returns. This is a significant compliance burden as PFIC calculations can be very complex and expensive. The professional fees for PFIC calculations may easily outstrip all other professional fees related to other aspects of your US tax compliance.

Second, since PFIC tax and PFIC interest are calculated independent of a taxpayer’s actual tax bracket, a taxpayer with Indian mutual funds may see a significant rise in his US tax liability. It may occur even in a situation where a taxpayer may not otherwise owe any tax to the IRS. This fact may be especially significant in a voluntary disclosure context.

Third, the actual disclosure of PFIC income occurs on Form 8621 before it is entered into your personal or business tax return. This information return must be filed with your US tax return. Unfortunately, since the vast majority of tax software programs (consumer and professional) do not support Form 8621 compliance, it is very likely that you will not be able to e-file your US tax return; rather, you may have to mail it.

Finally, Form 8621 is a very obscure requirement known mostly to a handful of US tax professionals who specialize in US international tax compliance (such as Sherayzen Law Office). This means that the majority of US taxpayers are not even aware of the fact that they need to comply with their Form 8621 reporting obligations. In other words, they believe themselves to be in compliance with US tax laws even though, in reality, they are not. Thus, the obscurity and complexity of Form 8621 pushes many US taxpayers into tax noncompliance.

Contact Sherayzen Law Office for Professional Help With US Tax Reporting of Your Indian Mutual Funds

If you are a US taxpayer with Indian mutual funds, contact Sherayzen Law Office for professional We have helped hundreds of US taxpayers with foreign mutual funds, including Indian mutual funds, to resolve their past FBAR, FATCA and PFIC noncompliance, and we can help you!

Contact Us Today to Schedule Your Confidential Consultation!

The Tinkov Case: Concealment of Foreign Assets During Expatriation

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On March 5, 2020, the Internal Revenue Service (“IRS”) and the U.S. Department of Justice (“DOJ”) announced that Mr. Oleg Tinkov was arrested in London in connection with an indictment concerning concealment of about $1 billion in foreign assets and the expatriation income in connection with these assets. Let’s discuss the Tinkov case in more detail.

The Tinkov Case: Alleged Facts

According to the indictment, Oleg Tinkov was the indirect majority shareholder of a branchless online bank that provided its customers with financial and bank services. The indictment alleges that, as a result of an initial public offering (IPO) on the London Stock Exchange in 2013, Tinkov beneficially owned more than $1 billion worth of the bank’s shares. He allegedly owned these shares through a British Virgin Island (“BVI”) structure.

The indictment further alleges that three days after the IPO, Mr. Tinkov renounced his U.S. citizenship or expatriated. Expatriation is a taxable event subject to the expatriation tax. As a an expatriated individual, Mr. Tinkov should have reported to the IRS the gain from the constructive sale of his worldwide assets and pay the expatriation tax on such a gain to the IRS. Yet, he allegedly never did it.

Instead, Mr. Tinkov filed an allegedly false 2013 tax return with the IRS that reported income of less than $206,000. Moreover, the IRS further alleges that he filed a false 2013 Initial and Annual Expatriation Statement reporting that his net worth was $300,000.

The Tinkov Case: Potential Noncompliance Penalties

If convicted, Mr. Tinkov faces a maximum sentence of three years in prison on each count. He also faces a period of supervised release, restitution, and monetary penalties. Other penalties (including Form 5471, Form 8938 and FBAR penalties) may be imposed.

The Tinkov Case: Presumption of Innocence

The readers should remember that an indictment is a mere allegation that crimes have been committed. The defendant (in this case, Mr. Tinkov) is presumed innocent until proven guilty beyond a reasonable doubt.

The Tinkov Case: Lessons from This Case

The Tinkov Case offers a number of useful lessons concerning US international tax compliance, particularly U.S. expatriation tax laws. Let’s concentrate on the three most important lessons.

First, a U.S. citizen or a long-term U.S. permanent resident must carefully consider all tax consequences of expatriation. Such a taxpayer must engage in careful, detailed tax planning prior to expatriation. Mr. Tinkov did not do such planning and renounced his U.S. citizenship merely three days before the IPO. By that time, the value of his assets was already easily established beyond reasonable dispute.

Second, one must be very careful and accurate with one’s disclosure to the IRS. Mr. Tinkov’s 2013 U.S. tax return and the Expatriation Statement contained information vastly different from the one that the IRS was able to acquire during its investigation. It is no wonder that the IRS concluded that he willfully filed false returns to the IRS, especially since it does not appear that his submissions to the IRS attempted to explain the gap between the returns and the information that IRS had or acquired later during an investigation.

Finally, expatriation cases involving sophisticated tax structures, especially those incorporated in an offshore tax-free jurisdiction, are likely to face a closer scrutiny and even a criminal investigation by the IRS. We have seen the confirmation of this fact in many cases already. In this case, Mr. Tinkov’s BVI corporation, which protected his indirect ownership of his online bank, was a huge red flag. His attorneys should have predicted that this structure alone would invite an IRS investigation of his expatriation.

Contact Sherayzen Law Office for Professional Help With Your U.S. International Tax Compliance and Offshore Voluntary Disclosures

If you are a U.S. taxpayer with assets in a foreign country, contact Sherayzen Law Office for professional help with your U.S. international tax compliance. If you have already violated U.S. international tax laws concerning disclosure of your foreign assets, foreign income or expatriation, then you need to secure help as soon as possible to conduct an offshore voluntary disclosure to lower your IRS penalties.

We have helped hundreds of US taxpayers around the globe with their U.S. international tax compliance and offshore voluntary disclosures. We can help you!

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§318 Entity-Member Attribution Summary | International Tax Lawyer

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In a previous article, I discussed the IRC (Internal Revenue Code) §318 sidewise attribution limitation. This limitation was the last piece in the jigsaw puzzle of the §318 entity-member attribution rules; now, we are ready to summarize these rules in light of this exception. This is the purpose of this article – state the §318 Entity-Member Attribution summary.

§318 Entity-Member Attribution Summary: Definition of Member

For the purpose of this §318 Entity-Member Attribution summary, I am using the word “member” to describe partners, shareholders and beneficiaries.

§318 Entity-Member Attribution Summary: Limitations

This summary of §318 entity-member attribution rules is limited only to situations where a member owns at 50% of the value of stock (in case of a corporation) and a beneficiary of a trust does not hold a remote and contingent interest in a trust. The readers need to keep these limitations in mind as they apply the summary below to a particular fact pattern.

Moreover, the readers must remember that this summary of the §318 Entity-Member attribution rules may be altered when one applies it within the context of a specific tax provision. Hence, the readers must check for any modification of these §318 attribution rules contained in that specific tax provision.

§318 Entity-Member Attribution Summary

Now that we understand the limitations above, we can state the following summary of the §318 Entity-Member attribution rules:

  1. All corporate stock is attributed to an entity from its member irrespective of whether the member owns this stock actually or constructively;
  2. If corporate stock is attributed from an entity to its member, such attribution will be done on a proportionate basis; and
  3. The following corporate stock is attributed from an entity to its member on a proportionate basis:
    (a). Corporate stock which the entity actually owns;
    (b). Corporate stock which the entity constructively owns under the option rules; and
    (c). Corporate stock which the entity constructively owns because it is a member of some other entity.

Contact Sherayzen Law Office for Professional Help With US International Tax Law Compliance

US international tax law is incredibly complex and the penalties for noncompliance are exceptionally severe. This means that an attempt to navigate through the maze of US international tax laws without assistance of an experienced professional will most likely produce unfavorable and even catastrophic results.

Contact Sherayzen Law Office for professional help with US international tax law. We are a highly experienced, creative and ethical team of professionals dedicated to helping our clients resolve their past, present and future US international tax compliance issues. We have helped clients with assets in over 70 countries around the world, and we can help you!

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