international-tax-lawyer

Italian Bank Accounts | International Tax Lawyer & Attorney New York New Jersey

US tax requirements concerning Italian bank accounts can be quite burdensome and complex. The chief three US reporting requirements applicable to Italian bank accounts are: worldwide income reporting, FBAR and FATCA Form 8938. Let’s discuss each of these requirements in more depth.

Italian Bank Accounts: US Tax Residents and US Persons

Before we delve into the discussion of these requirements, we need to identify who is required to comply with these requirements. This task is complicated by the fact that each of aforementioned three requirements has its own definition of a required filer.

Nevertheless, we can readily identify the categories of required filers shared by all three requirements. These categories correspond most closely, but not exactly to the concept of US tax residents. “US tax residency” is a broad term which includes US citizens, US permanent residents, residents who satisfy the Substantial Presence Test and individuals who declare themselves as US tax residents.

This definition of a US tax resident is fully applicable to the worldwide income reporting requirement and very closely corresponds to the concept of the Specified Person of Form 8938. FBAR’s concept of “US Persons”, however, does differ more significantly from the definition of a “US tax resident”, but only in more unusual circumstances. The most common differences arise with respect to the treaty “tie-breaker” provisions to escape US tax residency and persons who declare themselves tax residents of the United States.

Additionally, I wish to caution the readers that even the definition of US tax residents which I just stated has a number of important exceptions, such as visa exemptions (for example, an F-1 visa five-year exemption for foreign students) from the Substantial Presence Test.

In other words, the issue of who the required filer is, requires careful analysis of the facts and circumstances of an individual. This is definitely the job of your international tax attorney; it is just too dangerous to attempt to do it yourself.

Italian Bank Accounts: Worldwide Income Reporting

All US tax residents must report their worldwide income on their US tax returns. In other words, US tax residents must disclose both US-source and foreign-source income to the IRS. In the context of the Italian bank accounts, foreign-source income means all bank interest income, dividends, royalties, capital gains and any other income generated by these accounts.

Italian Bank Accounts: FBAR Reporting

The official name of the Report of Foreign Bank and Financial Accounts (“FBAR”) is FinCEN Form 114. FBAR requires all US Persons to disclose their ownership interest in or signatory authority or any other authority over Italian bank and financial accounts if the aggregate highest balance of these accounts exceeds $10,000.

I wish to emphasize again that, while the term “US persons” is very close to “US tax residents”, it is not the same. The term “US tax residents” is slightly broader than “US persons”. I encourage you to search our website – sherayzenlaw.com – for articles concerning the definition of a US Person.

One aspect of the FBAR requirement, however, deserves a special mention here – the definition of an “account”. The FBAR definition of an account is substantially broader than how this word is generally understood in our society. “Account” for FBAR purposes includes: checking accounts, savings accounts, fixed-deposit accounts, investments accounts, mutual funds, options/commodity futures accounts, life insurance policies with a cash surrender value, precious metals accounts, earth mineral accounts, et cetera. In fact, whenever there is a custodial relationship between a foreign financial institution and a US person’s foreign asset, there is a very high probability that the IRS will find that an account exists for FBAR purposes.

Finally, no discussion of FBAR can be considered complete without mentioned the much-dreaded FBAR penalty system. It is complex and severe to an astonishing degree. The most feared penalties are criminal FBAR penalties with up to 10 years in jail (of course, these penalties come into effect only in the most egregious situations). The next layer of penalties are FBAR willful civil penalties which can easily exceed a person’s net worth. Finally, FBAR imposes penalties even on non-willful taxpayers.

All of the civil FBAR penalties have their own complex web of penalty mitigation layers, which depend on the facts and circumstances of one’s case. One of the most important factors is the size of the Italian bank accounts subject to FBAR penalties. Additionally, since 2015, the IRS has added another layer of limitations on the FBAR penalty imposition. These self-imposed limitations of course help, but one must keep in mind that they are voluntary IRS actions and may be disregarded under certain circumstances (in fact, there are already a few instances where this has occurred).

Italian Bank Accounts: FATCA Form 8938

FATCA Form 8938 has been in existence since 2011. Unlike FBAR, it is filed with a federal tax return and considered to be an integral part of the return. This means that a failure to file File 8938 may render the entire tax return incomplete and potentially subject to an IRS audit.

Form 8938 requires “Specified Persons” to disclose on their US tax returns all of their Specified Foreign Financial Assets (“SFFA”) as long as these Persons meet the applicable filing threshold. The filing threshold depends on a Specified Person’s tax return filing status and his physical residency. For example, if he is single and resides in the United States, he needs to file Form 8938 as long as the aggregate value of his SFFA is more than $50,000 at the end of the year or more than $75,000 at any point during the year.

The IRS defines SFFA very broadly to include an enormous variety of financial instruments, including foreign bank accounts, foreign business ownership, foreign trust beneficiary interests, bond certificates, various types of swaps, et cetera. In some ways, FBAR and Form 8938 require the reporting of the same assets, but these two forms are completely independent from each other. This means that a taxpayer may have to do duplicate reporting on FBAR and Form 8938.

Specified Persons consist of two categories: Specified Individuals and Specified Domestic Entities. You can find a detailed explanation of both categories by searching our website sherayzenlaw.com.

Finally, Form 8938 has its own penalty system which has far-reaching consequences for income tax liability (including disallowance of foreign tax credit and imposition of higher accuracy-related income tax penalties). There is also a $10,000 failure-to-file penalty.

Contact Sherayzen Law Office for Professional Help With the US Tax Reporting of Your Italian Bank Accounts

Worldwide income reporting, FBAR and Form 8938 do not constitute a complete list of US reporting requirements that may apply to Italian bank accounts. There may be many more.

This is why, if you have Italian bank accounts, should contact Sherayzen Law Office. We have a highly knowledgeable international tax compliance team headed by an experienced international tax attorney, Mr. Eugene Sherayzen. We have helped hundreds of US taxpayers with their US international tax issues, including reporting Italian bank accounts, and We can help You!

Contact Us Today to Schedule Your Confidential Consultation!

Minsk Seminar Conducted by US International Tax Lawyer & Attorney

On June 9, 2017, Mr. Eugene Sherayzen, an international tax attorney and owner of Sherayzen Law Office, was the keynote speaker at a seminar “Introduction to U.S. Tax Compliance for U.S. Citizens and Green Card Holders Residing and Doing Business in Belarus” in Minsk, Republic of Belarus (the “Minsk Seminar”). The attorney conducted the entire Minsk Seminar in Russian, because he speaks this language fluently.

The Minsk Seminar was presented before the Minsk City Lawyer’s Association. It was a historic event, because it appears that this was the very first time that a practicing US international tax attorney conducted a seminar on this topic in Minsk. The Minsk Seminar was well-attended by close to 25-30 persons (despite the fact that it was conducted on a Friday afternoon); it appears that virtually all attendees were practicing lawyers in Minsk.

Mr. Sherayzen decided to make his presentation as broad as possible, but attended to details only as necessary. As a result, this more than two-hour presentation covered the main topics concerning US international tax reporting requirements of a U.S. citizen living and/or doing business in Belarus.

The tax attorney started the Minsk Seminar with the definition of a U.S. tax resident, emphasizing that a U.S. citizen and a U.S. Permanent Resident who reside in Belarus should be considered U.S. tax residents. Then, Mr. Sherayzen discussed the worldwide income reporting requirement and broadly covered various topics concerning specific income recognition.

The tax attorney continued the Minsk Seminar with an overview of the U.S. international information returns concerning individuals who have foreign assets, including an ownership interest in a foreign business. The severe FBAR penalties caused consternation among the attendees. As part of this discussion, he also explained the common-law concept of a “trust”.

The last part of the Minsk Seminar was devoted to the discussion of the U.S. anti-deferral regimes, such as Subpart F and PFIC rules. Mr. Sherayzen explained the potential tax consequences of income recognition under both of these regimes.

Throughout the Minsk Seminar, the Belarussian attorneys asked many questions and readily engaged in a lively comparison of the Belarussian tax rules to the U.S. tax rules. Overall, it was a very friendly seminar. Mr. Sherayzen looks forward to future presentations on this and other U.S. international tax topics in Eastern Europe.

Employment Income Sourcing | International Tax Lawyer & Attorney

Employment income sourcing is a very important tax issue for employees of US corporations sent overseas, employees of foreign corporations stationed in the United States and employees who work in different countries during a tax year. For employees who are tax residents of a foreign country, this issue will determine whether their income will be taxed in the United States; whereas for US tax residents, the source of income rules will determine the amount of the allowable foreign tax credit. In this article, I will focus on the employment income sourcing rules concerning monetary compensation of employees.

Employment Income Sourcing: General Rules

The source of income rules concerning employees are very similar to the rules that apply to self-employment income, but there are some differences. The main rule is that the location where the services are rendered determines whether this is US-source income or foreign-source income. If an employee works in the United States, then his salary would be considered US-source income; if he works in a foreign country, his salary would be sourced to that country. See §§861(a)(3) and 862(a)(3).

If the employer pays for work partly performed in the United States and partly outside of the United States, then the salary needs to be allocated between the countries. Treas. Reg. §1.861-4(b)(2)(ii)(A). The key issue arises here – how does an employee allocate this income between the countries?

Employment Income Sourcing: Time Basis Allocation

The first methodology for allocation of income between the countries is stated directly within the regulations – time basis. Id. Here, the IRS offers two choices to the employees: allocation based on specific number of days working in the United States versus separate time periods.

Under the “number of days” variation, the employee adds together the number of days worked in the United States and the number of days worked in a foreign country, figures out the percentages for each country and sources the income according to the percentage allocation. Treas. Reg. §1.861-4(b)(2)(ii)(F).

Under the “time periods” variation, a tax year is split into distinct time periods: one where employee spends all of his time in the United States and one where employee spends all of his time in a foreign country. The compensation paid in the first period is allocated entirely to the United States, whereas the salary paid in the second time period is considered to be foreign-source income. Id.

Employment Income Sourcing: Multi-Year Compensation

An interesting situation occurs with respect to employees with multi-year compensation contracts. A multi-year contract in this context means a situation where the “compensation that is included in the income of an individual in one taxable year but that is attributable to a period that includes two or more taxable years.” Reg. §1.861-4(b)(2)(ii)(F).

Generally, the employment income sourcing in this case occurs in the following manner: (1) employee first aggregates his total contract compensation for the entire year; (2) then, the employee sums up all of the days worked in the United States and all of the days worked in a foreign country for the period covered by the multi-year contract; and (3) the employee sources the income to the United States based on the number of days worked in the United States vis-a-vis the total number of days worked under the contract; the rest of the income is considered foreign-source income. Id. While this approach is specifically described in the regulations, the regulations also generally refer to the “time basis” allocation. Hence, it appears that an employee may have a choice between the “number of days” approach that was just described and the “time periods” variation.

Employment Income Sourcing: Alternative Basis Sourcing

Employees have the right to disregard completely the time basis approach to employment income sourcing and adopt an alternative basis approach. Treas. Reg. §1.861-4(b)(2)(ii)(C)(1)(i).  An employee can do so as long as he is able to establish that “under the facts and circumstances of the particular case, the alternative basis more properly determines the source of the compensation than a basis described in paragraph (b)(2)(ii)(A) or (B), whichever is applicable, of this section.” Id.

An employee is not the only person who has this right; the IRS also has the right to utilize an alternative basis for employment income sourcing “if such compensation either is not for a specific time period or constitutes in substance a fringe benefit.” Treas. Reg. §1.861-4(b)(2)(ii)(C)(1)(ii). The IRS can do so as long as the “alternative basis determines the source of compensation in a more reasonable manner than the basis used by the individual pursuant to paragraph (b)(2)(ii)(A) or (B) of this section.” Id.

A taxpayer does not need to obtain the IRS consent in order to use the alternative basis for employment income sourcing. He should, however, keep the records in order to be able to show how his method is better than the time basis approach. TD 9212, 70 FR 40663, 40665 (07/14/2005).

Special requirements apply to employees who received $250,000 or more in compensation and use the alternative basis for employment income sourcing. Not only must such employees answer the relevant questions on Form 1040, but they should also attach a detailed statement to their tax returns. Id. The statement must contain the following information: “(1) The specific compensation income, or the specific fringe benefit, for which an alternative method is used; (2) for each such item, the alternative method of allocation of source used; (3) for each such item, a computation showing how the alternative allocation was computed; and (4) a comparison of the dollar amount of the compensation sourced within and without the United States under both the individual’s alternative basis and the basis for determining source of compensation described in § 1.861-4(b)(2)(ii)(A) or (B).” Id.

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

If you are a US taxpayer who receives foreign-source income and/or has foreign assets, contact Sherayzen Law Office for professional help. Our professional tax team, headed by international tax attorney, Mr. Eugene Sherayzen, has helped hundreds of US taxpayers around the world with their US international tax issues. We can help You!

Contact Us Today to Schedule Your Confidential Consultation!

International Personal Services Sourcing Rules | International Tax Lawyer

In a previous article, I explained that US tax law sources personal services to the place where these services are performed. What about a situation where such services are performed partially in the United States and partially outside of the United States (hereinafter, I will call such services “international personal services”)? In this article, I will address this situation and discuss the US international personal services sourcing rules.

I will specifically limit my discussion in this essay to international personal services sourcing rules concerning non-corporate independent contractors. In the future, I will discuss the income source rules for corporations and employees, including the source of income rules concerning fringe benefits and stock options.

International Personal Services Sourcing: Two Main Situations

The rules concerning the sourcing of international person services income depend on how a contracting agreement structures the payment for such services. In this context, there are two most common categories of contracts.

The first category of contracts specifically designates part of the payment to cover the services performed in the United States and part of the payment to compensate for services performed in a foreign country. In this situation, we can easily apply the general rule and source each part of the payment to the place where services are performed. In other words, the payment for US services will be US-source income and the payment for foreign services will be foreign-source income.

Unfortunately, contractors rarely structure their agreements in this way, because they often fail to retain an international tax lawyer to review their contracts for US international tax issues. Business lawyers also often make the same mistake, because they fail to see the need to involve a tax attorney.

Hence, most contracts fall within the second category of contracts, where a contract does not allocate the payment between services performed in the United States and those performed in a foreign country. The general rule is of little help for these contracts; hence, the IRS developed a supplementary legal process for income sourcing in this type of a situation.

International Personal Services Sourcing: the Two-Step Allocation Process

If the contract does not divide the payment between the countries where the services are performed, then the taxpayer will need to engage in a two-step process.

First, the taxpayer should determine if the terms of the contract allow to make an accurate allocation of payment between the United States and a foreign country. Sometimes, a contractor may perform services so specific to a country that the allocation of payment is obvious, even though the contract does not expressly allocate the payment to this country.

Second, if no such accurate allocation is possible, then the taxpayer should allocate the payment “on the basis that most correctly reflects the proper source of income on the facts and circumstances of the particular case.” Treas. Reg. §1.861-4(b)(1). This appears to be a very general rule that opens up possibilities for creative tax planning, but, once we look at the history of this rule, we will quickly realize that one method – the Time Rule (described below) – limits its flexibility.

The current flexible rule is in force only since 1976. Prior to that year, the IRS required the allocation of payment strictly based on the Time Rule. The impetus to changing to a more flexible rule was a 1973 case from the Tenth Circuit, Tipton & Kalmbach, Inc v US, 480 F2d 1118, 32 AFTR2d 73-5334 (10th Cir 1973). In that case, the IRS determined that a re-enlistment bonus was a compensation for services which the taxpayer performed on the day he re-enlisted. The paradoxical result was the fact that the location of the soldier on the day of his re-enlistment determined the sourcing of the entire re-enlistment bonus.

Hence, the IRS infused more flexibility into the Time Rule by adopting the language currently found in Treas. Reg. §1.861-4(b)(1). Nevertheless, given this history, there is no question that the Time Rule remains the most persuasive method of income allocation for non-corporate individual contractors.

It should be emphasized, however, that dominance of the Time Rule should not deter a taxpayer utilizing alternative methodology (for example, the value produced by specific services) if it is more accurate. In other words, the Time Rule is the default methodology which the IRS will use to allocate the payment between the countries, but a taxpayer may use other alternatives as long as he can persuade the IRS that his methodology represents a more accurate allocation of income.

International Personal Services Sourcing: the Time Rule

The time has come to define the Time Rule. According to Treas. Reg. §1.861-4(b)(2)(ii)(E), under the Time Rule, the amount of payment allocated to the United States “is the amount that bears the same relation to the individual’s total compensation as the number of days of performance of the labor or personal services by the individual within the United States bears to his or her total number of days of performance of labor or personal services.” Taxpayers should use fractions in determining the allocations.

Let’s use an example to demonstrate the application of the Time Rule. A US Corporation signs a contract with Mr. Hause, a tax resident of Germany, to provide professional advice concerning incorporation of German heavy machinery into a Chinese factory owned by the corporation. The total price paid is $900,000; the work is performed within 180 days. Out of these 180 days, Mr. Hause spends 60 days in the United States working on the implementation plans and 120 days in China overseeing the implementation process. Based on the Time Rule, Mr. Hause spent 1/3 of his time in the United States and 2/3 in China; hence, $300,000 will be considered US-source income and $600,000 will be sourced to China. Of course, if Mr. Hause can show that the value of his work in China was far more important to the contract than his work in the United states, he can use an alternative methodology (which may still have to survive the IRS scrutiny during an audit).

Based on this example, you can see why the IRS likes the Time Rule – it is a relatively straightforward, objective calculation that can be easily implemented in almost any case.

Contact Sherayzen Law Office for Professional Help With International Personal Services Sourcing Rules and Other US International Tax Issues

Sherayzen Law Office can help you with all of your US international tax needs, including the international personal services sourcing rules. Our highly experienced international tax team has successfully helped US taxpayers around the globe to deal with their US international tax issues. We can help You!

Contact Us Today to Schedule Your Confidential Consultation!

Happy New Year 2019 from Sherayzen Law Office!

The legal tax team of Sherayzen Law Office, Ltd. wishes a very Happy New Year 2019 to our clients, blog readers and all US taxpayers around the world! May this new year bring you good health, prosperity and happiness! And, of course, full and proper compliance with all US international tax laws.

2019 Will Be a Highly Challenging Year from US Tax Compliance Perspective Due to the 2017 Tax Reform

The coming year is going to be a challenging one for all US taxpayers due to the enormous changes made to the Internal Revenue Code as a result of the 2017 tax reform. Already in 2018, some US taxpayers (especially owners of foreign corporations) had to work through the tax year 2017 transition rules.

The 2017 tax reform will be felt on an even grander scale in 2019 as millions of US taxpayers will struggle with the new rules in order to correctly file their 2018 tax returns. While many of these rules are meant to benefit these taxpayers, the tax compliance associated with them is likely to be complex.

Happy New Year 2019 to Individual US Taxpayers!

After the pain of learning how to comply with the new rules subsides, tens of millions of Americans are likely to call this a Happy New Year 2019 due to lower 2018 individual tax rates, the doubling of the child tax credit and higher standard deduction.

Millions of other, especially the upper middle-class Americans, however, are likely to be greatly hurt by the itemized deductions limitations with respect to state taxes and property taxes. The elimination of personal exemptions will further aggravate this problem. It will not be a Happy New Year 2019 for these taxpayers.

Happy New Year 2019 to Small-Business Owners!

It should still be a Happy New Year 2019 for the majority of the small business owners, including owners of S-corporations, due to the 20% reduction of pass-through income mandated by the tax reform. New depreciation rules are likely to have an overall beneficial impact, even if, in some cases, they may not be very helpful.

Happy New Year 2019 to C-Corporations and Their US & Foreign Owners!

It will be a very Happy New Year 2019 for one class of taxpayers in particular – regular C-corporations. These taxpayers arguably benefitted from the 2017 tax reform more than any type of taxpayers. The reduction in the tax rate from 35% to 21%, introduction of Foreign-Derived Intangible Income (“FDII”) and a whole series of small changes to corporate tax code have already led to the surge to corporate profits; this corporate tax boom is likely to continue to play out this year.

On the other hand, the introduction of the GILTI (Global Intangible Low-Taxed Income) tax, new attribution rules concerning the inclusion of non-US corporations and a myriad of other rules will greatly complicate the tax year 2018 corporate tax compliance. In fact, some corporations that never paid any taxes on their foreign income may now be forced to pay the GILTI tax in the United States.

Happy New Year 2019 to US Taxpayers Who Are Trying to Remedy Past Tax Noncompliance Through an Offshore Voluntary Disclosure!

The taxpayers with undisclosed foreign bank accounts and other assets will face increasing challenges in the year 2019 due to two unwelcome trends that came into existence after FATCA was fully implemented but became apparent to most professionals only in 2018. First, the IRS is narrowing the voluntary disclosure options, especially for willful taxpayers. As I just mentioned, this trend began already in 2017, but it could be clearly observed in the closure of the flagship 2014 OVDP on September 28, 2018. While it does not appear that the Streamlined Compliance Procedures will be targeted by the IRS any time soon, there is always a danger that the IRS may modify the terms of this voluntary disclosure option.

The November 20, 2018 modification of the Traditional Voluntary Disclosure (which greatly narrowed the utility of this option) is another manifestation of this trend. In fact, this modification poses a direct danger of forcing taxpayers into either Streamlined Compliance Procedures or the Traditional Voluntary Disclosure Program at the expense of Reasonable Cause disclosures.

The second trend complements the first trend: the loss of interest in offshore voluntary disclosures directly coincided with an increasingly aggressive IRS tax enforcement. The IRS audits, especially international tax audits, are on the rise as the IRS is taking advantage of the huge pile of information it has accumulated as a result of the previous voluntary disclosure programs, Swiss bank program and FATCA compliance.

The taxpayers will need professional help from an international tax attorney to successfully navigate around the legal challenges posed by these two negative trends in US international tax enforcement.

Taxpayers Will Need the Professional Help of Sherayzen Law Office For Proper Tax Compliance and Offshore Voluntary Disclosures of Foreign Assets in 2019

Overall, the new year 2019 promises to be a very interesting but highly complex year from the perspective of US international tax compliance. US taxpayers without adequate legal help are likely to either fail to take full benefit of the 2017 tax reform, suffer excessively from the negative aspects of the reform and/or even face the dreaded IRS penalties for international tax noncompliance.

At the same time, the narrower post-OVDP offshore voluntary disclosure options and the rising intensity of IRS audits will also present additional challenges to the already difficult situation of many taxpayers who wish to voluntarily resolve their past US international tax noncompliance issues.

Sherayzen Law Office can help you meet all of your 2019 tax challenges, including annual 2018 tax compliance, 2019 offshore voluntary disclosures of foreign assets and foreign income and IRS audit defense. We have helped hundreds of US taxpayers like you, and We can help you!

Contact Us Today to Schedule Your Confidential Consultation!