international tax lawyers

IRS Uses Panama Papers to Identify Noncompliant Taxpayers

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In April of 2016, the IRS acknowledged its participation in meetings with Joint International Tax Shelter Information and Collaboration network (“JITSIC”), International Monetary Fund (IMF) and World Bank to take advantage of the data about more than 200,000 offshore companies identified in the Panama Papers. At the same time, the IRS urged noncompliant U.S. taxpayers to come forward before the IRS finds them.

JITSIC and IMF/World Bank Meetings on Panama Papers

The JITSIC meeting regarding Panama Papers brought together senior tax officials from more than forty countries to discuss, per OECD, “opportunities for obtaining data, co-operation and information-sharing in light of the ‘Panama Papers’ revelations”. The IRS officials said they could not discuss who participated and what, specifically, was discussed. But in its statement to NBC News, the IRS described the meeting as “productive and timely” and said “governments around the world are working together cooperatively” to respond to the information released in the Panama Papers, with JITSIC setting itself up as a coordinator.

The following day, the IRS further discussed Panama Papers in gatherings that were part of the annual IMF and World Bank meetings.

After those meetings regarding Panama papers, bankers and finance ministers from the world’s twenty largest economies warned tax havens about their future efforts to punish governments that continue to hide billions of dollars in offshore accounts. The IRS also encouraged any U.S. citizens and companies that may have money in offshore accounts to do a voluntary disclosure with respect to these accounts.

Panama Papers Increase Pressure on IRS to Move Forward Against Cayman Islands, Singapore, Bermuda and Other Tax Shelters

According to media reports, the Panama papers may contain information on potentially thousands of U.S. citizens and firms that have at least an indirect connection to offshore accounts affiliated with Mossack Fonseca. The Panama papers, however, are not likely to contain any spectacular information with respect to U.S. taxpayers because these taxpayers mostly prefer to use Cayman Islands, Singapore and Bermuda.

Nevertheless, while the Panama papers might not be very informative about the U.S. citizens, these documents have increased the political pressure on the IRS to move forward against other tax shelters. Therefore, we should not be surprised if we see new bold IRS initiatives in Cayman Islands, Singapore and Bermuda.

This means that the U.S. taxpayers who have undisclosed foreign assets in Cayman Islands, Singapore and Bermuda should analyze their voluntary disclosure options before it is too late. After the IRS discovery, most (and, perhaps, all) of their voluntary disclosure options will be foreclosed due to IRS examinations.

Contact Sherayzen Law Office for Professional Help With Your Offshore Voluntary Disclosure

If you own, directly or indirectly (through a domestic or foreign corporation, LLC, partnership or trust) undisclosed foreign accounts, you should contact the professional legal team of Sherayzen Law Office as soon as possible. Our highly-experienced legal team is headed by one of the leading experts in U.S. international tax law, attorney Eugene Sherayzen. We will thoroughly review the facts of your case, analyze your current U.S. tax exposure and available voluntary disclosure options, prepare all of the necessary legal documents and tax forms and defend your case against the IRS until its completion. We have helped U.S. taxpayers around the world and we can help You!

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FBAR and Form 8938 Filings Continue to Grow

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On March 15, 2016, the IRS announced that there was continuous growth in the FBAR and Form 8938 filings. While the IRS attributes this growth in FBAR and Form 8938 filings to the greater awareness of taxpayers, one cannot underestimate the impact of the FATCA letter and the increasing knowledge of foreign financial institutions with respect to U.S. tax reporting requirements.

Background Information for the FBAR and Form 8938 Filings

FBAR and Form 8938 are the main forms with respect to reporting of foreign financial accounts and (in the case of Form 8938) “other specified assets”. The Report of Foreign Bank and Financial Accounts, FinCEN Form 114 (commonly known as “FBAR”) should be filed by U.S. taxpayers to report a financial interest in or signatory authority over foreign financial accounts if the aggregate value of these accounts exceeds $10,000. This form is associated with draconian noncompliance penalties.

IRS Form 8938 was created by the famous Foreign Account Tax Compliance Act (“FATCA”). Generally, U.S. citizens, resident aliens and certain non-resident aliens must report specified foreign financial assets on Form 8938 if the aggregate value of those assets exceeds the required thresholds (the lowest threshold is $50,000, but it varies by taxpayer). The noncompliance with respect to Form 8938 may result in additional penalties, including $10,000 per form.

IRS Registers Sustained Increase in the FBAR and Form 8938 Filings

Compliance with FBAR and, later, Form 8938 is one of the top priorities for the IRS according to the IRS Commissioner John Koskinen. Recent statistics with respect to the FBAR and Form 8938 filings support the conclusion that the IRS has been largely successful in achieving this task.

The IRS states that the FBAR filings have grown on average by 17 percent per year during the last five years, according to FinCEN data. In fact, in 2015, FinCEN received a record high 1,163,229 FBARs.

Similar, but far less successful trends can be seen with respect to Form 8938 filings. In 2011, the IRS received about 200,000 Forms 8938, but the number rose to 300,000 by the tax year 2013. However, it seems to have stagnated at the same number judging from the statistics for the tax year 2014.

While the lower number of Forms 8938 could be explained by the novelty of the form as well as higher thresholds, it appears that some Forms 8938 might not also be filed due to mistaken calculation of the asset base used to determine whether Form 8938 filing requirements were met.

Nevertheless, overall, it appears that the FBAR and Form 8938 filings have grown sufficiently for the IRS to be satisfied with its progress.

Contact Sherayzen Law Office for Professional Help with Your FBAR and Form 8938 Filings

U.S. international tax law is incredibly complex and the penalties are excessively high. If you were supposed to file FBARs and Forms 8938 in the past, but you have not done so, you need to contact Sherayzen Law Office as soon as possible. Mr. Sherayzen and his legal team will thoroughly analyze your case, assess your potential tax liabilities, determine the available voluntary disclosure options, and implement (including the preparation of all legal documents and tax forms) the voluntary disclosure option that fits your case best.

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SDOP Voluntary Disclosure Period and Tax Return Filing Deadline

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A lot of tax professionals and taxpayers fail to recognize the vital connection between a tax return filing deadline (like April 18, 2016) and the determination of the SDOP Voluntary Disclosure Period. In this article, I will explain what the SDOP Voluntary Disclosure Period and how it is related to tax return filing deadlines.

SDOP Background

Streamlined Domestic Offshore Procedure exists in its current format since June 18, 2014, when the IRS announced the most dramatic changes to its Offshore Voluntary Disclosure Program (OVDP) since 2009 OVDP. In essence, SDOP is an alternative to OVDP and allows taxpayers to bring their tax affairs into full compliance with US tax laws in a simpler way with a lower penalty.

SDOP Voluntary Disclosure Period

One of the most important differences between SDOP and OVDP is the Voluntary Disclosure Period – i.e. how many tax years should the voluntary disclosure cover. While OVDP voluntary disclosure period covers the past eight years for FBARs and tax returns, SDOP voluntary disclosure period covers only six past years of FBARs and only three years of past tax returns.

Connection Between SDOP Voluntary Disclosure Period and the Tax Return Filing Deadline

There is an important connection between SDOP voluntary disclosure period and the Tax Return Filing Deadline. As it mentioned above, SDOP Voluntary Disclosure Period covers “past” three years of tax returns.

What does “past year” mean in this context? It means a year for which the U.S. tax return due date (or properly applied for extended due date) has passed. The connection between SDOP voluntary disclosure period and the tax return filing deadline now becomes clear.

Let’s illustrate it further with a hypothetical example. If SDOP is scheduled to be completed on April 1, 2016, the SDOP voluntary disclosure period will cover the most recent three years of U.S. tax returns for which the Tax Return filing Deadline has passed. As of April 1, 2016, the deadline for the 2015 tax return has not yet passed; this means that the SDOP voluntary disclosure period (for tax return purposes) will cover tax years 2012-2014.

If SDOP is scheduled to be completed on April 30, 2016 and the 2015 tax return was timely filed (if not and no extension was filed, the taxpayer will likely be disqualified from participating in SDOP), then the SDOP voluntary disclosure period will shift to the tax years 2013-2015.

What if SDOP is completed on April 30, 2016, and an extension was filed for the 2015 tax return? In this case, the SDOP voluntary disclosure period will remain limited to 2012-2014 tax years.

SDOP Voluntary Disclosure Period’s Relationship to Tax Filing Deadline Offers Planning Opportunities

This relationship between SDOP voluntary disclosure period and the tax filing deadline offers plenty of planning opportunities for SDOP disclosures which are completed around the tax filing deadline because it allows the taxpayer’s attorney (who is doing SDOP on behalf of his client) exercise a certain degree of control over which years will be included in the SDOP voluntary disclosure period.

For example, if a taxpayer has a large tax liability in the tax year 2012 if the return is amended and a small tax liability in the tax year 2015, then the taxpayer’s attorney will likely choose to prepare and file timely 2015 tax return. On the other hand, there are situations where the taxpayer would like to include tax year 2012 in the SDOP voluntary disclosure period (for example, if there is a large foreign capital loss), then the taxpayer’s attorney would opt for filing an extension for the 2015 tax return.

It is important to emphasize that a decision with respect to SDOP voluntary disclosure period should always rest with an international tax attorney who is handling the SDOP disclosure. There may be complex reasons for excluding and including years within SDOP voluntary disclosure period and only an experienced tax professional should make these decisions.

Contact Sherayzen Law Office for Professional Help with Your Voluntary Disclosure

Offshore Voluntary Disclosures with respect to unreported foreign income and foreign assets can be extraordinarily complex, especially in light of draconian IRS penalties that U.S. taxpayers often face. This is why these matters should always be handled by an experienced international tax attorney.

Sherayzen Law Office is one of the most experienced international tax laws firms, especially when it comes to offshore voluntary disclosures. We have helped clients around the world to participate in every major voluntary disclosure program, including 2009 OVDP, 2011 OVDI, 2012 OVDP, 2014 OVDP (now closed), Streamlined Domestic Offshore Procedures, Streamlined Foreign Offshore Procedures and other related voluntary disclosure options. Not only did we help our clients to go through these complex legal procedures and prepared all of their tax forms (including those related to foreign business ownership, trust ownership and PFICs), but we also saved our clients millions in potential penalties and tax liabilities!

We can help You! Contact Us Today to Schedule Your Confidential Consultation!

Outbound Foreign Trust: An Introduction

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One of the most fundamental distinctions in US foreign trust law is the difference between an inbound foreign trust and an outbound foreign trust. This distinction was emphasized by the landmark piece of legislation “The Small Business Job Protection Act of 1996″ and should be clearly understood by US tax lawyers as well as US grantors and US beneficiaries of a foreign trust.

Definition of an Outbound Foreign Trust

In order for a foreign trust to be deemed “outbound”, two conditions must be satisfied. First, the trust was created through the transfer of assets by a US person. Second, the trust must be a foreign trust or a domestic trust that later became a foreign trust.

Obviously, a transfer by a foreign person of exclusively foreign assets to a foreign trust which has only foreign beneficiaries is completely irrelevant because there is no nexus with the United States (hence, the foreign trust is not subject to taxation in the United States).

Two Areas of Special Importance of an Outbound Foreign Trust

There are two particular areas of special interest for international tax lawyers with respect to an outbound foreign trust. First, the grantor trust rule under IRC (Internal Revenue Code) Section 679. In general, where a US grantor transfers property to a foreign trust, IRC Section 679 taxes the US grantor as the owner of any portion of a foreign trust attributable to the transferred property in any year in which the trust has a US beneficiary. This is a complex rule that deserves special treatment in a separate article.

The second area of special importance with respect to outbound foreign trusts is the taxation of the transfer of appreciated assets to a nongrantor foreign trust under IRC Section 684 and the excise tax under the already-repealed IRC Sections 1491-1494. Again, this is a topic that should be discussed in a separate article; I just wanted the readers to be aware of the existence of this rule.

Obviously, there are other highly important tax issues associated with an outbound foreign trust, but these issues are usually discussed in conjunction with an inbound foreign trust, taxation of foreign trusts in general, or they are similar to taxation of US domestic trusts.

Contact Sherayzen Law Office for Help With Respect to US Taxation of an Outbound Foreign Trust

The US tax issues associated with foreign trusts in general and an outbound foreign trust in particular are immensely complex. This is why, if you are a US person who is considered to be an owner or a beneficiary of an outbound foreign trust, you should contact Sherayzen Law Office for help with your US tax compliance and planning with respect to this outbound foreign trust.

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Foreign Trust Tax Treatment in the United States: Historical Overview

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Over the years, the US tax treatment of foreign trusts has undergone dramatic changes. It is important to study and understand this history in order to properly understand and interpret current US tax laws concerning foreign trust. In this essay, I will provide a broad overview of the history of foreign trust tax treatment in the United States since before 1962 until the present time.

Foreign Trust Tax Treatment Prior to 1962

Before 1962, the US tax laws treated in the same manner all foreign trusts, whether they had a US beneficiary or foreign one. A complex foreign trust established by a US grantor for the benefit of a US beneficiary was taxed similarly to the one established by a foreign granter for a US beneficiary. Moreover, since foreign-source income of a foreign trust was not included in the trust’s gross income for US income tax purposes, this trust would not have any DNI (distributable net income)!

Such treatment of foreign trusts led to a lot of abuse whereby large portions of income were never taxed in the United States. For example, prior to 1962, a foreign trust’s income would not be subject to US taxes in a situation where the trust was located in a country with low or no income taxes and the corpus consisted solely of foreign assets.

While in some situations US beneficiaries might have been taxed when the trust income was actually distributed (under the regular five-year throwback rule), careful tax planning could have prevented even such taxation of the beneficiaries in light of the fact that foreign-source income was excluded from DNI. Moreover, distributions of accumulated foreign trust income contained no undistributed net income (UNI) and were not subject to taxation under even the limited five-year throwback rule.

The Watershed Legislation in Foreign Trust Tax Treatment: the Revenue Act of 1962

The foreign trust tax treatment changed dramatically with the Revenue Act of 1962. The new legislation introduced two major changes to foreign trust tax treatment in the United States. First, it changed the calculation of DNI by requiring foreign trusts to add foreign-source income to it (unless such treatment was exempt by a treaty). Moreover, foreign trusts with US grantors now had to include capital gains in DNI.

Second, the Revenue Act of 1962 created the throwback rule on accumulation distributions from a foreign trust if the trust was created by a US person. Furthermore, important exceptions to throwback rule, such as exclusions for emergency distributions of accumulated income, were made unavailable to foreign trusts by the Act. Finally, the throwback rule became unlimited for foreign trusts while there was a five-year limitation on its application to domestic trusts.

Despite these profound changes in the foreign trust tax treatment, the Revenue Act of 1962 still failed to eliminate some important advantages of using foreign trusts to lower US tax liability. For example, the unlimited throwback rule did not seriously impact the foreign trust advantages in its ability for potentially unlimited tax deferral and tax-free income accumulation. Of course, this meant that the possibility of the rate of earnings of a foreign trust was likely to be much greater than that of US domestic trusts.

Furthermore, nothing was done to limit the ability of the US grantor and beneficiaries (and their families) to access undistributed funds of a foreign trust. For example, they could still receive these funds through loans, private annuities, like-kind exchanges and other similar “indirect” methods.

Finally, with respect to foreign trusts with US grantors, the foreign trusts were required to allocate capital gains to DNI. This meant that every distribution by a foreign trust contained a mixture of ordinary income and capital gains. US domestic trusts could not do that, because capital gains of a domestic trust could not be distributed until current and accumulated ordinary income was distributed.

Thus, perversely, the new foreign trust tax treatment afforded foreign trusts an important advantage in the form of its ability to distribute part of its capital gains to the beneficiaries more quickly than a domestic trust. This advantage became especially evident once the unlimited throwback rule was extended to domestic trusts in 1969.

Tightening of Screws in the Foreign Trust Tax Treatment: the Tax Reform Act of 1976

By 1976, these obvious advantages in the foreign trust tax treatment became unacceptable for the US Congress. Therefore, it acted in a major piece of US tax legislation known as the Tax Reform Act of 1976. While the Act was very broad, there were five key changes to the foreign trust tax treatment in the United States.

First, the new legislation re-classified foreign trusts that were created by US persons and had or could potentially have at least one US beneficiary as a grantor trust under IRC Section 679.

Second, the Act of 1976 required an automatic inclusion of capital gains of a foreign trust in the foreign trust’s DNI.

Third, it eliminated the loophole with respect to foreign trust distributions of income that accumulated prior to a beneficiary’s twenty-first birthday. Now, such distributions were taxed.

Fourth, with the obvious desire to attack the tax advantage in foreign trust tax treatment with respect to accumulated income, the Congress imposed a 6% simple interest charge on the tax imposed on a beneficiary of a foreign trust with respect to accumulations after December 31, 1976.

Finally, the last major change attacked the ability of US grantors to avoid US capital gain taxes by transferring appreciated assets into foreign trusts. The Act of 1976 imposed a 35% excise tax on the transfer of all appreciated assets to a foreign trust by a US grantor, unless the grantor elected to recognize the gain at the time of the transfer.

Changing the Foreign Trust Tax Treatment under IRC Section 672(f)

Another change in the foreign trust tax treatment came under the Revenue Reconciliation Act of 1990 with respect foreign grantor trusts that had a foreign grantor and a US beneficiary who had made gifts to the foreign grantor. This new law was summarized in IRC Section 672(f). Section 672(f) states that, in a situation where a foreign trust has a US beneficiary and should have been a grantor trust under the ordinary grantor trust rules found in IRC Sections 671 through 678 but for the fact that the grantor was a foreign person, this trust should be treated as owned by the trust’s US beneficiary to the extent that this beneficiary has made prior gifts to the foreign grantor.

There is still a small exception that a “gift shall not be taken into account to the extent such gift would be excluded from taxable gifts under section 2503(b).” 26 U.S.C. Section 672(f)(5)

1996 and 1997 Changes in the Foreign Trust Tax Treatment

The last major change in foreign trust tax treatment that I wish to mention here was introduced in the Small Business Job Protection Act of 1996 (as slightly modified by the Taxpayer Relief Act of 1997). The Act of 1996 introduced major revisions in the rules of foreign trust tax treatment, arguably on the scale of the Tax Reform Act of 1976.

Five major areas of foreign trust tax treatment were in focus. First, the definition of a foreign trust was clarified with a strong bias toward treating a trust as a foreign trust. Two new tests, the court test and the control test, were introduced (and clarified further in the Treasury regulations). These changes were codified in IRC Section 7701.

Second, the reporting requirements for foreign trusts (Forms 3520 and 3520-A) were introduced. This was a major change in the reporting burden for US taxpayers and foreign trusts with US beneficiaries.

Third, the penalties for failure to report transfers to a foreign trust were introduced.

Fourth, new rules were put in place to reduce the utility of foreign trusts by individuals who were planning to become US residents.

Finally, new restrictions were placed to reduce the utility of using foreign trusts by individuals who were planning to surrender their US residency or citizenship.

Contact Sherayzen Law Office for Tax Help With Foreign Trusts

Over the years, one can see profound changes in the foreign trust tax treatment; in this brief article, I only focused on some of the major changes in the foreign trust tax treatment, but there were other developments that took place (for example, FATCA compliance for foreign trusts).

These changes in foreign trust tax treatment generally indicate the trend toward stricter regulation of foreign trusts, increasing reporting burden on US taxpayers and foreign trusts, and the reduction in any type of an income tax advantage of foreign trusts. In fact, the foreign trust law has become so complex that one should not try to resolve these matters without the help of an experienced tax professional.

Despite these burdens, there is still a large number of foreign trusts with US grantors and US beneficiaries. The latter situation (i.e. US beneficiaries) often occurs when a foreign beneficiary becomes a US beneficiary through immigration. Oftentimes, these new US beneficiaries are not even aware of the existence of foreign trusts until significant US tax non-compliance occurs.

This is why it is so important to contact Sherayzen Law Office for professional help with respect to your foreign trusts as soon as possible. We have helped US beneficiaries, US grantors and foreign trusts around the world to do proper tax planning and comply with US reporting requirements (including Forms 3520, 3520-A and the voluntary disclosures associated with these forms). We can help You!

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