international tax lawyers

Costa Rica Corporations and U.S. Tax Reporting

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It has become common for U.S. citizens to engage in business abroad through a foreign corporation.  Costa Rica is definitely one of the most favored countries in Central America, partially due to its reputation for stability.  It is important to understand, however, that U.S. citizens who engage in business abroad through a foreign corporation must comply with very important tax reporting requirements.   In this article, I will try to briefly go over some of the most common US tax reporting requirements that may concern U.S. owners of Costa Rica corporations.

Form 5471

IRS Form 5471 is the most direct reporting requirement that U.S. owners of Costa Rica corporations may face.  Form 5471 may undoubtedly be considered as one of the most complex U.S. tax forms, both in its content as well as its scope.

As of the time of this writing, there are four non-exclusive (i.e. a taxpayer can belong to multiple categories at the same time) categories of filers of Costa Rica corporations who must file Form 5471.  Determining the categories, if any, to which a taxpayer belongs is a legal decision and a very important one since the number and severity of the reporting requirements directly depends on the number of  categories applicable to the taxpayer.

If the taxpayer is required to Form 5471 for Costa Rica corporations, then he must do so by attaching the completed Form 5471 with all of the numerous attachments to his tax return.

Failure to file Form 5471 for Costa Rica corporations may have severe consequences.  Explore this article for more information on Form 5471 penalties.

Form 8938

IRS Form 8938 is a newcomer to the world of U.S. tax compliance – in fact, the tax year 2001 is the first year that the form must be filed with the taxpayer’s U.S. tax return.

Form 8938 should be filed only if certain threshold requirements are met.  In case the taxpayer already disclosed the information regarding the specified foreign asset on Form 5471, Form 8938 should be filed to cross-reference Form 5471.  Explore this article to learn more about Form 8938.

FBAR

As long as the basic threshold requirement is met, the Report on Foreign Bank and Financial Accounts (“FBAR”) may be required if the taxpayer is the owner of a foreign corporation and has signatory authority (either as an officer of the corporation or an owner) over the corporate accounts.

It is highly important to comply with the FBAR requirement because the FBAR contains perhaps the most severe penalty structure of any other reporting requirement in the entire Internal Revenue Code (IRC).

Subpart “F” Income

If you are an owner of a Controlled Foreign Corporation (“CFC”) and the CFC has subpart “F” income, then you may be required to report subpart “F” income on your personal tax return (e.g. Form 1040).  This income is likely to be treated in a highly unfavorable way by the IRC.

Other Forms

Other forms may be required to be filed as a result of the your ownership of Costa Rica corporations.   Most of these additional tax reporting requirements are triggered by various transactional activities conducted by the corporation or between you and your corporation.  You should consult an international tax attorney for detailed analysis of your specific situation.

Contact Sherayzen Law Office for U.S. Tax Compliance Requirements if You Own Shares of Costa Rica Corporations

If you own a corporation in Costa Rica or you intend to do so, you should contact Sherayzen Law Office.  Owner Eugene Sherayzen will analyze your particular situation, determine what U.S. tax reporting requirements apply to you and help you comply with them, and offer a rigorous ethical tax plan designed to make sure that you do not overpay your U.S. taxes under the current IRC provisions.

The Location of Your International Tax Lawyers Austin Texas

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Choosing your lawyer among International Tax Lawyers Austin Texas is not a simple task, especially for a US taxpayer thinking about doing an offshore voluntary disclosure. One of the critical questions often arises is whether it is better to retain an international tax lawyer in Austin or in Minneapolis if you live in Austin? It is also related to a broader question: is the location of your international tax lawyer important?

Let’s analyze this question in the context of retaining one or more International Tax Lawyers Austin Texas.

International Tax Lawyers Austin Texas: US International Tax Law and Geography

One of the most critical aspects of US international tax law is that it does not respect national or state borders. Rather, it focuses on the individual taxpayer; if the taxpayer is a US person, then he is subject to US international tax law.

Another important aspect of US international tax law is that it applies uniformly (with a few exceptions, such blockades, sanctions, et cetera) irrespective of where the individual taxpayer is.

This means that, if you are in Austin and searching for International Tax Lawyers Austin Texas, it does not matter whether your lawyer is physically located in Austin, Minneapolis or Buenos Aires. The knowledge of international tax law of your lawyer and the application of that law to your specific case does not depend on the physical location of your lawyer.

International Tax Lawyers Austin Texas: Expertise and Experience in International Tax Law is the Critical Criteria, Not Geography

Based on this logic, it is easy to see that the geographical location of your International Tax Lawyers Austin Texas is not the most important factor in your decision to retain an attorney. Rather, it is a lawyer’s expertise in international tax law that should drive your decision.

If you feel comfortable with the lawyer’s grasp of the subject matter and his experience in handling cases involving issues similar to the ones involved in your case, then these factors should be the critical factors on which your decision to retain the an international tax lawyer should be based.

International Tax Lawyers Austin Texas: “Face-to-Face” Meetings Obstacle Has Been Overcome By Modern Technology

There is a common misconception that your international tax lawyer must be near you in order to understand you and be able to render advice.

About a third of my clients are overseas and, additionally, more than a third of my clients are located in the United States but outside of Minnesota, leaving me with only about a quarter of my clients physically located in Minnesota. Yet, this factor never influenced the outcome in any of my cases.

In the modern world of Video Skype Conferences, the value of the face-to-face meetings has deteriorated and, in most cases, completely disappeared.

Contact Sherayzen Law Office for Help With International Tax Issues

Hence, if you are searching for International Tax Lawyers Austin Texas, contact the international tax law team of Sherayzen Law Office (physically based in Minneapolis, MN). Our team of international tax professionals has developed deep expertise in international tax law based on the help that we have rendered to hundreds of US taxpayers worldwide.

So, if you have international tax issues with respect to undeclared foreign accounts, international tax compliance or international tax planning, please contact an experienced international tax attorney, Mr. Eugene Sherayzen of Sherayzen Law Office for comprehensive legal and tax help.

Call Us Today to Schedule Your Confidential Consultation!

Introduction to US International Tax Anti-Deferral Regimes

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Despite their enormous importance to tax compliance, there is a shocking level of ignorance of the US international tax anti-deferral regimes that is being displayed by US taxpayers, foreign bankers, foreign accountants, foreign attorneys, US accountants and even many US tax attorneys. In this article, for educational purposes only, I would like to provide a brief overview of the history and features of the main US international tax anti-deferral regimes.

What is a US International Tax Anti-Deferral Regime?

A US international tax anti-deferral regime is a set of US tax laws designed to prevent US taxpayers from utilizing various offshore strategies to defer US taxation of their income for a period of time or indefinitely.

Three Main US International Tax Anti-Deferral Regimes

Since 1937, there have been three main US international tax anti-deferral regimes: Foreign Personal Holding Company (“FPHC”) rules, subpart F rules, and PFIC rules. Let’s review the brief history and main features of each of these US international tax anti-deferral regimes.

First US International Tax Anti-Deferral Regime: FPHC

In 1937, the Congress for the first time addressed the offshore investment strategy problems by enacting the FPHC regime, which were designed to contemporaneously (i.e. in the year the income was earned) tax certain types of foreign corporations. In particular, FPHC rules targeted foreign corporations that had substantial investment income (i.e. passive income) compared to active business income – i.e. the FPHC rules effectively treat certain corporations as pass-through companies for the purposes of certain categories of passive income..

The FPHC rules were triggered only if both conditions of the then-Code §552(a) were satisfied. First, at least 60% of a foreign corporation’s gross income from the taxable year had to consist of “foreign personal holding company income”. The FPHC income included interest income, dividends, royalties, gains from the sale of securities or commodities, certain rents and certain income from personal services provided by shareholders of the FPHC. This was called the “income test”.

The second condition of the §552(a) was known as the “ownership test”. The ownership test was satisfied if at least 50% of either the total voting power or total value of the stock of the foreign corporation was owned by 5 or fewer individuals who were citizens or residents of the United States.

Despite the appearances, the FPHC regime was not very effective. It was actually not very hard to work around the FPHC rules with careful and creative tax planning. This is why, after the enactment of the Subpart F rules and the PFIC rules (which addressed some of the main inefficacies of the FPCH rules and made them redundant as a US international tax anti-deferral regime), the FPHC regime was finally repealed in the year 2004.

Second US International Tax Anti-Deferral Regime: Subpart F Rules

The second US international tax anti-deferral regime, the Subpart F rules, was enacted in 1962 and, despite numerous amendments, forms the core of the anti-deferral rules with respect to Controlled Foreign Corporations (“CFCs”). It is definitely one of the most important and complex pieces of US tax legislation.

The most important feature of the Subpart F regime is that it greatly expands the scope of the former FPHC regime by expanding the contemporaneous (i.e. pass-through) taxation to a much broader range of income and activities, including many kinds of active business activities as well as passive investment activities of a foreign corporation. Obviously, the focus of this US international tax anti-deferral regime is still on passive income or attempts to disguise passive income as active income.

Third US International Tax Anti-Deferral Regime: PFIC Rules

The third US international tax anti-deferral regime consists of the passive foreign investment company (“PFIC”) rules that were adopted by US Congress in 1986. Perhaps because it is the youngest of all US international tax anti-deferral regimes, the PFIC regime is more aggressive and less forgiving than Subpart F rules or FPHC regime. A lot of innocent taxpayers have fallen victims to this severe law.

The PFIC rules impose a unique additional US income tax in two circumstances: where (1) there is a gain on the disposition of the PFIC stock by the US person; or (2) there are PFIC distributions that are considered “excess distributions”. The PFIC rules also impose an additional PFIC interest (calculated similarly to underpayment interest) on the PFIC tax.

The definition of a PFIC is in some ways reminiscent of FPHC rules, but the PFIC regime is a lot more aggressive. Generally, a PFIC is any foreign corporation if it meets either the income tax or the assets test. The income tax is met if 75% of a foreign corporation’s gross income is passive; the assets test is satisfied if at least an average of 50% of a foreign corporation’s assets produce passive income.

Notice that the PFIC rules apply irrespective of the US ownership percentage of the company. This elimination of the FPHC and Subpart F ownership rules makes PFIC rules a much more comprehensive US international anti-deferral tax regime, because it is very easy to trigger PFIC rules – a lot of US naturalized citizens and permanent residents fall into the PFIC trap by simply owning foreign mutual funds as part of their former home countries’ investment portfolio.

Contact Sherayzen Law Office for Professional Help With Dealing with US International Tax Anti-Deferral Regimes

If you have an ownership interest in a foreign business or have foreign investments, you may be facing the extremely complex rules of US international tax anti-deferral regimes.

Please contact Mr. Eugene Sherayzen, an experienced international tax attorney at Sherayzen Law Office. Our international tax firm has helped hundreds of clients around the globe and we can help you!

Contact Us Today to Schedule Your Confidential Consultation!

US International Tax Attorney On The Necessity of Anti-Deferral Regimes

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As a US international tax attorney, I am fully aware of the crucially important role that the US international tax anti-deferral regimes (the Subpart F rules and PFIC rules) play in the Internal Revenue Code. Yet, the enormous complexity of the US international anti-deferral regimes often makes some people wonder about why we even have them.

As a US international tax attorney, I feel that it is important to educate the general public about the necessity of the anti-deferral regimes and how this necessity is deeply grounded in our tax system. I also wish to address here the issue of why the US anti-deferral regimes are so complex.

US International Tax Attorney: Anti-Deferral Regimes are a Natural Product of Our Tax System

The anti-deferral regimes is a natural legislative response to the anti-deferral strategies that originate from the deep policy contradictions that form the core of the US tax system. The most important of these contradictions arose from the recognition of income rules.

Generally, the US government imposes an income tax only when income is “recognized.” The recognition rules are complex, but there is a basic asymmetry in the treatment of individuals and corporation. On the one hand, US citizens are taxed on their worldwide income which is usually (though, with important exceptions) recognized when it is earned.

On the other hand, in general and without taking into account any anti-deferral regimes, the individuals are not be taxed on the corporate income (even if this is a one-hundred percent owned corporation) until: (a) the income is distributed (for example, as a dividend), or (b) the shares of the corporation are sold.

In the past, US international tax attorneys would combine these rules with the fact that, in general, foreign corporation would not be subject on foreign-source income earned outside of the United States, to build an effective investment strategy – contribution of all investment assets to a foreign corporation in order to avoid current US taxation of the taxpayers’ investment income. If a US international tax attorney was able to extend this strategy indefinitely, then it brought his clients benefits almost as valuable as not paying taxes at all.

Obviously, such an indefinite offshore deferral of US taxation of otherwise taxable income was not considered consistent with the fundamental goals and policies of US government. This is why the US Congress deemed it necessary to enact various anti-deferral regimes to combat offshore tax avoidance.

US International Tax Attorney: Why Are There Two Anti-Deferral Regimes Instead of One?

Even a US international tax attorney would agree that having multiple esoteric anti-deferral regimes with complex interrelationship between each other cannot be the best way to combat offshore tax avoidance investment strategies. Yet, this is our present reality and it is important to understand why this is the case.

There are four reasons for having multiple anti-deferral regimes. First, the US Congress did not create all of the anti-deferral regimes at the same time. Rather, the anti-deferral regimes appeared gradually over time with multiple amendments and shifting IRS interpretations.

Second, undoubtedly, the political influence of various lobbies with competing policies has greatly hampered the creation of a more transparent anti-deferral regime and elimination of many loopholes and exceptions.

Third, as I explained above, the offshore investment policies arose from the basic contradiction between different income recognition rules of the Internal Revenue Code. This contradiction in itself necessitates a more complex approach to combating any strategies of US international tax attorneys that seek to exploit it. It is difficult to do so with only one anti-deferral regime.

Finally, the combination of the sheer complexity of international commerce, conflicting policy priorities (for example, Congress does not want to stifle the US companies’ ability to compete overseas just for the purpose of completely closing off some offshore investments) and the great variety of various fact patterns makes it virtually impossible to address the offshore investment strategies in a simple way. This factor partially explains why there is such a variety of international tax rules that form part of the anti-deferral regimes.

Contact Sherayzen Law Office for Help with Anti-Deferral Regime Compliance and Planning

If you are a US person who owns a foreign business or foreign brokerage accounts, you are very likely to run into either Subpart F rules or PFIC rules. At this point, the extremely complex nature of these anti-deferral regimes makes it a reckless gamble to attempt to conduct business overseas without an advice from an experienced US international tax attorney.

This is why you should contact the experienced US international tax professionals of Sherayzen Law Office. We have helped clients around the globe to comply with and plan for the US anti-deferral regimes, and we can help you!

So, Contact Us Today to Schedule Your Initial Consultation!

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

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

The Facts and Outcome of the Fogel Case

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

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

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

IRS Recent Onslaught Against Bank Leumi Clients Continues

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

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

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

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

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

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

Contact Sherayzen Law Office for Help With Your Undisclosed Israeli Accounts

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

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

So, Contact Us Now to Schedule Your Confidential Consultation!