international tax lawyers

Foreign Tax Credit for Individuals: Who Can Take It?

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If you paid or accrued foreign taxes to a foreign country on foreign source income and are subject to U.S. tax on the same income, you may be able to take these qualified foreign taxes as a tax credit to offset (in part or in full) your U.S. tax liability. An important questions arises for foreign tax credit attorneys: who is eligible to claim a foreign tax credit on his individual U.S. tax returns.

The first and most obvious category consists of U.S. citizens. If you are a U.S. citizen, you would usually be entitled to take a credit for foreign taxes that you paid or accrued. Part of the reason for this eligibility is the fact that, as a U.S. citizen, you are taxed by the U.S. government on your worldwide income irrespective of where you live.

Resident aliens constitute the second eligible category to claim foreign tax credit. Same reasoning applies as to U.S. citizens.

In most cases, nonresident aliens would not be able to take a foreign tax credit. However, there are important exceptions. The two major exceptions are: Puerto Rico residency or ECI (Effectively Connected Income).

The latter exception requires a bit more explanation. If you are a non-resident alien who pays or accrues tax to a foreign country or a U.S. possession on income from foreign sources that is effectively connected (here where the “ECI” term comes into play) with a trade or business in the United States, then you may be able to claim foreign tax credit on your individual U.S. tax return. ECI is a term of art and whether your foreign income is effectively connected with a trade or business in the United States is a complex legal question that should be reviewed by an international tax attorney.

Note that, where a non-resident alien pays foreign taxes on income from U.S. sources only because he is a citizen or resident of that foreign country, then this tax cannot be used in figuring the amount of the foreign tax credit.

Contact Sherayzen Law Office for Professional Help with Your Foreign Tax Credit

Claiming a foreign tax credit can be a very complex tax question and you need the right professionals to help you. Contact Sherayzen Law Office for experienced professional help with your foreign tax credit issues.

2013 4th Quarter Underpayment and Overpayment Interest Rates

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The underpayment and overpayment interest rates will remain the same for the calendar quarter beginning October 1, 2013. The rates will be:

three (3) percent for overpayments [two (2) percent in the case of a corporation];
three (3) percent for underpayments;
five (5) percent for large corporate underpayments; and
one-half (0.5) percent for the portion of a corporate overpayment exceeding $10,000.

Under the Internal Revenue Code, the rate of interest is determined on a quarterly basis. For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points.

Generally, in the case of a corporation, the underpayment rate is the federal short-term rate plus 3 percentage points and the overpayment rate is the federal short-term rate plus 2 percentage points. The rate for large corporate underpayments is the federal short-term rate plus 5 percentage points. The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point.

The rate for large corporate underpayments is the federal short-term rate plus 5 percentage points. The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point.

Interest factors for daily compound interest for annual rates of 0.5 percent are published in Appendix A of Revenue Ruling 2011-32. Interest factors for daily compound interest for annual rates of 2 percent, 3 percent and 5 percent are published in Tables 7, 9, 11, and 15 of Rev. Proc. 95-17, 1995-1 C.B. 561, 563, 565, and 569.

2014 Tax Season to Start Later Following Government Closure

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The IRS recently announced a delay of approximately one to two weeks to the start of the 2014 filing season to allow adequate time to program and test tax processing systems following the 16-day federal government closure.

The IRS is exploring options to shorten the expected delay and will announce a final decision on the start of the 2014 filing season in December, Acting IRS Commissioner Danny Werfel said. The original start date of the 2014 filing season was January 21, 2014, and with a one- to two-week delay, the IRS would start accepting and processing 2013 individual tax returns no earlier than January 28.

The government closure came during the peak period for preparing IRS systems for the 2014 filing season. Programming, testing and deployment of more than 50 IRS systems is needed to handle processing of nearly 150 million tax returns. Updating these core systems is a complex, year-round process with the majority of the work beginning in the fall of each year.

About 90 percent of IRS operations were closed during the shutdown, with some major workstreams closed entirely during this period, putting the IRS nearly three weeks behind its tight timetable for being ready to start the 2014 filing season. There are additional training, programming and testing demands on IRS systems this year in order to provide additional refund fraud and identity theft detection and prevention.

“Readying our systems to handle the tax season is an intricate, detailed process, and we must take the time to get it right,” Werfel said. “The adjustment to the start of the filing season provides us the necessary time to program, test and validate our systems so that we can provide a smooth filing and refund process for the nation’s taxpayers. We want the public and tax professionals to know about the delay well in advance so they can prepare for a later start of the filing season.”

The IRS will not process paper tax returns before the start date, which will be announced in December. There is no advantage to filing on paper before the opening date, and taxpayers will receive their tax refunds much faster by using e-file with direct deposit. The April 15 tax deadline is set by statute and will remain in place.

IRS Releases Proposed Guidance for FFIs under FATCA

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On October 29, 2013, many Austin FATCA tax lawyers received the news that the U.S. Department of the Treasury and the Internal Revenue Service issued a notice for foreign financial institutions (FFIs) to comply with the information reporting and withholding tax provisions of the Foreign Account Tax Compliance Act (FATCA). FATCA is rapidly becoming the global standard in the effort to curb offshore tax evasion.

To date, Treasury has signed nine intergovernmental agreements (IGAs), has reached 16 agreements in substance, and is engaged in related conversations with many more jurisdictions.

The notice, which is the next step in implementation, previews proposed guidance and provides a draft agreement for participating FFIs directly engaging in agreements with the IRS and those reporting through a Model 2 IGA (like Switzerland). It provides FFIs with advance notice prior to the beginning of FATCA withholding and account due diligence requirements on July 1, 2014. The FFI agreement will be finalized by year end.

“The Agreement and forthcoming guidance have been designed to minimize administrative burdens and related costs for foreign financial institutions and withholding agents,” said Deputy Assistant Secretary for International Tax Affairs Robert B. Stack. “Today’s preview demonstrates the Administration’s commitment to ensuring full global cooperation and a smooth implementation.”

Congress enacted FATCA in 2010 as a way to identify U.S. citizens using foreign accounts to evade their U.S. tax responsibilities. FATCA requires U.S. financial institutions to withhold a portion of payments made to FFIs that do not agree to identify and report information on U.S. account holders.

Treasury has taken a global approach to the exchange of tax information in its implementation of FATCA. To address situations where foreign law would prevent an FFI from complying with the terms of an FFI agreement, Treasury developed two alternative model IGAs. Under Model 1, FFIs report to their respective governments who then relay that information to the IRS. Under Model 2, FFIs report directly to the IRS to the extent that the account holder consents or such reporting is otherwise legally permitted, and such direct reporting is supplemented by information exchange between governments with respect to non-consenting accounts.

October 29th Notice provides guidance to FFIs entering into agreements directly with the IRS, and to those reporting through a Model 2 IGA. The notice incorporates updates to certain due diligence, withholding, and other reporting requirements, and includes a draft FFI agreement. The draft FFI agreement will be finalized by December 31, 2013. Treasury and the IRS will continue to provide more detailed guidance on FATCA implementation as necessary.

The regulations were intentionally designed to appropriately balance the scope of entities and accounts subject to FATCA with due diligence requirements, while also phasing in the related obligations over several years. For example, the final regulations exempt all preexisting accounts held by individuals with $50,000 or less from review. For similar accounts with less than $1,000,000, an FFI is only required to search the account information that is electronically available. In many cases, FFIs are permitted to rely on information that they already must collect for local anti-money laundering and know-your-customer rules.

Many of these cost-saving simplifications were the result of comments received from affected financial institutions and foreign governments, which helped us to tailor the rules to achieve the policy objectives of the statute without imposing undue burdens or costs.

While withholding requirements begin next July and the first report of FATCA information is due in 2015, the IRS FATCA registration website is already open so that FFIs can begin testing the registration process and entering information.

Contact Sherayzen Law Office for Help with Undisclosed Offshore Accounts

If you have undisclosed foreign financial accounts overseas, contact Sherayzen Law Office for professional legal and accounting help. Our experienced international tax firm will thoroughly review your case, analyze the existing potential liabilities, propose appropriate solutions and implement the plan tailored to the facts of your case.

Tax-Filing Extension for Individuals Expires on October 15, 2013

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Individual taxpayers who filed Form 4868 to request a six-month extension to file their 2012 tax returns should be cognizant of the fast-approaching October 15, 2013 final deadline to timely file these extended tax returns. This is also the last day the IRS will accept an electronically filed tax return for the year 2012.

The deadline equally applies to the extended 2012 tax returns for the taxpayers who reside in the United States and outside of the United States. It also applies to the filing of any required information tax returns such as Forms 3520, 8865, 5471, et cetera. Particular attention should be paid to Forms 8938 (the new forms created by the IRS in 2011 as a result of FATCA).

While this is not true in every situation, generally, the taxpayers who are in the Offshore Voluntary Disclosure Program should nevertheless attempt to file their extended 2012 tax returns timely.

Moreover, October 15, 2013, is the final deadline to fund a SEP-IRA or solo 401(k) for tax year 2012 if the taxpayer requested an automatic extension of time to file.

This essay is provided as a courtesy notice by Sherayzen Law Office, Ltd. a Minnesota international tax law firm for businesses and individuals; the essay does not constitute a legal or tax advice on your particular situation.