international tax lawyers

Foreign Disregarded Entities: Form 8858 Introduction

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In my international tax practice, I have encountered frequent examples where business owners fail to comply with the U.S. tax reporting requirements with respect to a “foreign disregarded entity” (“FDE”). Therefore, in this essay, I will try to make some very broad observations with respect to the entity and Form 8858.

FDE is a business entity that is a foreign corporation under local law, but, is, or has elected under the “check-the-box” rules of Treas. Regs. §301.7701-3 to be disregarded as, an entity separate from its owner for U.S. federal income tax purposes.

If a U.S. person owns or is considered to be the owner of an FDE, then he must file Form 8858, Information Return of U.S. Persons With Respect to Foreign Disregarded Entities, with respect to such FDE. The ownership may be a direct, indirect, or constructive; the IRS provides certain guidelines in order to determine whether an indirect or constructive ownership of an FDE exists.

One of the most dangerous aspects of Form 8858 is that it may need to be filed in conjunction with Forms 8865 or 5471. Failure to properly file Form 8858 is likely to render Forms 8865 or 5471 incomplete, resulting in significant penalties being imposed.

While Form 8858 is used in part to compute the taxable income or E&P (earnings and profits) of the FDE, the Form also serves an important function for the IRS – an audit guideline for the IRS examiners. This becomes most obvious by looking at the Schedule G questions, which appear to focus on potential audit issues.

Contact Sherayzen Law Office For Legal Help With Disregarded Entities

This very short legal note is intended only to point out some very broad contours with respect to FDEs, Form 8858 and its purposes. The subject matter is extremely complex and should be only approached with the help of an international tax attorney.

If you have any questions with respect to Form 8858 compliance, contact Sherayzen Law Office by phone or email. Our experienced international tax firm will guide you through the complex maze of the IRS regulations with respect to Form 8858 and help you comply with its complex tax accounting and reporting requirements.

Child Tax Credit and Foreign Earned Income Exclusion

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The U.S. government allows eligible parents to take a tax credit for up to $1,000 per qualifying child. In addition to various issues with respect to what constitutes a “qualifying child”, there are various complications with respect to the eligibility of the parents.

In this short essay, I will concentrate solely on the interaction of the parents’ income eligibility for the child tax credit and the foreign earned income exclusion.

General Income Limitations

Generally, in order to take full advantage of the child tax credit, the parents’ adjusted gross income (AGI) should be below a certain amount. The AGI amount will depend on your filing status as follows:

Married filing jointly – $110,000.

Single, head of household, or qualifying widow(er) – $75,000.

Married filing separately – $55,000.

If your AGI is above the relevant threshold, then you must reduce your child tax credit at the rate of $50 per each $1,000 of income above the threshold

Foreign Earned Income Exclusion and Income Limitation Calculation

Under I.R.C. §911, if certain conditions are met, Foreign Earned Income Exclusion allows a qualified individual to exclude as much as $92,900 (for tax year 2011) of his foreign earned income from taxable gross income. This means that, if eligible, you may reduce your AGI by as much as $92,900.

What happens then to the income limitation calculations for the purposes of the child tax credit?

Generally, in order to avoid giving U.S. taxpayers who work abroad an unfair advantage, the IRS requires you to follow the modified AGI rules in determining your income for the child tax credit phase out purposes. Under the modified AGI rules, you should add the amount excluded on lines 45 and/or 50 of Form 2555 to your regular AGI.  This means that you are adding the excluded amount back to your AGI to determine your eligibility for the child tax credit.

Thus, the Foreign Earned Income Exclusion is not likely to have any affect on your AGI calculations for the purposes of determining whether your income is above the child tax credit threshold and how much.

Contact Sherayzen Law Office For Legal Help With the Foreign Earned Income Exclusion

If you have any questions with respect to how Foreign Earned Income Exclusion works, contact Sherayzen Law Office at [email protected]. Our experienced international tax firm will guide you through the complex maze of the interaction of various sections of the U.S. tax law with the Foreign Earned Income Exclusion.

IRS Form 1120 Schedule UTP Filing Requirements

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The IRS recently announced that Schedule UTP must be filed with Forms 1120, 1120-F, 1120-L or 1120-PC, if an entity meets certain requirements. UTP stands for “Uncertain Tax Positions”, and the purpose of the schedule is for corporate taxpayers to provide concise disclosure of uncertain tax issues relating to the reporting of reserves in their audited financial statements.

Filing Requirements

Schedule UTP will affect more and more corporate taxpayers through a gradual phase-in period. For tax years 2010-2011, corporations that file Forms 1120, 1120-F (foreign companies), 1120-L (life insurance companies) or 1120-PC (property and casualty insurance companies), have uncertain tax positions and possess total assets exceeding $100 million, must file Schedule UTP. For Form 1120-F filers, worldwide assets are used to determine whether a corporation must also file Schedule UTP.

Beginning with the tax year 2012, the total asset threshold will be reduced to $50 million. Starting in tax year 2014, the threshold will be further reduced to $10 million. Currently, tax positions taken before 2010 need not be reported on Schedule UTP.

The IRS has stated that these requirements may also be extended to additional entities, such as tax-exempt organizations, real estate investment trusts, regulated investment companies, and pass-through entities (S corporations, partnerships, and limited liability companies).

While Schedule UTP requires the reporting of U.S. Federal income tax positions, reporting of uncertain foreign or state tax positions is not required.

Reporting of a tax position is required on Schedule once a reserve for a tax position has been recorded on the financial statements, and a position is taken on the Federal tax returns.

Reporting Reserves

Schedule UTP requires reporting of uncertain Federal income tax positions for which a corporation or related party has recorded a reserve in its audited financial statements under applicable financial accounting standards (corporations, however, only report their own tax positions on the schedule, and not the tax positions of a related party). Reserves may include, for example, reported contingent legal liabilities, reductions of an Income Tax Refund Receivable, or increases in a liability for Income Taxes Payable.

Additionally, a corporation must report tax positions taken for which no reserve was established because of an expectation of litigation. If no reserve was established for income tax, Schedule UTP will also be required if a corporation or related party determines that there is less than a 50% chance that the IRS will settle, and it is “more likely than not” that the corporation will prevail in litigation.

However, corporations are not required to report in instances where no reserve was created because the tax position was sufficiently certain, or where applicable financial accounting standards determined that the item was immaterial.

Major Tax Positions

Corporations filing Schedule UTP must also identify “major tax positions” (MTP’s). MTP’s, including transfer pricing positions, which exceed greater than or equal to 10% of the overall tax liability (calculated by dividing the amount of the MTP by the sum of all tax positions, excluding positions expected to be litigated) must be reported.

Purpose of Schedule UTP

Schedule UTP is intended to provide the IRS with a concise disclosure of the uncertain tax issues taken by a corporate taxpayer. The description should be limited to no more than a few sentences and should state the relevant facts involved. Further, Schedule UTP instructions specify that the brief description should not include legal analysis of the tax position taken.

The IRS will treat an entity as having filed Form 8275 (Disclosure Statement) or Form 8275-R by filing a complete and accurately disclosed tax position on Schedule UTP; additionally the Internal Revenue Code (IRC) section 6662(i) disclosure requirements will be satisfied with proper disclosure on the schedule.

Penalties

Schedule UTP instructions currently do not specify a penalty structure. However, the IRS has noted that in instances where it appears that corporations are non-compliant with Schedule UTP requirements, it will bring an appropriate enforcement action.

In the upcoming years, it is clear that Schedule UTP will need to be filed by an increasing number of corporations, raising compliance costs and the complexity of tax planning and preparation. Corporations that have, or expect to have total assets of $10 Million or more (and possibly tax-exempt organizations, depending upon future IRS interpretations), should prepare in advance for complying with this new form. Sherayzen Law Office can help you plan for this eventuality.

Contact Sherayzen Law Office NOW To Prepare For New Schedule UTP Requirements

This article is intended to give a brief summary of these issues, and should not be construed as legal or tax advice. Corporate compliance and tax planning necessitates an experienced understanding of complex regulations, IRC statutes, and case law, and IRS penalties for failure to comply can be substantial. If you have further questions regarding your own tax circumstances, Sherayzen Law Office offers professional advice for all of your corporate, cross-border, international, and other tax needs. Call or email for a consultation today.

IRS Form 8938 and Revised Form 8621 Filing Requirements Under Notice 2011-55

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The IRS recently released Notice 2011-55, partially suspending certain Foreign Account Tax Compliance Act (“FATCA”) information reporting requirements until Form 8938, (Statement of Specified Foreign Financial Assets), and a revised Form 8621, (Return by a Shareholder of a Passive Foreign Investment Company or a Qualified Electing Fund) are released.

It is important to note that while the reporting requirements of Forms 8938 and revised Form 8621 have been partially suspended, they have not been excused for taxpayers. Thus, taxpayers should be aware that until the new forms are issued, tax preparation may be necessary in order to be in compliance and avoid severe penalties.

FATCA Reporting Requirements

Congress enacted FATCA as part of the Hiring Incentives to Restore Employment Act (“HIRE” Act). Included in FATCA is the additional information reporting requirements of IRC Sections 6038(D) and 1298(f).

Under 6038(D), taxpayers who hold more than $50,000 in the aggregate in any financial account maintained by a foreign financial institution, or in any foreign stock, interest in a foreign entity (including a foreign trust, or financial instrument with a foreign counterpart that is not held in a custodial account of a financial institution) are subject to file a Form 8938 with their annual return.

IRC Code Section 1298(f) requires a U.S. person who is a shareholder in a passive foreign investment company (“PFIC”) to file an annual report, Form 8621. Notice 2011-55 states that the IRS will be issuing a revised Form 8621. Once the revised form is issued, individuals must retroactively file the revised Form 8621 for tax years beginning after the date of the HIRE Act (March 18, 2010).

The IRS is planning on also issuing further regulations regarding these reporting requirements.

Notice 2011-55

IRS Notice 2011-55 provides that the IRC 6038D Form 8938 reporting requirements are suspended until the form is released. Additionally, as noted above, for U.S. shareholders of PFIC’s who were not previously required to file Form 8621 under the current requirements before the enactment of Section 1298(f), reporting requirements are suspended (but not excused) until the revised Form 8621 is released. Taxpayers who are already required to file Form 8621 under the current instructions must continue to file the form.

When the IRS issues the revised forms, taxpayers who must file will be required to attach the appropriate forms to their next information return or tax return, completed for the suspended tax year. Failure to file (or to properly file) Form 8938 and/or Form 8621 for the suspended tax year may result in the extension of the statute of limitations under section 6501(c)(8), and penalties may also be applied.

A Form 8938 or revised Form 8621 filed for a suspended tax year with a timely filed information or tax return will generally be treated as having been filed in the date that the income tax or information return for the suspended tax year was filed.

Subject to certain exceptions, the statute of limitations for assessment of tax will not expire until three years after Form 8938 and/or revised Form 8621 is received by the IRS.

FBAR Requirements Not Affected

The IRS stated in Notice 2011-55 that the filing requirements of FinCEN Form 114 formerly Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts; “FBAR”) are not suspended under the notice.

Contact Sherayzen Law Office For Experienced Legal Help

This article is intended to give a brief summary of these issues, and should not be construed as legal or tax advice. Tax planning and reporting often necessitates an experienced understanding of complex regulations, statutes, and case law, and penalties for failure to comply can be substantial. If you have further questions regarding your own tax circumstances, Sherayzen Law Office offers professional advice for all of your Federal, international, cross-border, and state tax needs. Call or email for a consultation today.

What is SEP IRA?

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A Simplified Employee Pension (“SEP”) is a written plan that allows you to make contributions toward your own retirement as well as your employees’ retirement while avoiding the complexity of various qualified plans. Under a SEP, you make contributions to a traditional IRA set up by or for each eligible employee.

It is important to note that SEP-IRA is owned and controlled by the employee, and you make contributions to the financial instituation where the SEP-IRA is maintained.

At a minimum, SEP-IRAs are set up for each employee that is considered to be eligible under the IRS regulations. “Excludable” employees can be excluded from coverage under a SEP.

There are three basic steps in setting up a SEP. First, you must execute a formal written agreement to provide benefits to all eligible employees. Second, you must give each eligible employee certain information about the SEP. Finally, a SEP-IRA must be set up by or for each eligible employee.

While there are special rules determining the contribution limit for self-employed individuals, generally, a contribution to a common-law employee’s SEP-IRA cannot exceed the lesser of 25% of the employee’s compensation or $49,000 (for the tax year 2011).

Contact Sherayzen Law Office to Understand SEP-IRA Option

If you have any questions with respect to SEP-IRA and how it functions, contact Sherayzen Law Office for additional legal help.