taxation law services

2019 Third Quarter IRS Interest Rates | MN International Tax Law Firm

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On June 5, 2019, the Internal Revenue Service announced 2019 Third Quarter IRS Interest Rates. This quarter, the IRS interest rates will be reduced for the first time in years.

2019 Third Quarter IRS Interest Rates: 3rd Quarter and Interest Rates Defined

Third quarter of 2019 begins on July 1, 2019 and ends on September 30, 2019. The term “IRS interest Rates” refers to both, IRS underpayment and overpayment rates. In other words, these are the interest rates that the IRS will charge on any late tax liability; at the same time, these are also the interest rates that the IRS will pay on tax refunds (for example, if a refund results from amending a tax return).

For international tax purposes, the IRS Interest Rates also refer to the rates that the IRS will change on any PFIC tax under the default PFIC IRC Section 1291 calculations. These are also the rates that taxpayers will need to pay on any tax due as part of their offshore voluntary disclosure submissions, including Streamlined Domestic Offshore Procedures and Streamlined Foreign Offshore Procedures. Under the Internal Revenue Code, the rate of interest is determined on a quarterly basis; therefore, US taxpayers and tax professionals should refer to IRS announcements of IRS interest rates on a quarterly basis. For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points.

2019 Third Quarter IRS Interest Rates: How These Rates Were Determined

Under the Internal Revenue Code, the rate of interest is determined on a quarterly basis; therefore, US taxpayers and tax professionals should refer to IRS announcements of IRS interest rates on a quarterly basis. For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points.

2019 Third Quarter IRS Interest Rates: Rate Reduction

The 2019 Third Quarter IRS Interest Rates will be reduced from those of the second quarter as follows:

five (5) percent for overpayments (four (4) percent in the case of a corporation) instead of six (6) and (5) percent respectively;
five (5) percent for underpayments from (6) percent;
seven (7) percent for large corporate underpayments from eight (8) percent; and
two and one-half (2.5) percent for the portion of a corporate overpayment exceeding $10,000 (it used to one and one-half (1.5) percent).

Sherayzen Law Office will continue to closely monitor the moves of the Federal Reserve regarding its interest rates in the future.

Minneapolis MN International Tax Lawyer & Attorney | PLR 201922010

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On May 31, 2019, the IRS released a Private Letter Ruling (“PLR”) on the extension of time to make an election to be treated as a disregarded entity for US tax purposes under Treas. Reg. Section 301.7701 (26 CFR 301.7701-3). Let’s explore this PLR 201922010 in more detail.

PLR 201922010: Fact Pattern

PLR 201922010 deals with a typical fact pattern for someone who is doing business overseas. A US citizen wholly owns a foreign corporation which wholly owns a foreign subsidiary. The foreign subsidiary wants to make an election to be classified as a disregarded entity for US tax purposes, but misses the deadline to do so timely. Hence, it files a request for the IRS to grant a discretionary extension of time to file Form 8832 pursuant to Treas. Reg. Sections 301.9100-1 and 301.9100-3.

PLR 201922010: Legal Analysis

The IRS began its legal analysis of the request by noting that, under Treas. Reg. Section 301.7701-3(a), a business entity that is not classified as a corporation under Treas. Reg. Section 301.7701-2(b)(1), (3), (4), (5), (6), (7) or (8) (hereinafter, an “eligible entity”) can elect its classification for federal tax purposes as provided in Treas. Reg. Section 301.7701-3. An eligible entity with at least two members can elect to be classified as either an association (and thus a corporation under the Treas. Reg. Section 301.7701-2(b)(2)) or a partnership. An eligible entity with a single owner, however, can elect to be classified as an association (i.e. a corporation) or to be disregarded as an entity separate from its owner.

The IRS then focused specifically on the classification of foreign entities relying on Treas. Reg. Section 301.7701-3(b)(2)(I). This provision states that, unless it elects otherwise, a foreign eligible entity is (A) a partnership if it has two or more members and at least one member does not have limited liability; (B) an association if all members have limited liability; or © disregarded as an entity separate from its owner if it has a single owner that does not have limited liability.

What does “limited liability” mean in this context? Treas. Reg. Section 301.7701-3(b)(2)(ii) answers this question by stating that a member of a foreign eligible entity has limited liability if the member has no personal liability for the debts of or claims against the entity by reason of being a member.

How does one make this classification election? Treas. Reg. Section 301.7701-3(c)(1)(I) provides, in part, that an eligible entity may elect to be classified other than as provided under Treas. Reg. Section 301.7701-3(b), or to change its classification, by filing Form 8832 with the service center designated on Form 8832.

Then, the IRS addressed the key issue for this PLR – when this classification election can be made. Treas. Reg. Section 301.7701-3(c)(1)(iii) provides that the election will be effective on the date specified by the entity on Form 8832 or on the date filed if no such date is specified on the election form. The effective date specified on Form 8832 can not be more than 75 days prior to the date on which the election is filed and can not be more than 12 months after the date on which the election is filed.

Is it possible to make a late election? The IRS answered this question by referring to Treas. Reg. Section 301.9100-1(c), which provides that the Commissioner may grant a reasonable extension of time to make a regulatory election, or a statutory election (but no more than six months except in the case of a taxpayer who is abroad), under all subtitles of the Internal Revenue Code (Code), except subtitles E, G, H, and I. Treas. Reg. Section 301.9100-1(b) defines “regulatory election” as an election whose due date is prescribed by a regulation published in the Federal Register, or a revenue ruling, revenue procedure, notice or announcement published in the Internal Revenue Bulletin.

Treas. Reg. Section 301.9100-3 addresses extensions of time for making late regulatory elections. Treas. Reg. Section 301.9100-3(a) states that such requests for relief will be granted when the taxpayer provides the evidence (including affidavits described in Treas. Reg. Section 301.9100-3(e)) to establish to the satisfaction of the Commissioner that the taxpayer acted reasonably and in good faith, and the grant of relief will not prejudice the interests of the Government.

PLR 201922010: IRS Granted Request for Extension to Time to Make the Election

Based on the information submitted and the representations made, the IRS concluded that the foreign entity satisfied the requirements of Treas. Reg. Sections 301.9100-1 and 301.9100-3. As a result, the IRS granted to the foreign entity an extension of time of 120 days from the date of PLR 201922010 to file a properly executed Form 8832 with the appropriate service center electing to be treated as a disregarded entity.

PLR 201922010: The Electing Foreign Entity Must Submit Form 8858 and All Other Returns

The IRS emphasized that its ruling was contingent on the electing foreign entity and its owner filing within 120 days from the date of the PLR all of the required federal income tax and information returns for all relevant years. The IRS specifically mentioned Form 8858 (Return of U.S. Persons With Respect to Foreign Disregarded Entities).

Contact Sherayzen Law Office if You Need to File a PLR Request for Late Entity Classification Election Similar to PLR 201922010

If you need to ask the IRS to grant a late entity classification request, you can contact Sherayzen Law Office for professional help with drafting and submitting your request for a Private Letter Ruling.

IRC 965 Tax: Introduction | US International Tax Lawyer & Attorney

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The 2017 Tax Reform created the Internal Revenue Code Section 965, which requires US shareholders of foreign corporations to pay a new transition tax (hereinafter, “IRC 965 Tax”) in certain circumstances. In this short article, I will introduce the readers to the IRC 965 Tax.

IRC 965 Tax: Taxpayers Who Are Targeted by the New Tax

The IRC 965 Tax targets US shareholders of specified foreign corporations. In very general terms, a specified foreign corporation means either a controlled foreign corporation, as defined under the IRC Section 957 (“CFC”), or a foreign corporation (other than a passive foreign investment company (“PFIC”), as defined under the IRC Section 1297, that is not also a CFC) that has a US shareholder that is a domestic corporation.

The term “US shareholders” includes all individuals who are considered to be US tax residents, domestic corporations (including S-corporations), domestic partnerships (including LLC, LP, LLP and LLLP), domestic estates, domestic trusts, domestic cooperatives, REITs, RICs and even US tax-exempt organizations. All US shareholders of a CFC who previously filed a Form 5471 are in a particular danger of being subject to the IRC 965 Tax. Note, however, that even if you are a US shareholder who has not filed Form 5471 before, you may still be subject to the new tax.

IRC 965 Tax: What It Taxes and How

Generally, IRC 965 Tax imposes a special tax on untaxed foreign earnings of specified foreign corporations as if these earnings had been repatriated to the United States. In other words, if a specified foreign corporation has a positive accumulated Earnings & Profits (“E&P”), its US shareholders will have to pay the new tax on it unless the E&P had been already taxed under a different provision of the Internal Revenue Code.

The effective tax rates applicable to income inclusions are adjusted by way of a participation deduction set out in IRC Section 965©. A reduced foreign tax credit applies to the inclusion under the IRC Section 965(g). Interestingly, in certain situations, a US shareholder may reduce the amount of the income inclusion for the purposes of the new tax based on deficits in earnings and profits of other specified foreign corporations (of which he is a US shareholder as well).

The new tax applies to the last taxable year of a specified foreign corporations beginning before January 1, 2018; a US shareholder must include the new tax in the tax year in which the specified foreign corporation’s year ends (in other words, a US shareholder may need to pay the tax on his 2017 and/or 2018 US tax returns). If a US shareholder must pay the IRC 965 Tax, he may either pay it in full when he files the relevant US tax return or choose to do it in installments over an eight-year period.

IRC 965 Tax: IRS Closely Monitors Compliance with the New Tax

Any US taxpayers’ noncompliance with the IRC 965 Tax faces a high risk of IRS detection. The reason for it is the IRS pledge to closely monitor potential noncompliance with the new tax. In fact, the IRS even launched a special compliance campaign dedicated to the IRC Section 965 compliance.

IRC 965 Tax: What to Do if You Did Not Timely Pay the Tax

If you failed to properly comply with your reporting and payment obligations under the IRC Section 965, you will most likely face additional IRS tax penalties as well as the interest on the tax. If you also did not file the required Form 5471 and/or Form 8938 to disclose your interest in a foreign corporation, you are also at a high risk of being subject to Form 5471 penalties as well as Form 8938 penalties. Additional penalties may also apply, including the draconian FBAR criminal and civil penalties (for example, if you are the majority shareholder of a controlled foreign corporation and you did not disclose the foreign bank and financial accounts of this corporation on your FBAR).

Given the gravity of your situation, it is important that you immediately contact an international tax lawyer who specializes in US international tax compliance and offshore voluntary disclosures.

Contact Sherayzen Law Office for Professional Help If You Are Not in Compliance with the IRC 965 Tax

If you have not complied with your payment requirement with respect to IRC 965 Tax and other related US international tax forms, contact Sherayzen Law Office as soon as possible.

Sherayzen Law Office is an international tax law firm that specializes in US international tax compliance and offshore voluntary disclosures. We have helped hundreds of US taxpayers to resolve their past US tax noncompliance issues, and We Can Help You!

Contact Us Today to Schedule Your Confidential Consultation!

International Tax Lawyer & Attorney | April 2019 IRS Compliance Campaigns

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On April 16, 2019, the IRS Large Business and International division (LB&I) announced the approval of three additional compliance campaigns. Let’s discuss in more detail these April 2019 IRS compliance campaigns.

April 2019 IRS Compliance Campaigns: Background Information

In the mid-2010s, after extensive planning, the IRS decided to move LB&I toward issue-based examinations and a compliance campaign process. The idea was to let LB&I itself decide which compliance issues presented the most risk and required a response in the form of one or multiple treatment streams to achieve compliance objectives. The IRS came to the conclusion that this was the most efficient approach that assured the best use of IRS knowledge and appropriately deployed the right resources to address specific noncompliance issues.

The first thirteen campaigns were announced by LB&I on January 13, 2017. Then, the IRS added eleven campaigns on November 3, 2017, five campaigns on March 13, 2018, six campaigns on May 21, 2018, five campaigns on July 2, 2018, five campaigns on September 10, 2018 and five campaigns on October 30, 2018. With the additional three April 2019 IRS compliance campaigns, there are fifty-three total IRS compliance campaigns outstanding as of the time of this writing.

The IRS has created each campaign after careful strategic planning, re-deployment of resources, creation of new training and tools as well as careful taxpayer population selection through metrics and feedback. The IRS has also built a supporting infrastructure inside LB&I for each specific campaign.

Three New April 2019 IRS Compliance Campaigns

Here are the new three new campaigns: Captive Services Provider Campaign, Offshore Private Banking Campaign and Loose-Filed Forms 5471. Each of these five campaigns was identified through LB&I data analysis and suggestions from IRS employees.

April 2019 IRS Compliance Campaigns: Captive Services Provider Campaign

The section 482 regulations and the OECD Transfer Pricing Guidelines provide rules for determining arm’s length pricing for transactions between controlled entities, including transactions in which a foreign captive subsidiary performs services exclusively for the parent or other members of the multinational group. The arm’s length price is determined by taking into consideration data available on companies performing functions, employing assets, and assuming risks that are comparable to those of the captive subsidiary.

Excessive pricing for these services would inappropriately shift taxable income to these foreign entities and erode the U.S. tax base. The goal of this campaign is to ensure that U.S. multinational companies are paying their captive service providers no more than arm’s length prices. The treatment streams for this campaign are issue-based examinations and soft letters.

April 2019 IRS Compliance Campaigns: Offshore Private Banking Campaign

US tax residents are subject to tax on worldwide income from all sources, including income generated outside of the United States. It is not illegal or improper for US taxpayers to own offshore structures, accounts or assets, but they must comply with income tax and information reporting requirements associated with these foreign activities.

Through FATCA, bilateral information exchange treaties, the Swiss Bank Program, offshore voluntary disclosures and audits, the IRS has accumulated a great pile of records that identify taxpayers with transactions and/or accounts at offshore private banks. This campaign addresses tax noncompliance and the information reporting associated with these offshore accounts. The IRS will initially address tax noncompliance through the examination and soft letter treatment streams. Additional treatment streams may be developed based on feedback received throughout the campaign.

April 2019 IRS Compliance Campaigns: Loose-Filed Forms 5471

Form 5471, Information Return of US Persons With Respect to Certain Foreign Corporations, must be attached to an income tax return (or a partnership or exempt organization return, if applicable) and filed by the return’s due date including extensions. Some taxpayers are incorrectly filing Forms 5471 by sending the form to the IRS without attaching it to a tax return.

If a Form 5471 is required to be filed and was not attached to an original return, an amended return with the Form 5471 attached should be filed. The goal of this campaign is to improve compliance with the requirement to attach a Form 5471 to an income tax, partnership or exempt organization return.

Contact Sherayzen Law Office for Professional Tax Help

If you have been contacted by the IRS as part of any of its campaigns, you should contact Sherayzen Law Office for professional help. We have helped hundreds of US taxpayers around the world with their US tax compliance issues, and we can help you!

Contact Us Today to Schedule Your Confidential Consultation!

Panamanian Bank Accounts | US International Tax Lawyer & Attorney

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A large number of US taxpayers own Panamanian bank accounts. These taxpayers have bank accounts in Panama for a variety of reasons: personal, business, tax planning and/or estate planning. Many of these account holders still do not realize that their Panamanian bank accounts may be subject to numerous reporting requirements in the United States. In this essay, I will outline the three most common US tax reporting requirements that may apply to Panamanian bank accounts.

Panamanian Bank Accounts: Definition of a “Filer”

Each of the requirements discussed below has its own eligibility requirements – i.e. each has its own definition of “filer” who is required to comply with these requirements. Despite these differences in the definition of a filer, we can identify a certain common definition that underlies all of the requirements we will discuss in this article, even if this definition is modified for the purposes of a particular form. This common denominator is the concept of “US tax residency”.

US tax residents include the following persons: US citizens, US permanent residents, persons who satisfy the Substantial Presence Test and persons who declare themselves as US tax residents. It is important to remember that this general definition of US tax residents is subject to a number of important exceptions.

All of the US international tax reporting requirements adopt US tax residency as the basis for their definitions of a filer. Where there are differences from the definition of US tax residency, they are mostly limited to the application of the Substantial Presence Test and/or the first-year and last-year definitions of a US tax resident.

For example, Form 8938 identifies its filers as “Specified Persons” while FBAR defines its filers as “US Persons”. Yet, the differences between these two terms mostly arise with respect to persons who voluntarily declared themselves as US tax residents or non-residents. A common example can be found with respect to treaty “tie-breaker” provisions, which foreign persons use to escape the effects of the Substantial Presence Test for US tax residency purposes.

The determination of your US tax reporting requirements is the primary task of your international tax attorney. It is simply too dangerous for a common taxpayer or even an accountant to attempt to dabble in US international tax law.

Panamanian Bank Accounts: Worldwide Income Reporting

Now that we understand the concept of US tax residency, we are ready to explore the aforementioned three US reporting requirements with respect to Panamanian bank accounts.

The first and most fundamental requirement is worldwide income reporting. It is also the requirement that applies to US tax residents as they are defined above (i.e. we are dealing here with the classic definition of US tax residency in its purest form).

All US tax residents must disclose their worldwide income on their US tax returns. This means that they must report to the IRS their US-source and foreign-source income. The worldwide income reporting requirement applies to all types of foreign-source income: bank interest income, dividends, royalties, capital gains and any other income.

The worldwide income reporting requirement applies even if the foreign income is subject to Panamanian tax withholding or reported on a Panamanian tax return. It also does not matter whether the income was transferred to the United States or stayed in Panama. US tax residents must disclose their Panamanian-source income on their US tax returns.

Panamanian Bank Accounts: FBAR/FinCEN Form 114

The second requirement that I would like to discuss in this essay is FinCEN Form 114, the Report of Foreign Bank and Financial Accounts, commonly known as “FBAR”. Under the Bank Secrecy Act of 1970, the US government requires all US Persons to disclose their ownership interest in or signatory authority or any other authority over Panamanian (and any other foreign country) bank and financial accounts if the aggregate highest balance of these accounts exceeds $10,000. If these requirements are met, the disclosure requirement is satisfied by filing an FBAR.

It is important to understand all parts of the FBAR requirement are terms of arts that require further exploration and understanding. I encourage you to search our firm’s website, sherayzenlaw.com, for the definition of “US Persons” and the explanation of other parts of the FBAR requirement.

There is one part of the FBAR requirement, however, that I wish to explore here in more detail – the definition of “account”. The reason for this special treatment is the fact that the definition of an account for FBAR purposes is a primary source of confusion among US Persons with respect to what needs to be disclosed on FBAR.

The FBAR definition of an account is substantially broader than what this word generally means 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.

Despite the fact that FBAR compliance is neither easy nor straightforward, FBAR has a very severe penalty system. On the criminal side, FBAR noncompliance may lead to as many as ten years in jail (of course, these penalties come into effect in extreme situations). On the civil side, the most dreaded penalties are FBAR willful civil penalties which can easily exceed a person’s net worth. Even FBAR non-willful penalties can wreak a havoc in a person’s financial life.

Civil FBAR penalties have their own complex web of penalty mitigation layers, which depend on the facts and circumstances of one’s case. In 2015, the IRS added another layer of limitations on the FBAR penalty imposition. One must remember, however, that these are voluntary IRS actions which the IRS may disregard whenever circumstances warrant such an action.

Panamanian Bank Accounts: FATCA Form 8938

The third requirement that I wish to discuss today is a relative newcomer, FATCA Form 8938. This form requires “Specified Persons” to disclose 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.

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 report the same foreign assets on FBAR and Form 8938.

Specified Persons consist of two categories of filers: 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 income tax consequences (including disallowance of foreign tax credit and imposition of 40% accuracy-related income tax penalties). There is also a $10,000 failure-to-file penalty.

One must also remember that, unlike FBAR, Form 8938 is filed with a federal tax return and forms part of the tax return. This means that a failure to file Form 8938 may render the entire tax return incomplete and potentially subject to an IRS audit.

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

If you have Panamanian bank accounts, contact Sherayzen Law Office for professional help with your US international tax compliance. We have helped hundreds of US taxpayers with their US international tax issues (including disclosure of Panamanian bank accounts), and We can help You!

Contact Us Today to Schedule Your Confidential Consultation!