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IRS Announces 2018 Pension Plan Limitations | Tax Lawyer Update

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On October 27, 2017, the IRS announced the cost of living adjustments affecting 2018 Pension Plan limitations.

2018 Pension Plan Limitations: Summary of Main Changes

1. The first main change in 2018 Pension Plan Limitations affects all employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan. In 2018, employees can contribute up to $18,500 into these plans. This amount represents a $500 increase from the 2017 contribution limitation of $18,000.

2. The second major change in 2018 Pension Plan Limitations is the modification of income ranges concerning eligibility to make deductible contributions to traditional IRAs. Here are the new 2018 phase-out ranges:

Single Taxpayers (covered by a workplace retirement plan): $63,000 to $73,000 (up from the 2017 range of $62,000 to $72,000);
Married Filing Jointly (covered by a workplace retirement plan): $101,000 to $121,000 (up from the 2017 range of $99,000 to $119,000).
Taxpayer not covered by a workplace retirement plan, but who is married to someone who is covered: $189,000 and $199,000 (up from the 2017 range of $186,000 and $196,000).

No changes for a married individual filing a separate return, but who is covered by a workplace retirement plan. The phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

3. The third change in 2018 Pension Plan Limitations affects the modification of income ranges concerning eligibility to make contributions to Roth IRA. Here are the new 2018 phase-out ranges:

Single and Head of Household Taxpayers: $120,000 to $135,000 (up from the 2017 range of $118,000 to $133,000);
Married Couples Filing Jointly: $189,000 to $199,000 (up from the 2017 range of $186,000 to $196,000).

No change in the phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA. Such contributions are not subject to an annual cost-of-living adjustment and remain at the range of $0 to $10,000.

4. The fourth change in 2018 Pension Plan Limitations affects the modification of income range concerning eligibility for the Retirement Savings Contributions Credit. In 2018, the income limits will be:

Married Couple Filing Jointly: $63,000 (up from $62,000 in 2017);
Heads of Household: $47,250 (up from $46,500 in 2017);
Singles and Married Individuals Filing Separately: $31,500 (up from $31,000 in 2017).

2018 Pension Plan Limitations: Summary of Main Unchanged Limitations from 2017

1. IRA Annual Contribution Limit: remains unchanged at $5,500.

2. IRA additional catch-up contribution for individuals aged 50 and over: remains at $1,004.40 (not subject to annual cost-of-living adjustment).

3. 401(k), 403(b) and most 457 plans and the federal government’s Thrift Savings Plan catch up contribution limit for employees aged 50 and over: remains unchanged at $6,000.

IRS Wins Against Wells Fargo’s Tax Shelter Scheme | Int’l Tax Lawyers MN

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On May 25, 2017, the IRS sealed another victory against the infamous abusive tax shelter known as STARS (Structured Trust Advantaged Repackaged Securities).

The actual victory occurred on November 17, 2016, when a jury in Minnesota found Wells Fargo guilty of engaging in abusive tax shelter and determined that Wells Fargo was not entitled to a about $350 million of foreign tax credits. On May 25, 2017, however, the IRS expanded that victory when the Minnesota federal district court found Wells Fargo liable for a 20 percent negligence penalty.

Wells Fargo’s Tax Shelter Scheme can be traced to Barclays Bank PLC (“Barclays”). Barclays marketed the STARS transaction to American banks, including Wells Fargo. STARS was designed to exploit differences between the tax laws in the United States and in the United Kingdom.

Wells Fargo’s Tax Shelter Scheme is not the first one to be rejected by courts. In fact, at this point, three other cases have rejected the STARS tax shelters similar to Wells Fargo’s Tax Shelter Scheme. These case are: Bank of New York, BB&T Bank and Santander Bank purchased. Santander Holdings USA, Inc. v. United States, 844 F.3d 15 (1st Cir. 2016), pet. for cert. filed, March 20, 2017 (No. 16 1130); Bank of N.Y. Mellon Corp. v. Comm’r, 801 F.3d 104 (2d Cir. 2015), cert. denied, 136 S. Ct. 1377 (2016); Salem Fin., Inc. v. United States, 786 F.3d 932 (Fed. Cir. 2015), cert. denied, 136 S. Ct. 1366 (2016).

The recent victory by the IRS against Wells Fargo’s Tax Shelter Scheme is an important reminder of the salience of the business purpose doctrine in US international tax law. Sherayzen Law Office has previously written on the doctrine and emphasized how crucial it is to distinguish legitimate tax planning from engaging in abusive tax shelters.

Sherayzen Law Office advocates an approach that emphasizes legitimate tax planning that allows US taxpayers to utilize the advantages offered by US tax laws without engaging in abusive tax schemes, like STARS.

The IRS Large Business and International Division Organizational Structure

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Almost two years ago, the IRS Large Business and International Division announced long-term changes in its structure as well as its approach to tax enforcement. In the fall of 2015, the IRS completed the first phase of the structural changes in the Division – re-organization of its administrative structure. This structure exists intact today and we fully expect for it to last for a long while. Let’s discuss this current administrative structure of the IRS Large Business and International Division.

IRS Large Business and International Division: Areas of Responsibility

The IRS Large Business and International Division forms a huge part of the IRS. First, it is responsible for the tax compliance enforcement (US domestic and US international) with respect to all corporations, subchapter S corporations, and partnerships with assets greater than $10 million. Most of these businesses employ a large number of employees and their business affairs involve complex accounting principals and tax laws. Second, the Division deals with individual international tax compliance, including offshore voluntary disclosures.

Current Organization of the IRS Large Business and International Division

The IRS Large Business and International Division is currently organized into Support Areas (a smaller part of the Division) and Practice Areas.

The Support areas concentrate on supporting the Practice Areas through data analysis and integrated feedback loop (which is a highly important feature that was incorporated into the Division’s reorganization plan in 2015). The Support areas include Headquarters, Program and Business Solutions (including Technology and Program Solutions and Resource Solutions), Compliance Integration (including Data solutions and the highly-important Compliance Planning and Analytics) and Assistant Deputy Commissioner – International.

The second part of the IRS Large Business and International Division is divided into five Practice Areas and four Compliance Practice Areas. The Practice Areas include: (1) Cross Border Activities, (2) Enterprise Activity, (3) Pass-Through Entities, (4) Treaty and Transfer Pricing Operations and (5) Withholding and International Individual Compliance. US international tax compliance concerns are especially important in areas 1, 4 and 5.

The Compliance Practice Areas basically represent a geographical division of the United States into four tax enforcement areas: Central (which consists of North Central and South Central Fields), Eastern (which consists of Great Lakes and Southeast Fields), Northeastern (which includes North-Atlantic and Mid-Atlantic Fields) and, finally, Western (which includes West and Southwest Fields).

The IRS Large Business and International Division Reorganization Now Entered Into the Second Phase

Since January 31, 2017, the IRS Large Business and International Division reorganization commenced the second phase with the enaction of the first thirteen issue-based IRS Compliance Campaigns. These campaigns represent a new approach to tax enforcement that is believed to fit best the new administrative structure of the division. In the near future, Sherayzen Law Office will update its website with articles dedicated to this important new development.

Greece Publishes the List of Noncooperative States | FATCA Lawyer Atlanta

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On February 28, 2017, the Ministry of Finance of Greece published a list of noncooperative states.

What are Noncooperative States

In order for a state to be designated as “noncooperative”, it has to satisfy the following four conditions:

1. The state is not a member of the European Union;

2. The state’s legal structure with respect to transparency and exchange of information in tax matters has not been reviewed by the OECD (Organisation for Economic Co-Operation and Development);

3. The state has not signed any treaty with Greece on administrative assistance in tax matters (basically tax information exchange) nor do they offer such assistance; and

4. The state has not signed tax administrative assistance treaties with at least twelve other states.

The last requirement appears to be somewhat random in the number of states.

Why the List of Noncooperative States Matters

The list of noncooperative states is important because transactions with any states on this list are subject to heightened scrutiny by the Greek tax authorities. Moreover, certain limitations may be imposed on the companies involved in transactions with noncooperative states, especially with respect to tax deductibility of certain expenses. Additionally, the Greek tax authorities may look particularly close at such companies with respect to transfer pricing issues and the controlled foreign corporation tax compliance issues.

This Year’s List of Noncooperative States

In February of 2017, a total of twenty-nine states were on the list of noncooperative states. Here is the list: Andorra, Antigua and Barbuda, Bahamas, Bahrain, Barbados, Brunei, Cook Islands, Dominica, Grenada, Guatemala, Hong Kong, Lebanon, Liberia, Liechtenstein, Macedonia, Malaysia, Marshall Islands, Monaco, Nauru, Niue, Panama, Philippines, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Samoa, Uruguay, the U.S. Virgin Islands, and Vanuatu. As the readers can see, some of the “states” are really just tax jurisdictions within a state (such as U.S. Virgin Islands).

It should be noted that some of these tax jurisdictions are favorite designations for forming foreign corporations (e.g. Bahamas and Barbados), other foreign entities (such as Nevis LLC) and foreign trusts (e.g. Cook Islands). Furthermore, a lot of these tax jurisdictions are also designated as “tax shelters” by other countries.

International Tax Lawyer Lectures on US Tax Reporting of Italian Assets and Income

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On February 2, 2017, Mr. Eugene Sherayzen, the founder and owner of Sherayzen Law Office (an international tax law firm headquartered in Minneapolis, Minnesota) gave a lecture at the Italian Cultural Center in downtown Minneapolis. The topic of the lecture was an introduction to US tax reporting of Italian assets and income for individual taxpayers. The lecture was well-attended by mostly native Italians (the room was filled to capacity) and caused a great amount of interest in the audience.

US Tax Reporting of Italian Assets

US Tax Reporting of Italian Assets Introduction

US Tax Reporting of Italian Assets and Income: Worldwide Income Reporting Requirement

The lecture commenced with the discussion of the worldwide income reporting requirement. After explaining the US tax residency requirement, Mr. Sherayzen focused on the importance of reporting Italian-source income in the United States for those Italians who are considered to be US tax residents (i.e. US citizens, US permanent residents, persons who satisfied the Substantial Presence Test and the US tax residents by choice). The lawyer explained that the Italian-source income must be disclosed by these Italians even if the income is already taxed in Italy and even if it is never brought into the United States.

US Tax Reporting of Italian Assets and Income: Foreign Rental Income Must Be Reported but Real Estate itself Is Reportable Only In Certain Cases

Then, Mr. Sherayzen discussed the subject of reporting by Italians of their foreign real estate and income derived from foreign real estate. The international tax lawyer emphasized that foreign rental income and foreign capital gains must be disclosed on the taxpayers’ US tax returns.

Then, Mr. Sherayzen clarified that, in situations where real estate is owned outright by individuals (i.e. not through any entity or any other complex arrangement), the ownership of the real estate itself is not generally reportable. However, if the Italian real estate is owned through an entity, then it will need to be disclosed as part of the entity’s financial statements prepared as part of Form 5471, 8865 or 8858. The lawyer again emphasized that, even in these circumstances, the income derived from Italian real estate is still reportable on the taxpayers’ US tax returns.

Minnesota International Tax Attorney

US Tax Reporting of Italian Assets and Income: FBAR and FATCA Form 8938

After discussing real estate as an exception from the general rule that foreign assets are likely to be reportable on the information returns in the United States, Mr. Sherayzen turned to the subject of reporting of foreign accounts with particular focus on FBAR and FATCA Form 8938. The discussion focused on the types of accounts that needed to disclosed, the reporting thresholds, and the penalties associated with the failure to file these forms. The international tax lawyer also discussed in more depth the history of FBAR.

This discussion caused a great number of questions related to FBAR, its thresholds and its relationship to income reporting. Fewer questions were asked with respect to Form 8938.

US Tax Reporting of Italian Assets and Income: PFICs

Despite the time limitations, Mr. Sherayzen briefly discussed Form 8621 as a hybrid form. The lawyer explained that a “hybrid form” meant that Form 8621 was used for both, income tax reporting and asset reporting, with respect to PFICs. Mr. Sherayzen explicated, in a very general manner, what assets qualified for PFIC status and what were the income tax consequences of PFICs. The Minneapolis international tax lawyer warned the audience that their Italian private pension plans and life insurance policies could contain PFICs.

International tax lawyer Madison

US Tax Reporting of Italian Assets and Income: Foreign Inheritance and Foreign Gifts

The lecture ended with a brief discussion of US tax reporting requirements concerning inheritance and gifts from Italian nationals and non-resident aliens (for US tax purposes). At that point, Mr. Sherayzen introduced Form 3520 and its threshold reporting requirements for foreign gifts and foreign inheritance. The lawyer also explained how Form 8938 could be applicable to a foreign inheritance.

After the lecture ended, Mr. Sherayzen continued to take questions in private for the next thirty minutes.