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May 2018 IRS Compliance Campaigns | International Tax Lawyer & Attorney

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On May 21, 2018, the IRS announced the creation of another six compliance campaigns. Let’s explore these May 2018 IRS Compliance Campaigns in more detail.

May 2018 IRS Compliance Campaigns: Background Information

After a long period of planning, the IRS Large Business and International division (“LB&I”) finalized its new restructuring plan in 2017. Under the new plan, LB&I decided to switch to issue-based examinations and IRS campaigns.

The idea behind the IRS compliance campaigns is to concentrate the LB&I limited resources where they are most needed – i.e. where there is the highest risk of noncompliance. The first campaigns were announced by the IRS on January 31, 2017. Then, the IRS introduced additional campaigns in November of 2017 and March of 2018. As of March 13, 2018, there were a total of twenty-nine campaigns outstanding.

Six New May 2018 IRS Compliance Campaigns

On May 21, 2018, the LB&I introduced the following new campaigns: Interest Capitalization for Self-Constructed Assets; Forms 3520/3520-A Non-Compliance and Campus Assessed Penalties; Forms 1042/1042-S Compliance; Nonresident Alien Tax Treaty Exemptions; Nonresident Alien Schedule A and Other Deductions; and NRA Tax Credits. Each of these campaigns was selected by the IRS through the analysis of the LB&I data as well as from suggestions made by IRS employees.

It is also important to point out that each of these campaigns as well as the twenty-nine previous campaigns were reviewed by the IRS in light of the 2017 Tax Reform (which was enacted on December 22, 2017).

May 2018 IRS Compliance Campaigns: Interest Capitalization for Self-Constructed Assets

The first campaign focused on the Internal Revenue Code (“IRC”) Section 263A. Under this provision if a taxpayer engaged in certain production activities with respect to “designated property”, he is required to capitalize the interest that he incurs or pays during the production period with respect to this property.

IRC Section 263A(f) defined “designated property” as: (a) any real property, or (b) tangible personal property that has: (i) a long useful life (depreciable class life of 20 years or more), or (ii) an estimated production period exceeding two years, or (iii) an estimated production period exceeding one year and an estimated cost exceeding $1,000,000.

The IRS created this campaign with the goal of ensuring taxpayer compliance by verifying that interest is properly capitalized for designated property and the computation to capitalize that interest is accurate. Construction companies are likely to be the most immediate target of this campaign. Given the fact that Section 263A is not well-known, the IRS adopted varous treatment streams for this campaign, including issue-based examinations, education soft letters, and educating taxpayers and practitioners to encourage voluntary compliance.

May 2018 IRS Compliance Campaigns: Form 3520/3520-A Non-Compliance and Campus Assessed Penalties

This campaign reflects the increasing attention of the IRS to foreign trusts. This is a highly complex area of law. In order to deal with this complexity, the IRS stated that it will adopt a multifaceted approach to improving Form 3520 and Form 3520-A compliance. The treatment streams will include (but not limited to) examinations and penalties assessed by the campus when the forms are received late or are incomplete. The IRS will also use Letter 6076 to inform the trusts about their potential Form 3520-A obligations.

May 2018 IRS Compliance Campaigns: Form 1042/1042-S Compliance

Taxpayers who make payments of certain US-source income to foreign persons must comply with the related withholding, deposit and reporting requirements. This campaign targets Withholding Agents who make such payments but do not meet all of their compliance duties. The IRS will address noncompliance and errors through a variety of treatment streams, including examination.

May 2018 IRS Compliance Campaigns: Nonresident Alien Tax Treaty Exemptions

This campaign is intended to increase compliance in nonresident alien (NRA) individual tax treaty exemption claims related to both effectively connected income and Fixed, Determinable, Annual Periodical (“FDAP”) income. Some NRA taxpayers may either misunderstand or misinterpret applicable treaty articles, provide incorrect or incomplete forms to the withholding agents or rely on incorrect information returns provided by US payors to improperly claim treaty benefits and exempt US-source income from taxation. This campaign will address noncompliance through a variety of treatment streams including outreach/education and traditional examinations.

May 2018 IRS Compliance Campaigns: Nonresident Alien Schedule A and Other Deductions

This is another campaign that targets NRAs. In this case, the IRS focuses on the Form 1040NR Schedule A itemized deductions. NRA taxpayers may either misunderstand or misinterpret the rules for allowable deductions under the previous and new IRC provisions, do not meet all the qualifications for claiming the deduction and/or do not maintain proper records to substantiate the expenses claimed. The campaign will address noncompliance through a variety of treatment streams including outreach/education and traditional examinations.

May 2018 IRS Compliance Campaigns: NRA Tax Credits

This is yet another (third) campaign that targets NRAs; this time it concerns tax credits claimed by the NRAs. The IRS here targets NRAs who erroneously claim a dependent tax credit and who either have no qualifying earned income, do not provide substantiation/proper documentation, or do not have qualifying dependents. Furthermore, the IRS also wants to target NRAs who claim education credits (which are only available to U.S. persons) by improperly filing Form 1040 tax returns. This campaign will address noncompliance through a variety of treatment streams including outreach/education and traditional examinations.

Contact Sherayzen Law Office for Professional Tax Help

If you have been contacted by the IRS as part of any of its campaigns, please 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!

Costa Rican Bank Accounts | International Tax Lawyer & Attorney Miami

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Upon moving to Costa Rica, many US retirees open Costa Rican bank accounts in order to pay for their local expenses and purchase properties. While to US retirees their Costa Rican bank accounts seem innocent and completely unrelated to US tax laws, the ownership of these accounts may put them at a significant risk for US tax noncompliance. In this article, I would like to discuss the top three US reporting requirements with which US owners of the Costa Rican bank accounts need to comply.

Costa Rican Bank Accounts: Who Must Report Them?

Before we discuss these US tax requirements in more detail, we need to make it clear that, generally, only US tax residents must comply with these requirements. The definition of a US tax resident is broad and includes US citizens, US permanent residents, an individual who declares himself a US tax resident.

A couple of words of caution. First, there are important exceptions to this general definition of a US tax resident. For example, students on an F-1 visa are generally exempt from the Substantial Presence Test for five years. It is the job of your international tax attorney to determine whether you fall within any of these exceptions.

Second, different information returns may modify the categories of persons which are included in the category of the required filers. In other words, while it is generally true that US tax residents are the ones who are required to comply with the US tax requirements concerning Costa Rican bank accounts, there are important, though limited exceptions. The most prominent example is FBAR discussed below; the form requires “US persons”, not “US tax residents” to disclose the ownership of foreign accounts. While these two concepts are similar, they are not exactly the same.

Costa Rican Bank Accounts: Worldwide Income Reporting

All US tax residents must report their worldwide income on their US tax returns. In other words, US tax residents must disclose both US-source and foreign-source income to the IRS. In the context of the Costa Rican bank accounts, foreign-source income would usually include bank interest income, but this concept also covers dividends, royalties, capital gains and any other income generated by the Costa Rican bank accounts.

Costa Rican Bank Accounts: FBAR Reporting

The official name of the Report of Foreign Bank and Financial Accounts (“FBAR”) is FinCEN Form 114. FBAR requires all US persons to disclose their ownership interest in or signatory authority or any other authority over Costa Rican bank and financial accounts if the aggregate highest balance of these accounts exceeds $10,000.

Note that the term “US persons” is very close to “US tax residents”, but it is not the same. The term “US tax residents” is slightly broader than “US persons”. I have already discussed the definition of US persons in a series of articles (for example, see this article on individuals who are considered US persons); hence, I will not discuss it here, but I urge the readers to search sherayzenlaw.com for more materials on this subject.

There is one aspect of the FBAR requirement that I wish to explain in more detail here – the definition of an “account”. The FBAR definition of an account is substantially broader than how this word is generally understood by taxpayers. “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.

The final aspect of FBAR that I wish to discuss here is its penalty system. US taxpayers dread FBAR penalties which are supremely severe to an astonishing degree. At the apex are the criminal penalties with up to 10 years in jail (of course, these penalties come into effect only in the most egregious situations). While FBAR willful civil penalties do not threaten incarceration, they are so harsh that they can easily exceed a person’s net worth. Even taxpayers who non-willfully did not file an FBAR (either because they did not know about it or due to circumstances beyond their control) are not free from FBAR penalties. Since 2004, the Congress added non-willful FBAR penalties of up to $10,000 per account per year.

In order to mitigate the potential for the 8th Amendment challenges to FBAR penalties and make the penalty imposition more flexible, the IRS created a multi-layered system of penalty mitigation. Since 2015, the IRS has added additional limitations on the FBAR penalty imposition. These self-imposed limitations of course help, but one must keep in mind that they are voluntary IRS actions and maybe disregarded under certain circumstances (in fact, there are already a few instances where this has occurred).

Costa Rican Bank Accounts: FATCA Form 8938

Form 8938 is one of the most important and relatively recent additions to the numerous US international tax requirements. The IRS created Form 8938 under the Foreign Account Tax Compliance Act (“FATCA”) in 2011.

Form 8938 is filed with a federal tax return. This means that, without Form 8938, the tax return would not be complete and, potentially, open to an IRS audit.

The primary focus of Form 8938 is on the reporting by US taxpayers of Specified Foreign Financial Assets (“SFFA”). SFFA includes a very diverse range of foreign financial assets, including: foreign bank accounts, foreign business ownership, foreign trust beneficiary interests, bond certificates, various types of swaps, et cetera.

In some ways, Form 8938 requires the reporting of the same assets as FBARs (especially with respect to foreign bank and financial accounts), but the two requirements are independent. This means that a taxpayer may have to do duplicate reporting on FBAR and Form 8938.

Form 8938 has a filing threshold that depends on a taxpayer’s tax return filing status and his physical residency. For example, if a taxpayer is single and resides in the United States, he needs to file Form 8938 as long as the aggregate value of his SFFA is more than $50,000 at the end of the year or more than $75,000 at any point during the year.

Form 8938 needs to be filed by Specified Persons. Specified Persons consist of two categories: Specified Individuals and Specified Domestic Entities. There are specific definitions for both categories; you can find them by searching our website sherayzenlaw.com.

Finally, Form 8938 has its own penalty system which has far-reaching consequences for income tax liability (including disallowance of foreign tax credit and imposition of higher accuracy-related income tax penalties). There is also a $10,000 failure-to-file penalty.

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

Foreign income reporting, FBAR and Form 8938 do not constitute a complete list of requirements that may apply to Costa Rican bank accounts. There may be many more.

If you have Costa Rican bank accounts, contact the experienced international tax attorney and owner of Sherayzen Law Office, Mr. Eugene Sherayzen. Mr. Sherayzen has helped hundreds of US taxpayers with their US international tax issues, and He can help You!

Contact Mr. Sherayzen Today to Schedule Your Confidential Consultation!

FBAR United States Definition | FBAR Lawyer & Attorney Minneapolis MN

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The United States is defined differently with respect to different parts (and, sometimes even within the same part) of the United States Code. There is a specific definition of the United States for FBAR Purposes. In this brief essay, I would like to discuss the FBAR United States Definition and explain its importance to FBAR compliance.

Importance of FBAR United States Definition to FinCEN Form 114

Before we discuss the FBAR United States Definition, we need to the context in which it is used and why it is important for US international tax purposes. FBAR is a common acronym for the Report of Foreign Bank and Financial Accounts, FinCEN Form 114. It used to be known under a different name – TD F 90-22.1.

FBAR is part of Title 31, Bank Secrecy Act, but the IRS has administered FBAR since 2001. The IRS primarily uses FBAR not to fight financial crimes (which was its original purpose), but for tax enforcement. In particular, the IRS found that FBAR is an extremely useful tool for combating tax evasion associated with a strategy of hiding money in secret foreign bank accounts.

FBAR’s draconian penalties is what makes this form the favorite with the IRS, but much hated by US taxpayers. The penalties range from a jail sentence to civil willful penalties and even civil non-willful penalties which may exceed a taxpayer’s net worth.

It is precisely these penalties which make it absolutely necessary for US taxpayers to understand when they need to file FBARs. One of the aspects of this understanding is the FBAR United States Definition, which allows one to determine two things. First, the FBAR United States Definition is used to define the United States for the purposes of the Substantial Presence Test. Second, the FBAR United States Definition allows one to classify bank accounts as foreign or domestic for FBAR compliance purposes.

FBAR United States Definition

31 CFR 1010.100(hhh) contains the FBAR United States Definition. Under this provision, the United States is defined as: the States of the United States, the District of Columbia, the Indian Lands (as defined in the Indian Gaming Regulatory Act) and the territories and insular possessions of the United States. As of February 3, 2019, the US territories and insular possessions refer to: Puerto Rico, Guam, American Samoa, US Virgin Islands and Northern Mariana Islands.

Contact Sherayzen Law Office for Professional FBAR Help

If you have undisclosed foreign accounts, contact Sherayzen Law Office for professional help. We have successfully helped hundreds of US taxpayers around the world with their FBAR issues, and We can help You! Contact Us Today to Schedule Your Confidential Consultation!

Uruguay-US Social Security Agreement Sent to Congress | Tax Lawyer

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On March 19, 2018, President Trump sent the Uruguay-US Social Security Agreement to the US Senate. This is an important step toward the final ratification of the treaty that promises to benefit the citizens of both countries.

Uruguay-US Social Security Agreement: What is a Social Security Agreement?

A Social Security Agreement (also called a Totalization Agreement) is essentially a treaty between two countries that eliminates the burden of dual social security taxation for individuals and businesses who operate in both countries.

Typically, the potential for this type of double-taxation arises when a worker from country A works in Country B, but he is covered under the social security systems in both countries. In such situations, without a Social Security Agreement, the worker will have to pay social security taxes to both countries on the same earnings. A Social Security Agreement, on the other hand, allows the worker (and employers) to pay social security taxes only in one country identified in the treaty.

Social Security Agreements are authorized by Section 233 of the Social Security Act. Right now, only 26 Totalization Agreements are in force between the United States and another country: Australia, Austria, Belgium, Canada, Chile, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Japan, Luxembourg, the Netherlands, Norway, Poland, Portugal, the Slovak Republic, South Korea, Spain, Sweden, Switzerland and the United Kingdom. Uruguay may become the 27th country to have a Social Security Agreement with the United States.

Uruguay-US Social Security Agreement: Recent History

The Uruguay-US Social Security Agreement has had a very favorable history so far. In fact, it may set the record for the fastest treaty ever negotiated by Uruguay. The countries first agreed to pursue a Social Security Agreement between them in May 2014, when the then Uruguayan president Jose Mujica was in Washington.

Amazingly, already in May of 2015, after just two rounds of talks held over a six-month period, the countries finished the negotiations of the Uruguay-US Social Security Agreement. Typically, it takes anywhere between two to three years to negotiate a Totalization Agreement.

On January 10, 2017, the Uruguay-US Social Security Agreement was signed in Montevideo. The United States was represented by its ambassador Mr. Kelly Kinderling. Uruguay was represented by its Foreign Minister Jose Luis Cancela and Labor and its Social Security Minister Ernesto Murro.

On October 3, 2017, the Uruguayan Senate approved the pending Uruguay-US Social Security Agreement, thereby completing the first part of the necessary ratification process. By sending the treaty to Congress for the required 60-day review period, President Trump started the US ratification process.

Uruguay-US Social Security Agreement: Benefits

According to Uruguay, the Uruguay-US Social Security Agreement will benefit some 60,000 Uruguayans working in the United States and up to 6,000 Americans living in Uruguay. The primary benefit is that the workers of both countries will be able to count the working years spent in both countries to be obtain eligibility for their home-country retirement, disability and survivor benefits.

Additionally, the Agreement will exempt US citizens sent by US-owned companies to work in Uruguay for five years or less from paying the Uruguayan social security taxes. Similarly, Uruguayan citizens sent to work temporarily in the United States by Uruguayan-owned companies will not need to pay social security taxes to the US government. Thus, employers in both countries will pay social security taxes only to their employees’ home countries.

Additionally, both countries hope that the Uruguay-US Social Security Agreement will boost trade between the countries. Currently, more than 200 American firms operate in Uruguay (mostly in the service sector).

Sherayzen Law Office will continue to monitor future developments with respect to this highly-beneficial treaty.

FBAR Legislative History | FBAR Tax Attorney Minneapolis

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Exploring the FBAR legislative history is not just a theoretical adventure which should interest only legal scholars. Rather, the FBAR legislative history allows us to understand the theoretical and historical basis for the high FBAR penalties and the legal arguments that may serve best to combat the imposition of these severe penalties.

FBAR Legislative History: The Bank Records and Foreign Transactions Act and the Bank Secrecy Act

The obligation to file a Report of Foreign Bank and Financial Accounts (FBAR) originated from the Bank Records and Foreign Transactions Act, which, together with subsequent amendments, is commonly known as the Bank Secrecy Act.

The Bank Secrecy Act (BSA) was first enacted in 1970. The BSA created various financial reporting obligations to identify and collect evidence against money laundering, tax evasion and other criminal activities. One of these reporting obligations is U.S. Code Title 31, Section 5314 which directly discusses what became known as the FBAR.

31 U.S.C. §5314 requires a U.S. person to file reports and keep records regarding this person’s foreign financial accounts maintained with a foreign financial institution: “the Secretary of the Treasury shall require a resident or citizen of the United States or a person in, and doing business in, the United States, to keep records, file reports, or keep records and file reports, when the resident, citizen, or person makes a transaction or maintains a relation for any person with a foreign financial agency.” The statute identifies the basic information required to be reported on FBAR and authorizes the U.S. Department of Treasury to prescribe the requirements, including identifying the classes of persons who should file FBARs and the threshold amount triggering this reporting requirement.

FBAR Legislative History Prior to 2001

Prior to 2001, the FBAR legislative history does not reflect any major changes. In fact, the most important development in the FBAR legislative history prior to 2001 came not from Congress, but from the United States Supreme Court.

Prior to 2001, the BSA required that, in order to impose civil and criminal FBAR penalties, the U.S. government had to prove willful failure to file an FBAR. Here is where the Supreme Court made its decisive contribution in Ratzlaf v. United States, 510 U.S. 135, 149 (1994). In that case, the Court established the willfulness standard as a “voluntary, international violation of a known legal duty”. The Court further held that merely structuring a transaction to avoid the applicability of the BSA did not constitute willfulness.

In other words, after 1994, the DOJ (the U.S. department of Justice) had to show that the defendant structured the transactions with knowledge that such structuring was in itself unlawful. Such a high standard was difficult to satisfy and the FBAR-related indictments became relatively rare.

FBAR Legislative History After 2001

The terrorist attacks on September 11, 2001, resulted in significant changes in the FBAR legislative history which propelled the FBAR to its current prominence. Let’s focus on three such changes.

1. USA PATRIOT Act

The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (“USA PATRIOT Act”) charged the U.S. Treasury Department with improving FBAR enforcement, particularly with respect to illegal offshore banking activities. The USA PATRIOT Act reflected the Congress’s findings that terrorist funding was successfully concealed through offshore banking activities which provided secrecy and anonymity of the parties involved. It is worth noting that the focus of the USA PATRIOT Act was still on the money-laundering and terrorist activities, not tax enforcement.

The USA PATRIOT Act further required the Treasury Department to submit recommendations to improve FBAR policies and procedures.

2. Treasury Reports and the Delegation of FBAR Enforcement to the IRS

In response to the Congress’ request, the Treasury Department released three reports between 2002 and 2004. The importance of these reports lies in the evolution of the FBAR role from the original purpose of fighting terrorism to international tax compliance.

The first report was released in 2002 complained that, due to the small probability of imposition of civil penalties and limited FBAR filing guidance, compliance with the FBAR was lower than 20% (in retrospect, this was still a very generous assessment because FBAR compliance was, in reality, much lower). Therefore, the Treasury Department outlined a number of objectives to improve FBAR policies and procedures, such as improving forms, enhancing outreach and strengthening enforcement.

Most importantly, for the first time, the Treasury Department suggested delegating the enforcement of civil FBAR penalties from FinCEN to the IRS. While nothing yet expressly suggested in the FBAR legislative history that FBAR should be used for tax enforcement, it is difficult to interpret the Treasury Department’s report in any other way. At the very least, the first report hinted at such a possibility.

The second report issued by the Treasury Department (in 2003) was much more direct. The report noted that the civil enforcement of FBAR was already delegated to the IRS and contained the key statement: “one could argue the FBAR is directed more towards tax evasion, as opposed to money laundering or other financial crimes, that lie at the core mission of FinCEN”. This was the first time the IRS officially stated the true purpose of FBAR in the post-9/11 world.

It is worth noting that the final report of the Treasury Department (issued in 2004) happily related to the Congress that the FBAR filings had increased in 2003 by 17% from the year 2000 as a result of the IRS enforcement action, confirming the correctness of the Department’s original objectives stated in the first report.

3. American Jobs Creation Act of 2004

No summary of the post-2001 FBAR legislative history would be complete without discussion of the American Jobs Creation Act of 2004 (“2004 Jobs Act”). The 2004 Jobs Act was enacted partially as a result of the Treasury Department’s reports and its complaints about the difficulty of imposing civil sanctions for a failure to file FBAR and partially seeking an increase revenue. As a result of the 2004 Jobs Act, the Congress made one of the most important changes to FBAR by significantly increasing the FBAR penalties, including the imposition of a non-willful penalty for up to $10,000 per violation.

FBAR Legislative History: New FBAR Deadline Starting 2016 FBAR

The most recent change in the FBAR Legislative History came from the innocently-sounding “The Surface Transportation and Veterans Health Care Choice Improvement Act of 2015″ that was enacted on July 31, 2015. As a result of this new law, starting with the 2016 FBAR, the FBAR deadline moved from June 30 to April 15 (with an extension possible for the first time in the FBAR legislative history).

Contact Sherayzen Law Office for FBAR Legal and Tax Help

If you have not complied with the FBAR requirement in the past or you need to determine whether FBAR applies in your situation, contact Sherayzen Law Office for professional help. We have helped hundreds of US taxpayers around the world with their FBAR compliance and we can help you!

Contact Us Today to Schedule Your Confidential Consultation!