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US Airspace and the Definition of the United States | US Tax Lawyers

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This article is a continuation of a recent series of articles on the exploration of the definition of the United States. As it was mentioned in a prior article, the general definition of the United States found in IRC § 7701(a)(9) has numerous exceptions throughout the Internal Revenue Code (“IRC”). The US airspace is another example of such exceptions. In this article, I would like to outline some of the ways in which the borders of the United States are defined in the context of the US airspace.

General Tax Definition of the United States Does Not Mention US Airspace

The general tax definition of the United States is found in IRC § 7701(a)(9). According to IRC § 7701(a)(9), the United States is comprised of the 50 states, the District of Columbia and the territorial waters. There is no mention of the US airspace.

This, of course, does not mean that US airspace never constitutes part of the United States. Rather, as I had explained it in a prior article, one needs to look at the specific tax provisions and determine if there is a special definition of the United States that applies to them.

Examples of Various IRC Provisions Including and Excluding US Airspace from the Definition of the United states

Indeed, there is a rich variety of treatment of US airspace that can be found within the IRC. Here, I will just mentioned three examples that demonstrate how differently the IRC provisions define the United States with respect to its airspace.

1. There is an esoteric but important IRC § 965 which deals with the Dividends Received deduction for repatriated corporate earnings. IRS Notice 2005-64 provides foreign tax credit guidance under IRC § 965 and specifically follows the general definition of the United States with the addition of the Continental Shelf. Then, the Notice states: “the term ‘United States’ does not include possessions and territories of the United States or the airspace over the United States and these areas”. Thus, the US airspace is excluded from the tax definition of the United States under IRC § 965.

2. The treatment of the US airspace is the opposite for the purposes of the Foreign Earned Income Exclusion (“FEIE”). Since FEIE allows a taxpayer to exclude only “foreign” earned income, the tax definition of the United States is crucial for this part of the IRC.

In general, the courts have ruled that the airspace over the United States is included within the definition of the United States with respect to IRC § 911. This means that, if you are flying over the United States, you are considered to be within the United States for the purposes of FEIE.

3. When we are dealing with the analysis of whether an individual is a US tax resident under the Substantial Presence Test, we are again back to the same situation as in example 1 – the US airspace is not included in the definition of the United States.

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Totalization Agreement with Romania Progresses | Minnesota Tax Lawyer

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On October 26, 2016, the Totalization Agreement with Romania entered a new stage – the government of Romania approved for signature a draft social security (also known as “Totalization”) agreement with the United States.

The Totalization Agreements are authorized by Section 233 of the Social Security Act. The United States currently has Totalization Agreements with 26 countries – Australia, Austria, Belgium, Canada, Chile, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary (the most recent addition), Ireland, Italy, Japan, Luxembourg, the Netherlands, Norway, Poland, Portugal, the Slovak Republic, South Korea, Spain, Sweden, Switzerland and the United Kingdom

The purpose of a Totalization Agreement is to eliminate the burden of dual social security taxes. Such situation arise usually in the context of workers from one country working in another country while they are covered by the social security systems in both countries. In such cases, the Totalization Agreement protects the workers from paying social security taxes in both countries on the same earnings.

The Totalization Agreement with Romania is intended to benefit the Romanian workers who work in the United States and US workers who work in Romania. This is why any advance in the progress of the Totalization Agreement with Romania is of high interest to workers and businesses who work in both countries, United States and Romania.

Obviously, there is still a very long road to go for the Totalization Agreement with Romania. First, the Totalization Agreement with Romania has to be finalized (and it seems that this stage has been reached), then signed by both countries and, finally, ratified by both countries. This process, especially ratification, can take years especially if the US Congress and the new President do not see “eye to eye” on this issue. However, the obvious benefits of the Totalization Agreement with Romania should eventually pave the way to its ratification in both countries.

FBARs and Polish Lokata Accounts

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In recent years, I have received a number of questions from my Polish clients about whether “Lokata” accounts are reportable on the FBARs. The short answer is “Yes”.

Lokata Accounts

Lokata is a fixed-term deposit account which is very common in Polish banks; a Lokata is very similar to U.S. CD-type of accounts. There are many types of lokatas – overnight, three-month, six-month and even twelve-month lokatas. Usually, the bank would automatically take the funds from a current account (so-called “rachunek biezacy”) and deposit it on the lokata at a certain fixed percent. At the end of the lokata period, the lokata is closed by the bank and the balance with interest (minus automatic 19% tax withholding for non-business accounts) is returned to the current account.

All major Polish banks (e.g. DZ Bank and Bank Zchodni WBK S.A.) offer lokatas to their clients.

Lokata and FBAR Complications

Every time lokata is opened, it is assigned a separate account number. For the purposes of the FBAR, it is a bank account which should be reported on the FBAR separately from the current accounts (contrary to some of the widely-held beliefs among U.S. taxpayers living and working in Poland).

So far, this sounds fairly simple. However, there are serious complications with respect to reporting lokata accounts on the FBAR. First, most current bank account statements are not likely to fully identify lokata accounts.

Second, even where a lokata is identified by a separate number, you still need to make sure that the amount shown on the statements actually reflects the gross amount (i.e. before tax withholding). Usually, it would not and you will need to request the bank to supply a separate bank statement for each lokata and keep track of all gross interest and withholding tax amounts.

Third, the sheer number of lokata accounts can be overwhelming. While there are may be renewable long-term lokatas, oftentimes, it is the opposite. The problem with short-term lokatas is that they terminate once the funds with interest are returned to the current account. This means that a new lokata account is likely to be open every time a new deposit is made. Imagine if a new lokata is opened every week, every three days or every day?! This can be an extremely burdensome requirement for U.S. taxpayers who maintain bank accounts in Poland.

Other problems may arise where the taxpayer needs records for prior years, a lokata is opened in one year and is closed in the following year, et cetera.

Contact Sherayzen Law Office for Help with Reporting Undisclosed Lokata Accounts

If you have undisclosed bank and financial accounts in Poland, contact Sherayzen Law Office for help with your voluntary disclosure. Our team of experienced international tax professionals will thoroughly analyze your case, estimate your current potential FBAR liabilities, propose a solution to your FBAR problems, and implement your voluntary disclosure plan, including preparation of all required legal documents and tax forms.

IRS 2013 Budget Proposal Emphasizes International Tax Enforcement

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Every year, the President has to submit a budget request to U.S. Congress for federal agencies, including the Internal Revenue Service. In February of 2012, the IRS posted the following information regarding its budget.

Administration’s fiscal year (FY) 2013 budget request for the Internal Revenue Service is approximately $12.8 billion, a $944.5 million increase (8%) over the FY 2012 enacted level.

A significant portion of the increase from FY 2012 represents the Administration’s request to restore lost revenue resulting from reductions in IRS funding made over the past two years. This request is designed to provide the resources necessary to administer and enforce the current tax code, implement recent changes to the law to update the Code and serve the American taxpayer in a timely manner.

In FY 2011, the IRS collected $2.415 trillion in taxes, representing 92 percent of federal government receipts. The IRS processed more than 144.7 million individual returns during the 2011 filing season and issued almost 110 million refunds totaling $345 billion.

The IRS consistently achieves a high return on investment for its activities while running a fiscally disciplined operation. In FY 2013, the IRS expects to identify nearly $71 million in cost savings from increased use of electronic return filing, reductions in non-case related travel and streamlining operations.

Enforcement Program

IRS Enforcement Program is projected to receive the lion’s share of the increase. The FY 2013 budget includes $403 million in new IRS enforcement activities, which are expected to raise $1.48 billion in revenue annually at full performance, once new hires are fully trained and develop broader experience by FY 2015. This is a 4.3-to-1 return on investment. The return on investment is even greater when factoring in the deterrence value of these investments and other IRS enforcement programs, which is conservatively estimated to be at least three times the direct revenue impact.

The enforcement budget also includes $200 million in additional examination and collection programs that will generate more than $1.1 billion in additional annual enforcement revenue by FY 2015. Investments such as these in IRS enforcement programs are especially important to further the IRS’ mission of improving tax compliance.

International Tax Compliance Emphasized by the IRS

International tax compliance is specifically emphasized by the IRS. The IRS will continue to address offshore tax evasion by individuals through a combined “carrot and stick” approach – special offshore voluntary disclosure program and increased examinations and prosecutions.

International tax compliance will also concern domestic businesses operating abroad and foreign businesses owned by U.S. taxpayers. In order to ensure business entity compliance, the IRS will provide additional international technical specialists to increase coverage of complex international transactions.

Contact Sherayzen Law Office for Tax Help with International Tax Compliance Issues

If you have any issues regarding international tax compliance with U.S. laws and regulations, contact Sherayzen Law Office. Our experienced international tax firm will review the facts of your case, analyze the available options, propose a concrete plan of action with respect to your U.S. tax compliance issues, and implement this plan (including drafting and completing the necessary tax documents and forms).

Form 5472 Penalties

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In a previous article, we covered the basics of the IRS Form 5472. In this article we will explain the penalties that may apply for failure to comply with the form’s requirements.

Main Failure to File and Failure to Maintain Records Penalties

If a corporation fails to timely file the required Form 5472, a $10,000 penalty may be assessed. Furthermore, a reporting corporation that files a substantially incomplete Form 5472 will be deemed as having failed to file Form 5472, and penalties may apply.

An interesting twist in Form 5472 penalties is that, in addition to failure to file penalties, the IRS imposes substantial record-keeping penalties. A $10,000 penalty may be assessed for failure to maintain records, as required under IRS regulation Section 1.6038A-3. Under this regulation, “a reporting corporation must keep the permanent books of account or records… that are sufficient to establish the correctness of the federal income tax return of the corporation, including information, documents, or records (“records”) to the extent they may be relevant to determine the correct U.S. tax treatment of transactions with related parties.”

It is also important to note that, for the purposes of Form 5472 penalties, each member of a group of corporations filing a consolidated information return is treated as a separate reporting corporation, and each member is potentially subject to a separate $10,000 penalty, as well as being jointly and severally liable.

Additional Failure to File Penalties

If the IRS issues a failure to file notification, and the failure continues for more than 90 days after such notification, an additional penalty of $10,000 may apply. This penalty applies with respect to each related party for which a failure occurs for each 30-day period (or part of a 30-day period) during which the failure continues after the 90-day period end.

Criminal Penalties

Under IRC Sections 7203 (Willful failure to file return, supply information, or pay tax), 7206 (Fraud and False Statements), and 7207 (Fraudulent returns, statements, or other documents), criminal penalties may potentially apply for failure to submit necessary information, or for filing false or fraudulent information.

Contact Sherayzen Law Office for Legal Help With Form 5472 Reporting Requirements

Complying with Form 5472 requirements and dealing with Form 5472 penalties usually requires professional review. Contact Sherayzen Law Office for tax assistance with Form 5472; our experienced international tax firm will determine whether you need to file Form 5472, explain how to comply with the form’s requirement, complete the form for you, and handle any necessary IRS negotiations.