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Voluntary Compliance with US Tax Laws | International Tax Attorney Austin

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The IRS has repeatedly stated that the US tax system is a voluntary compliance system. Yet, what does “voluntary compliance” mean in this context? Does it mean that US taxpayers only need to comply with US tax laws whenever they wish to do it? Does it mean that any US taxpayer has a right to refuse to comply with US tax laws or file his tax returns whenever he feels like doing it?

A lot of people tried to take this position and failed. The IRS has always won on the issue that US taxpayers have an obligation to comply with US tax laws, whether they want to do it or not.

Then, what is so “voluntary” about our tax system? Let’s explore this question in more detail.

Voluntary Compliance with US Tax Laws is Obligatory

Let us start with the affirmative statement that the word “voluntary” does not refer to the actual obligation of US taxpayers to comply with US tax laws. In other words, the compliance with US tax laws is compulsory and any noncompliance with US tax laws is punishable to the extent permitted by the law. Intentional noncompliance may even result in incarceration of a noncompliant taxpayer.

The IRS Inability to Engage in Full Enforced Tax Compliance

Since the word “voluntary” does not apply to the actual obligation to comply with US tax laws, we must look at the assessment of US tax liability to understand what voluntary compliance means. In particular, our focus should be on what is known as “enforced tax compliance” – i.e. direct assessment of tax liability and the audit of tax returns.

Here, we encounter an obvious yet interesting fact: the IRS does not have the resources to audit every one of the hundreds of millions of US taxpayers (resident and non-resident, individual and business), especially on an annual basis. Similarly, the IRS also lacks the ability to audit every single tax return every year; in fact, it only audits about 3% of all tax returns per year.

This means that the IRS does not have the capacity to sustain a system of enforced tax compliance and the vast majority of US taxpayers operate outside of this system.

The Definition of Voluntary Compliance

This lack of the IRS ability to engage in 100% enforced tax compliance leads to the inevitable conclusion that it has to rely on US taxpayers to timely file their own tax returns, assess their own tax liability and pay this tax liability to the IRS. It is precisely in this sense that US tax compliance system is “voluntary”.

In other words, voluntary compliance means that US taxpayers do their own self-assessment of their US tax liability (hopefully, in accordance with the IRS guidance) instead of the IRS doing it for each of them. Underlying this voluntary compliance, however, is the threat that the IRS can audit the tax returns and impose noncompliance penalties.

Contact Sherayzen Law Office for Professional Help with Your Voluntary Compliance Concerning US International Tax Laws

The IRS focus on the enforced tax compliance regarding the US international tax obligations of US taxpayers has caused an unprecedented rise in the voluntary compliance in this area of law. Noncompliant US taxpayers are at a historically-high risk of detection by the IRS and may face draconian IRS penalties, including jail time.

This means that, if you have foreign assets and foreign income, you need the professional help of Sherayzen Law Office to bring your tax affairs into full compliance with US tax laws. Our firm is highly experienced in the area of US international tax compliance with hundreds of successful cases closed and millions of dollars saved in US taxes and potential penalties! We can help you!

Contact Us Today to Schedule Your Confidential Consultation!

How IRS Can Get $718 Billion in Tax Revenue | International Tax Lawyer

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On October 4, 2016, the US Public Interest Research Group, Citizens for Tax Justice, and the Institute on Taxation and Economic Policy issued a report called “Offshore Shell Games 2016: the Use of Offshore Tax Havens by Fortune 500 Companies”. The report calculates that eliminating all tax deferral on Fortune 500 US companies’ foreign earnings would allow the IRS to collect almost $718 Billion in additional US tax revenue.

Where does the Amount of $718 Billion Come From?

This amazing report targets the estimated $2.5 trillion in offshore earnings which are assumed to be mostly help by the US companies’ foreign subsidiaries in tax havens. The report calculates that the top 30 (meaning top 30 companies by the amount of offshore holdings) of the Fortune 500 companies account for two-thirds of the total, with Apple ($215 billion), Pfizer ($194 billion), and Microsoft ($124 billion) topping the list. It should be noted that some of the other estimates calculate the amount of total offshore earnings of US companies to be in excess of $5 trillion, i.e. double the amount used by the report.

The number of foreign subsidiaries owned by US multinationals is also impressive – the estimate runs as high as 55,000 subsidiaries owned just by Fortune 500 companies. The report states that, although many offshore subsidiaries do not show up in companies’ SEC filings, at least 367 of the Fortune 500 companies maintain subsidiaries in tax havens and the top 20 account for 2,509 of those entities. Subsidiaries of US multinationals reported profits of more than 100 percent of national GDP for five tax havens, including 1,313 percent for the Cayman Islands and 1,884 percent for Bermuda.

The most popular country for organizing the subsidiaries remains the Netherlands. However, Ireland, Luxembourg, Switzerland, Bermuda and Cayman Islands closely follow Netherlands in terms of their popularity among US multinationals.

How is $718 Billion Calculated?

The report sets forth its methodology for the calculation of $718 Billion. In essence, the report focuses on the data from 58 Fortune 500 companies to estimate the additional tax all of the companies would owe upon repatriation of funds to the United States. The final tax rate amount to about 28.8% of the repatriated income; the rest (i.e. the difference between the 35% US statutory rate and the 28.8%) is assumed to be the foreign tax rate that the companies will be able to use as a foreign tax credit to offset their US tax liability. Once 28.8% rates is applied to $2.5 trillion, the total amount of additional tax due to the IRS by the Fortune 500 companies is estimated to be close to $718 Billion.

This methodology, however, is not without its flaws. First, as I already referenced above that the amount of funds in foreign subsidiaries may be substantially higher than the estimated $2.5 trillion. Second, the report’s assumption of 6.2% of foreign tax rate may be too generous, especially for foreign companies owned by US persons for generations; in reality, a lot of companies are able to escape all taxation on a substantial amount of their income. Hence, the $718 Billion amount may actually be an understatement.

How Does the Report Propose to Collect the $718 Billion?

The report offers three approaches to the problem of collecting the $718 billion. The first approach is deceptively simple – end all tax deferral. The problem that I see with this approach is that it essentially expands US tax jurisdiction to foreign entities (which are non-resident alien business structures) to the extent that these entities automatically become US persons as soon as any US person becomes an owner of all or any part of them. In addition to the obvious legal problems with such an approach, there is also a potential to create a real chilling effect to US activities overseas. At the very least, the proposed course of action should be modified to include only controlled foreign entities and large US corporations.

The second approach is less radical; the report suggests tighter anti-inversion rules, elimination of the check-the-box election and the elimination of aggressive tax planning through intellectual property transfers. While many of these rules may be effective to combat future aggressive tax planning, they are unlikely to influence the current IRS inability to collect the $718 billion in additional tax revenue.

Finally, the report also lends support to the Obama administration’s (which is actually not a resurrection of older proposals) tax proposal to treat as subpart F income excess profits earned by a controlled foreign corporation from US-developed intangibles. The administration’s proposal is to expand the definition of Subpart F income to all excess income taxed at 10% or less (later expanded to 15%) would be included in subpart F. While a sensible proposal, it also seems to fall short of the expected $718 billion in additional tax revenue.

Also, it seems strange that all of the proposals seems to put foreign companies owned by small US firms and those owned by large US firms on the same footing. This kind of seemingly non-discriminatory approach has had a disproportionally heavy impact on small US firms’ ability to conduct business overseas due to lower resources that small firms can devote to the same type of tax compliance as that required of the Fortune 500 companies. 

France Asks Switzerland for Names of UBS Accountholders

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This is an international tax lawyer news update: on September 26, 2016, Swiss tax officials confirmed that France asked Switzerland to provide the names of the holders of more than 45,000 UBS bank accounts. The request covers years 2006-2008.

Le Parisien newspaper, which first published extracts from the French request that the combined balance in the affected accounts exceeded CHF 11 billion (around $ 11.4 billion.). Le Parisien, which did not disclose how it gained access to the letter, also said the French authorities were able to identify the holders of 4,782 accounts.

The French request came to light after, on September 12th 2016, the Swiss Supreme Court over-ruled the lower court’s rejection of a similar request from the Netherlands for financial details of Dutch residents with accounts at UBS. Despite the Netherlands’ success, doubts still remain about the viability of the French request due to the fact that article 28 of the France-Switzerland tax treaty of 1967, as modified in 2010, provides that accounts that were closed before 2010 are not covered by the agreement and, therefore, should not be subject to information exchange.

US Tax Return Statute of Limitations and IRC Section 6501(c)(8)

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Most tax practitioners are familiar with the general rules of assessment statute of limitation for US tax returns. However, very few of them are aware of the danger of potentially indefinite extension of the statute of limitations contained in IRC Section 6501(c)(8). In this article, I would like to do offer a succinct observation of the impact of IRC Section 6501(c)(8) on the US tax return Statute of Limitations as well as your offshore voluntary disclosure strategy.

Background Information

While IRC Section 6501(c)(8) has existed for a while, its present language came into existence as a result of the infamous HIRE act (the same that gave birth to FATCA) in 2010. The major amendments came from PL 111-147 and PL 111-226.

When IRC Section 6501(c)(8) Applies

IRC Section 6501(c)(8) applies when there has been a failure to by the taxpayer to supply one or more accurate foreign information return(s) with respect to reporting of certain foreign assets and foreign-related transactions under IRC Sections 1295(b), 1298(f), 6038, 6038A, 6038B, 6038D, 6046, 6046A and 6048. In essence, it means IRC Section 6501(c)(8) applies whenever the taxpayer fails to file Forms 8621, 5471, 5472, 926, 3520, 3520-A, 8865, 8858 and 8938 (and potentially other forms). In essence, this Section comes into play with respect to virtually all major international tax reporting requirements, with the exception of FBAR (which is governed by its own Title 31 Statute of Limitations provisions).

It is important to emphasize that it is not just the failure to file these international tax returns that triggers IRC Section 6501(c)(8). Rather, most international tax attorneys agree that, if the filed international tax returns are inaccurate or incomplete, IRC Section 6501(c)(8) still applies.

IRC Section 6501(c)(8) only applies to the returns filed after the date of the enactment of the provisions that amended the section – March 18, 2010. The Section also applies to returns filed on or before March 18, 2010 if the statute of limitations under Section 6501 (without regard to the amendments) has not expired as of March 18, 2010.

The Impact of IRC Section 6501(c)(8) On the Statute of Limitations

As amended by PL 111-147 and PL 111-226, IRC Section 6501(c)(8) may have a truly monstrous effect on the statute of limitations for the entire affected tax return – a failure to file any of the aforementioned international tax forms (including a failure to provide accurate and complete information) will keep the statute of limitations open indefinitely with respect to “any tax return, even, or period to which such information relates”.

Thus, a failure to file a foreign information return may keep the statute of limitations open forever for the entire tax return, not just that particular foreign information return. This means that the IRS can potentially audit a taxpayer’s return and assess additional taxes outside of the usual statute of limitations period; the IRS changes can affect any item on the US tax return, not just the items on the foreign information return.

Reasonable Cause Exception to the “Entire Case” Rule

IRC Section 6501(c)(8)(B) provides a limited exception to the “entire case” rule. Where a taxpayer establishes that the failure to file an accurate international information return was due to a reasonable cause and not willful neglect, only the international tax forms will be subject to indefinite statute of limitations and not the entire return.

Impact of IRC Section 6501(c)(8) on Your Voluntary Disclosure Strategy

IRC Section 6501(c)(8) may have a significant impact on the voluntary disclosure strategy where multiple international tax forms need to be filed. In these cases, the taxpayers are more likely to go into Streamlined disclosures or 2014 OVDP (now closed) rather than attempt doing a reasonable cause disclosure.

This is the case because this indefinite statute of limitations may undermine a reasonable cause strategy if the disclosure period does not coincide with the years in which the international tax returns were due. For example, let’s suppose that US citizen X owned PFICs during the years 2008-2014, but he never filed Forms 8621 even though they were required. If X decides to do a reasonable cause disclosure and files amended 2012-2014 tax returns only, then, the years 2008-2011 will still be open to an IRS audit (though, if X successfully establishes reasonable cause for the earlier non-filing, only Forms 8621 will be subject to an IRS audit). In this case, X may have to make a choice between an unpleasant filing of amended 2008-2011 tax return or doing a Streamlined disclosure.

Obviously, IRC Section 6501(c)(8) is just one factor in what could be a very complex maze of pros and cons of a distinct voluntary disclosure strategy. Other factors need to be taken into effect in determining, including whether the financials were disclosed on the FBAR and Form 8938 and the amounts of underreported income (which may actually keep the statute of limitations open for the years 2009-2011 as well).

These types of decisions need to be made carefully by a tax professional on a case-by-case basis with detailed analysis of the facts and potential legal strategies; I strongly recommend retaining an experienced tax attorney for the creation and implementation of your voluntary disclosure strategy.

Contact Sherayzen Law Office for Help With Your Delinquent International Tax Forms

If you have not filed international tax forms and you were required to do so, contact the professional international tax team of Sherayzen Law Office. Our team is lead by an experienced international tax attorney, Mr. Eugene Sherayzen, and has helped hundreds of US taxpayers around the world to bring their US tax affairs into fully US tax compliance.

Contact Us Today to Schedule Your Confidential Consultation!

Determining the Residency of a Trust in Cross-Border Situations

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One of the most important tax aspects involving trusts in cross-border tax situations is the determination of the residency of a trust- i.e. whether it is a domestic or foreign trust for US tax purposes. This determination of the residency of a trust will have important tax consequences for US taxpayers.

In this article we will do a general exploration of how the residency of a trust in cross-border situations is determined; this article is not intended to convey tax or legal advice. Please contact Eugene Sherayzen an experienced tax attorney at Sherayzen Law Office, Ltd. if you have questions concerning trust planning or compliance.

General Criteria for Determining the Residency of a Trust

The general determination of the residency of a trust is described in the Internal Revenue Code (IRC) Section 7701 and Regulation Section 301.7701-7. Under these tax provisions, a trust will be deemed to be a U.S. person if: “(i) A court within the United States is able to exercise primary supervision over the administration of the trust (court test); and (ii) One or more United States persons have the authority to control all substantial decisions of the trust (control test).” (See explanations of the court test and the control test in the paragraphs below). Under the regulation, a trust will be a U.S. person for the purposes of the IRC on any day that the trust meets both of these tests. If a trust does not satisfy both of these tests, it will be considered to be a foreign trust for U.S. reporting purposes.

Determining the Residency of a Trust: The Court Test

In determining the residency of a trust under the Court Test, we need to consult the Treasury Regulations. Regulation Section 301.7701-7(c)(1) provides a safe harbor in which a trust will satisfy this (i.e. US residency) test if: “(i) The trust instrument does not direct that the trust be administered outside of the United States; (ii) The trust in fact is administered exclusively in the United States; and (iii) The trust is not subject to an automatic migration provision…”. For the purposes of the regulation, the term “court” is defined in the regulation to mean any federal, state, or local court, and the United States is used a geographical manner (thus including only the States and the District of Columbia, and not a court within a territory or possession of the United States or within a foreign country).

The term primary supervision means that a court has or would have the authority to determine substantially all issues regarding the administration of the entire trust.” The term “administration” is defined in the regulation to mean, “the carrying out of the duties imposed by the terms of the trust instrument and applicable law, including maintaining the books and records of the trust, filing tax returns, managing and investing the assets of the trust, defending the trust from suits by creditors, and determining the amount and timing of distributions.” The regulations further provide examples of situations that will cause a trust to fail or satisfy the court test.

Determining the Residency of a Trust: The Control test

The Control Test is often the key area of dispute in determining the residency of a trust. “Control” in the control test is explained in the regulation to mean, “having the power, by vote or otherwise, to make all of the substantial decisions of the trust, with no other person having the power to veto any of the substantial decisions.” Critically important – it is required under the regulation to consider all individuals who may have authority to make “substantial decisions”, and not simply the trust fiduciaries.

Under the regulation, the term “substantial decisions” (see usage in first paragraph) is defined to mean, “those decisions that persons are authorized or required to make under the terms of the trust instrument and applicable law and that are not ministerial.” (Some examples of “ministerial” decisions are provided in the regulation, including, bookkeeping, the collection of rents, and the execution of investment decisions).

The regulation further provides numerous examples of substantial decisions: “(A) Whether and when to distribute income or corpus; (B) The amount of any distributions; (C) The selection of a beneficiary; (D) Whether a receipt is allocable to income or principal; (E) Whether to terminate the trust; (F) Whether to compromise, arbitrate, or abandon claims of the trust; (G) Whether to sue on behalf of the trust or to defend suits against the trust; (H) Whether to remove, add, or replace a trustee; (I) Whether to appoint a successor trustee to succeed a trustee who has died, resigned, or otherwise ceased to act as a trustee…; and (J) Investment decisions; however, if a United States person under section 7701(a)(30) hires an investment advisor for the trust, the investment decisions made by the investment advisor will be considered substantial decisions controlled by the United States person if the United States person can terminate the investment advisor’s power to make investment decisions at will.”

Contact Sherayzen Law Office for Tax and Legal Help With Issues Involving Foreign Trusts

Determination of the residency of a trust is just one of a myriad of highly complex issues than an international tax attorney can help you resolve with respect to U.S. tax compliance, tax planning and estate planning. If you are an owner or a beneficiary of a foreign trust, contact Sherayzen Law Office for professional legal and tax help.

Contact Us Today to Schedule Your Confidential Consultation!