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Happy New Year 2022 From Sherayzen Law Office!!!

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Dear clients, followers, readers and colleagues:

Sherayzen Law Office wishes you a very Happy New Year 2022!!!

For those of you who are currently not in compliance with their US international tax reporting obligations, including FBAR or FinCEN Form 114, we wish you to successfully resolve your prior noncompliance in this new year 2022 with a minimal amount of IRS penalties!

Dear friends, in the year 2022, you can continue to rely on Sherayzen Law Office for your annual US international tax compliance (including the preparation of FBAR and other US international tax compliance forms such as: Forms 3520, 3520-A, 5471, 8621, 8865, 8938 and 926), your international tax planning (inbound and outbound) and your offshore voluntary disclosures (including: Streamlined Domestic Offshore Procedures (SDOP), Streamlined Foreign Offshore Procedures (SFOP), Delinquent FBAR Submission Procedures, Delinquent International Information Return Submission Procedures, IRS Voluntary Disclosure Practice and Reasonable Cause Disclosures).

In 2022, we will also continue to help you with your IRS audits and examination, including audits of: your prior SDOP and SFOP submissions (as well as other voluntary disclosure options) and your annual international tax compliance. We can also help you fight the imposition of IRS penalties for prior international tax noncompliance, including Form 3520 and 3520-A penalties, Form 5471 penalties, Form 5472 penalties, Form 8865 penalties, Form 926 penalties, et cetera.

In 2022, the US international tax compliance requirements are going to grow more complex, detailed and extensive. The IRS will continue to demand more and more information from US taxpayers, introducing heretofore unknown reporting obligations such as Schedules K-2 and K-3.

In order to deal with this ever-increasing US tax compliance burden, you will need the professional help of Sherayzen Law Office. In this New Year 2022, we can help you!

Your professional US international tax help is but a phone call away from you! Contact us today to schedule a confidential consultation in this New Year 2022!

HAPPY NEW YEAR 2022 EVERYONE!!!

US Information Returns: Introduction | International Tax Lawyer Minnesota

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In this article, I would like to introduce the readers to the concept of US information returns; I will also explore the differences between US information returns and US tax returns.

US Information Returns: Two Types of Returns

The US tax system is a self-assessment system where taxpayers must file certain forms or returns developed by the IRS in order to report information required by the Internal Revenue Code and the Treasury Regulations. The Internal Revenue Code specifies the due date for these returns.

There are two primary types of returns: tax returns and information returns. A tax return is a form that a taxpayer uses to compute the tax that he owes to the IRS. A tax return requires the taxpayer to set forth the relevant information and amounts for this computation.

On the other hand, the IRS requires US taxpayers to file information returns in order to obtain information on transactions and payments to taxpayers that may affect the information reflected on tax returns. In other words, the IRS uses information returns not to compute the tax liability, but to obtain information (or verification of information) to make sure that the tax returns were properly filed.

US Information Returns: Hybrid Returns

This ideal distinction between the two types of returns is often not preserved. Instead, there are many hybrid returns which possess the features of both, tax returns and information returns. For example, Part III of Form 1040 Schedule B is an information return which forms part of the overall tax return (i.e. Form 1040). Similarly, Form 8621 is a US international information return that is a hybrid return for the reporting of ownership of PFICs and calculation of PFIC tax at the same time.

US Information Returns: Domestic vs. International

The information returns are subdivided into two categories: domestic and international. The domestic information returns are usually filed by third parties with respect to US-source income or income under the supervision of a domestic financial institution. For example, US brokers provide Forms 1099-INT to report US-source interest income and foreign interest income that the taxpayer earned by investing through a domestic financial institution.

It should be mentioned that, due to the implementation of FATCA (Foreign Account Tax Compliance Act), some foreign subsidiaries of US banks also began to issue Forms 1099 to US taxpayers with respect to foreign income from their foreign accounts. The most prominent example is Citibank. However, this is a tiny minority of foreign financial institutions at this point.

On the other hand, international information returns primarily report information concerning foreign assets, foreign income and foreign transactions; there are even information returns concerning foreign owners of US businesses. Usually, these returns are filed not by third parties, but by taxpayers directly – individuals, businesses, trusts and estates. For example, Form 5471 is an international tax return which US taxpayers must file to report their ownership of a foreign corporation, its financial statements and its certain transactions.

US Information Returns: High Civil Penalties

One of the most distinguishing characteristics of information returns are high noncompliance civil penalties. This is very different from tax returns.

The tax return civil penalties are calculate based on a taxpayer’s unpaid income tax liability. The worst case scenario is a civil fraud penalty of 75% of unpaid tax liability. This is followed by negligence, failure-to-file and accuracy penalties.

The noncompliance penalties for information returns, however, do not depend on whether there was ever any tax liability connected with the failure to file an accurate information return; in fact, many information return penalties are imposed in a situation where there is no income tax noncompliance at all. This is logical, because pure information returns would never have any income tax noncompliance directly related to them.

Hence, in order to enforce compliance with information returns, the IRS imposes objective noncompliance penalties per each unfiled or incorrect information return. This divorce between income tax noncompliance and information return penalties, however, may produce extremely unjust results. For example, failure to file a Form 5471 for a foreign corporation which never produced any revenue may result in the imposition of a $10,000 penalty.

It should be emphasized that the domestic information return penalties are much smaller in size than those imposed for noncompliance with international information returns. Again the logic is clear: since the temptation to avoid compliance with US international tax laws is much greater overseas, Congress wanted to raise the stakes for such noncompliant taxpayers in order to make the risk of noncompliance intolerable for most taxpayers.

US Information Returns: Special Case of FBAR

The IRS may impose the most severe penalties out of all information returns for a failure to file a correct FinCEN Form 114, commonly known as “FBAR”. The paradox of these penalties is that FBAR is not a tax form, but a Bank Secrecy Act information return. FBAR was created to fight financial crimes, not for tax enforcement. Its penalties were originally meant to deter and punish criminals, not induce self-compliance with US tax laws – this is precisely why FBAR penalties may easily exceed the penalties imposed with respect to any other US international information return.

So, why is the IRS able to use FBAR as a tax information return and impose FBAR penalties? The reason is that the US Congress turned over FBAR enforcement to the IRS after September 11, 2001. Since then, even though FBAR is not part of the Internal Revenue Code, the IRS has used this form as an information return for tax purposes.

Contact Sherayzen Law Office for Professional Help With US International Information Return Compliance and Penalties

If the IRS imposed penalties on your noncompliance with US international information returns, contact Sherayzen Law Office for professional help.

We are a highly experienced US international tax law firm dedicated to helping US taxpayers around the world with their US international tax compliance. In particular, we have helped hundreds of US taxpayers to avoid or lower their IRS penalties with respect to virtually all types of US international information returns, including FBARs, Forms 8938, 8865, 8621, 5471, 3520, 926, et cetera. We can help you!

Contact Us Today to Schedule Your Confidential Consultation!

Attribution Rules: Introduction | International Tax Lawyer & Attorney

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One of the most popular tax reduction strategies is based on shifting an ownership interest in an entity or property to related persons or related entities. In order to prevent the abuse of this strategy, the US Congress has enacted a large number of attribution rules. In this brief essay, I will introduce the concept of attribution rules and list the most important attribution rules in the Internal Revenue Code (“IRC”).

Attribution Rules: Definition and Purpose

The IRC attribution rules are designed to prevent taxpayers from shifting an ownership interest to related persons or entities. They achieve this result through a set of indirect and constructive ownership rules that shift the ownership interest assigned to third parties back to the taxpayer. In other words, the rules disregard the formal assignment of an ownership interest to a related third party and re-assign the ownership interest back to the assignor for specific determination purposes.

For example, in the context of determining whether a foreign corporation is a Controlled Foreign Corporation, all shares owned by the spouse of a taxpayer are deemed to be owned by the taxpayer if both spouses are US persons.

Attribution Rules: Design Similarities and Differences

The IRC contains a great variety of attribution rules. All of them are very detailed and have achieved a remarkable degree of specificity. Behind this specificity, all of the rules are always concerned with the substance of a transaction rather than its form. Hence, there always lurks a general question of whether there was a tax avoidance motive when a taxpayer entered into a transaction.

In spite of the fact that they share similar goals, the rules differ from each other in design. Most of these differences can be traced back to legislative history.

List of Most Important Attribution Rules

Here is a list of the most important attribution rules in the IRC (all section references are to the IRC):

1. The constructive ownership rules of §267, which apply to disallow certain deductions and losses incurred in transactions between related parties;

2. The constructive ownership rules of §318, which apply in corporate-shareholder transactions and other transactions, including certain foreign transactions expressly referenced in §6038(e).

3. The constructive ownership rules of §544; these are the personal holding company rules which apply to determine when a corporation will be subject to income tax on undistributed income.

3a. While they are now repealed, the foreign personal holding company rules of §554 are still important. In the past, they applied to determine whether US shareholders of a foreign corporation would be taxed on deemed distributions which were not actually made;

4. Highly important Subpart F constructive ownership rules of §958, which apply to determine when US shareholders of a Controlled Foreign Corporation should be taxed on deemed distributions which are not actually made;

5. The PFIC constructive ownership rules of §1298, which apply to determine whether a US shareholder is subject to the unfavorable rules concerning certain distributions by a PFIC and sales of PFIC stock; and

6. The controlled group constructive ownership rules of §1563 which determine whether related corporations are subject to the limitations and benefits prescribed for commonly controlled groups.

This is not a comprehensive list of all attribution rules, there are other rules which apply in more specific situations.

Contact Sherayzen Law Office for Professional Help With the Attribution Rules

The rules of ownership attribution are highly complex. A failure to comply with them may result in the imposition of high IRS penalties.

This is why you need to contact the highly experienced international tax law firm of Sherayzen Law Office. We have helped US taxpayers around the globe to deal with the US tax rules concerning ownership attribution, and We Can Help You!

Contact Us Today to Schedule Your Confidential Consultation!

The Pursley Case: Offshore Tax Evasion Leads to Criminal Conviction

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On September 6, 2019, the Tax Division of the US Department of Justice (“DOJ”) announced another victory against Offshore Tax Evasion. This time, a Houston lawyer, Mr. Jack Stephen Pursley, was convicted of one count of conspiracy to defraud the United States and three counts of tax evasion. Let’s discuss this Pursley Case in more detail.

Facts of the Pursley Case

According to the evidence presented at trial, Mr. Pursley conspired with a former client to repatriate more than $18 million in untaxed income that the client had earned through his company, Southeastern Shipping. Southeastern Shipping had a business bank account located in the Isle of Man.

Knowing that his client had never paid taxes on these funds, Mr. Pursley designed and implemented a scheme whereby the untaxed funds were transferred from Southeastern Shipping’s foreign bank account to the United States. Mr. Pursley helped to conceal the movement of funds from the Internal Revenue Service (“IRS”) by disguising the transfers as stock purchases in domestic corporations in the United States, which Mr. Pursley owned and his client owned and controlled.

At trial, the DOJ proved that Mr. Pursley received more than $4.8 million and a 25% ownership interest in the co-conspirator’s ongoing business for his role in the fraudulent scheme. For tax years 2009 and 2010, Mr. Pursley evaded the assessment of and failed to pay the income taxes he owed on these payments by, among other means, withdrawing the funds as purported non-taxable loans and returns of capital. Mr. Pursley then used these funds for personal investments as well as purchase of properties, including a vacation home in Vail, Colorado and a property in Houston, Texas.

Potential Penalties in the Pursley Case

Judge Lynn Hughes has set sentencing for December 9, 2019. Mr. Pursley faces a statutory maximum sentence of five years in prison for the conspiracy count and five years in prison for each count of tax evasion. He also faces a period of supervised release, monetary penalties, and restitution.

Main Lesson from the Pursley Case

The main lesson from the Pursley case is for business lawyers. They should be very careful about involving themselves in schemes related to repatriation of overseas funds. These business lawyers should verify whether US taxes were paid on these funds and consult an international tax attorney concerning the legality of the proposed repatriation scheme.

Of course, if a business lawyer knows that his client never paid any US taxes on the funds, he should not participate in any stratagems which could be interpreted as conspiracy to defraud the United States. Otherwise, this lawyer would be at risk of finding himself in a situation similar to the Pursley case.

Contact Sherayzen Law Office for Professional Help With US International Tax Compliance

If a business lawyer finds out that he has a client with untaxed funds stored in an overseas account, he should urge the client to contact Sherayzen Law Office concerning the client’s offshore voluntary disclosure options. The main goal of such a voluntary disclosure would be to reduce and even eliminate the risk of a criminal prosecution.

Contact Sherayzen Law Office Today to Schedule Your Confidential Consultation!

September 2018 IRS Compliance Campaigns | International Tax Lawyer & Attorney News

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On September 10, 2018, the IRS Large Business and International division (“LB&I”) announced the creation of another five compliance campaigns. Let’s explore in more depth these September 2018 IRS Compliance Campaigns.

September 2018 IRS Compliance Campaigns: Background Information

Since January of 2017, the IRS has been regularly adding more and more compliance campaigns. The compliance campaigns were created by the LB&I after extensive planning concerning the restructuring of its compliance enforcement activities. The IRS solution to the then existing enforcement problems was to move towards issue-based examinations and a compliance campaign process in which the IRS itself decides which compliance issues that present risk require a response in the form of one or multiple treatment streams to achieve compliance objectives. The idea is to concentrate the IRS resources where they are most need – i.e. where there is a substantial risk of tax noncompliance.

The new campaigns have been coming in batches. The IRS announced the initial batch of thirteen campaigns on January 31, 2017. Then, the IRS added another eleven campaigns in November of 2017, five in March of 2018, six in May of 2018 and five in July of 2018. The new campaigns announced on September 10, 2018, brings the total number of campaigns to forty five as of that date.

It is important to point out that the tax reform that passed on December 22, 2017, may impact some of these existing campaigns.

Five New September 2018 IRS Compliance Campaigns

Here are the new September 2018 IRS Compliance campaigns that should be added to the forty campaigns that were announced prior to that date: IRC Section 199 – Claims Risk Review, Syndicated Conservation Easement Transactions, Foreign Base Company Sales Income – Manufacturing Branch Rules, Form 1120-F Interest Expense & Home Office Expense and Individuals Employed by Foreign Governments & International Organizations. All of these campaigns were selected by the IRS through LB&I data analysis and suggestions from IRS employees.

September 2018 IRS Compliance Campaigns: IRC Section 199 – Claims Risk Review

Public Law 115-97 repealed the Domestic Production Activity Deduction (“DPAD”) for taxable years beginning after December 31, 2017. This campaign addresses all business entities that may file a claim for additional DPAD under IRC Section 199. The campaign objective is to ensure taxpayer compliance with the requirements of IRC Section 199 through a claim risk review assessment and issue-based examinations of claims with the greatest compliance risk.

September 2018 IRS Compliance Campaigns: Syndicated Conservation Easement Transactions

The IRS issued Notice 2017-10, designating specific syndicated conservation easement transactions as listed transactions requiring disclosure statements by both investors and material advisors. This campaign is intended to encourage taxpayer compliance and ensure consistent treatment of similarly situated taxpayers by ensuring the easement contributions meet the legal requirements for a deduction, and the fair market values are accurate. The initial treatment stream is issue-based examinations. Other treatment streams will be considered as the campaign progresses.

September 2018 IRS Compliance Campaigns: Manufacturing Branch Rules for Foreign Base Company Sales Income

In general, foreign base company sales income (“FBCSI”) does not include income of a controlled foreign corporation (“CFC”) derived in connection with the sale of personal property manufactured by such a corporation. There is an exception to this general rule. If a CFC manufactures property through a branch outside its country of incorporation, the manufacturing branch may be treated as a separate, wholly owned subsidiary of the CFC for the purposes of computing the CFC’s FBCSI, which may result in a subpart F inclusion to the US shareholder(s) of the CFC.

The goal of this campaign is to identify and select for examination returns of US shareholders of CFCs that may have underreported subpart F income based on certain interpretations of the manufacturing branch rules. The treatment stream for the campaign will be issue-based examinations.

September 2018 IRS Compliance Campaigns: 1120-F Interest Expense & Home Office Expense

Two of the largest deductions claimed on Form1120-F (US Income Tax Return of a Foreign Corporation) are interest expenses and home office expense. Treasury Regulation Section 1.882-5 provides a formula to determine the interest expense of a foreign corporation that is allocable to their effectively connected income. The amount of interest expense deductions determined under Treasury Regulation Section 1.882-5 can be substantial.

Similarly, Treasury Regulation Section 1.861-8 governs the amount of Home Office expense deductions allocated to effectively connected income. Through its data analyses, the IRS noted that Home Office Expense allocations have been material amounts compared to the total deductions taken by a foreign corporation.

This IRS campaign addresses both of these Form 1120–F deductions. The campaign compliance strategy includes the identification of aggressive positions in these areas, such as the use of apportionment factors that may not attribute the proper amount of expenses to the calculation of effectively connected income. The goal of this campaign is to increase taxpayer compliance with the interest expense rules of Treasury Regulation Section 1.882-5 and the Home Office expense allocation rules of Treasury Regulation Section 1.861-8. The treatment stream for this campaign is harsh – issue-based examinations only.

September 2018 IRS Compliance Campaigns: Individuals Employed by Foreign Governments & International Organizations

Foreign embassies, foreign consular offices and international organizations operating in the United States are not required to withhold federal income and social security taxes from their employees’ compensation nor are they required to file information reports with the Internal Revenue Service. This lack of withholding and reporting often results in unreported income, erroneous deductions and credits, and failure to pay income and Social Security taxes, because some individuals working at foreign embassies, foreign consular offices, and various international organizations may not be reporting compensation or may be reporting it incorrectly.

This campaign will focus on outreach and education by partnering with the Department of State’s Office of Foreign Missions to inform employees of foreign embassies, consular offices and international organizations. The IRS will also address noncompliance in this area by issuing soft letters and conducting examinations.

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!