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

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Public Law 115-97 repealed the Domestic Production Activity Deduction (“DPAD”) for taxable years beginning after December 31, 2017.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!

Colombian Bank Accounts | International Tax Lawyer & Attorney Miami

Even today many US owners of Colombian bank accounts remain completely unaware of the numerous US tax requirements that may apply to them. The purpose of this essay is to educate these owners about the requirement to report income generated by these accounts in the United States as well as the FBAR and FATCA obligations concerning the disclosure of ownership of Colombian bank accounts to the IRS.

Colombian Bank Accounts: Individuals Who Must Report Them

Before we discuss the aforementioned requirements in more detail, we need to determine who is required to comply with them. In other words, is every Colombian required to file FBAR in the United States? Or, does this obligation apply only to certain individuals?

The answer is very clear: only Colombians who fall within one of the categories of US tax residents must comply with these requirements. US tax residents include US citizens, US Permanent Residents, an individual who satisfies the Substantial Presence test and an individual who properly declares himself a US tax resident. There are important exceptions to this general rule, but, if you fall within any of these categories, you need to contact an international tax attorney as soon as possible to determine your US tax obligations concerning your ownership of Colombian bank accounts.

Colombian Bank Accounts: Income Reporting

All US tax residents are subject to the worldwide income reporting requirement. In other words, they must disclose on their US tax returns not only their US-source income, but also their foreign income. The latter includes all bank interest income, dividends, royalties, capital gains and any other income generated by Colombian bank accounts.

The worldwide income reporting requirement also requires the disclosure of PFIC distributions, PFIC sales, Subpart F income and GILTI income. These are complex requirements which are outside the scope of this article, but US owners of Colombian bank accounts need to be aware of the existence of these requirements.

Colombian Bank Accounts: FinCEN Form 114 (FBAR)

FinCEN Form 114, the Report of Foreign Bank and Financial Accounts (commonly known as “FBAR”) mandates US tax residents to disclose their ownership interest in or signatory authority or any other authority over Colombian bank and financial accounts if the aggregate highest balance of these accounts exceeds $10,000. Every part of this sentence has a special significance and contains a trap for the unwary.

The most dangerous of these traps is the definition of an “account”. The FBAR definition of account is much broader than how this word is generally understood by taxpayers. For the purposes of FBAR compliance, this term 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, it is very likely that the IRS will find that an account exists whenever there is a custodial relationship between a foreign financial institution and a US person’s foreign asset.

FBAR has its own intricate penalty system which is widely known for its severity. The FBAR penalties range from incarceration to willful and even non-willful penalties which may easily exceed the value of the penalized accounts. In order to circumvent the potential 8th Amendment challenges and make the penalty imposition more flexible, the IRS has implemented a system of self-imposed limitations, but it is a completely voluntary system (i.e. the IRS can, and in fact already did several times, disregard these limitations).

Colombian Bank Accounts: FATCA Form 8938

While Form 8938 is a relative newcomer (since tax year 2011), it has occupied a special place among the US international tax requirements. In fact, one could argue that it is currently as important as FBAR for US taxpayers with Colombian bank accounts.

The Foreign Account Tax Compliance Act (“FATCA”) gave birth to Form 8938, making it part of a taxpayer’s federal tax return. This means that a failure to file Form 8938 may render the entire federal tax return incomplete, and the IRS may be able to audit the return. Immediately, we can see the profound impact Form 8938 has on the Statute of Limitations for the entire tax return.

Given the fact that it is a direct descendant of FATCA, it is not surprising Form 8938’s primary focus is on foreign financial assets. Form 8938 requires a US taxpayer to disclose all Specified Foreign Financial Assets (“SFFA”) as long as he satisfies the relevant filing threshold. The filing thresholds differ depending on the filing status and the place of residence (i.e. inside or outside of the United States) of the taxpayer.

SFFA includes an enormous variety of foreign financial assets, including foreign bank and financial accounts. In fact, with respect to bank and financial accounts, Form 8938 is very similar to FBAR, which often results in double-reporting of the same assets. It is important to emphasize that Form 8938 does not replace FBAR, both forms must still be filed. In other words, US taxpayers should report their Colombian bank accounts on FBAR and disclose them again on Form 8938.

Form 8938 has its own penalty system which contains some unique elements. In addition to its own $10,000 failure-to-file penalty, Form 8938 directly affects the accuracy-related income tax penalties and the ability of a taxpayer to use foreign tax credit.

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

US international tax compliance is extremely complex. It is very easy to get yourself into trouble, and much more difficult and expensive to get yourself out of this trouble. This is why, if you have Colombian bank accounts, you should 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!

Worldwide Income Reporting Requirement | IRS International Tax Lawyer

Worldwide income reporting is at the core of US international tax system. Yet, every year, a huge number of US taxpayers fail to comply with this requirement. While some of these failures are willful, most of this noncompliance comes from misunderstanding of the worldwide income reporting requirement. In this essay, I will introduce the readers to the worldwide income reporting requirement and explain who must comply with it.

Worldwide Income Reporting Requirement: Who is Affected

It is important to understand that the worldwide income reporting requirement applies to all US tax residents. US tax residents include US citizens, US Permanent Residents (the so-called “green card” holders), taxpayers who satisfied the Substantial Presence Test and non-resident aliens who declared themselves US tax residents on their US tax returns. This is the general definition and there are certain exceptions, including treaty-based exceptions.

Worldwide Income Reporting Requirement: What Must Be Disclosed

The worldwide income reporting requirement mandates US tax residents to disclose all of their US-source income and all of their foreign-source income on their US tax returns. This seems like a very straightforward rule, but its practical application creates many tax traps for the unwary, which I will discuss in a future article.

Worldwide Income Reporting Requirement: Constructive Income and Anti-Deferral Regimes

It is important to emphasize that the worldwide income reporting requirement requires the disclosure not only of the income that you actually received, but also the income that you are deemed to have received by the operation of law. In other words, US tax residents must also disclose their constructive income.

One of the most common sources of constructive income in US international tax law are Anti-Deferral regimes that arise from the ownership of a foreign corporation. The two most common regimes are Subpart F rules (which apply only to a Controlled Foreign Corporation) and the brand-new GILTI  regime. You can find out more about these two highly-complex US tax laws by searching the articles on our website.

Contact Sherayzen Law Office for Professional Help With the Worldwide Income Reporting Requirement

The worldwide income reporting requirement can be extremely complex; you can easily get yourself into trouble with the IRS over this issue. In order to avoid making costly mistakes and correct prior US tax noncompliance in the most efficient manner, you should contact Sherayzen Law Office help. We have helped hundreds of US taxpayers to comply with their US international tax obligations with respect to foreign income and foreign assets, and we can help you!

Contact Us Today to Schedule Your Confidential Consultation!

Mexican Bank Accounts & US Tax Obligations | International Tax Lawyers

In this essay, I would like to discuss three main US tax obligations concerning Mexican bank accounts: the worldwide income reporting requirement, FBAR and Form 8938. I will only concentrate on the obligations concerning individuals, not business entities.

Mexican Bank Accounts and US Tax Residents

Before we delve into the discussion concerning US tax obligations, we should establish who is required to comply with these obligations. In other words, who needs to report their Mexican bank accounts to the IRS?

The answer to this question is clear: US tax residents. Only US tax residents must disclose their worldwide income and report their Mexican bank accounts on FBAR and Form 8938. Non-resident aliens who have never declared themselves as US tax residents do not need to comply with these requirements.

US tax residents include US citizens, US Permanent Residents, an individual who satisfied the Substantial Presence test and an individual who properly declares himself a US tax resident. This is, of course, the general rule; important exceptions exist to this rule.

Mexican Bank Accounts: Worldwide Income Reporting Requirement

US tax residents must disclose their worldwide income on their US tax returns, including any income generated by Mexican bank accounts. In other words, all interest, dividend and royalty income produced by these accounts must be reported on Form 1040. Similarly, any capital gains from sales of investments held in Mexican bank accounts should also be disclosed on Form 1040. US taxpayers should pay special attention to the reporting of PFIC distributions and PFIC sales.

It is also possible that you may have to disclose passive income generated by your Mexican business entities through the operation of Subpart F rules and the GILTI regime, but this is a topic for a separate discussion.

Mexican Bank Accounts: FBAR

US tax residents must disclose on FBAR their ownership interest in or signatory authority or any other authority over Mexican bank and financial accounts if the aggregate highest balance of these accounts exceeds $10,000. FBAR is a common acronym for the Report of Foreign Bank and Financial Accounts, FinCEN Form 114. Even though this is a FinCEN Form, the IRS is charged with the enforcement of this form since 2001.

While seemingly simple, FBAR contains a number of traps for the unwary. One of the most common trap is the definition of “account”. For the FBAR purposes, “account” has a much broader definition than what people generally think of as an account. ‘Account” includes not just regular checking and savings accounts, but also investment accounts, life insurance policies with a cash surrender value, precious metals accounts, earth mineral accounts, et cetera. In fact, it is very likely that the IRS will find that an account exists whenever there is a custodial relationship between a financial institution and a US person’s foreign asset.

FBAR is a very dangerous form. Not only is the filing threshold very low, but there are huge penalties for FBAR noncompliance. For a willful violation, the penalties can go up to $100,000 (adjusted for inflation) per account per year or 50% of the highest value of the account per year, whichever is higher. In special circumstances, the IRS may refer FBAR noncompliance to the US Department of Justice for criminal prosecution. Even non-willful FBAR penalties may go up to $10,000 (again, adjusted for inflation) per account per year.

Mexican Bank Accounts: FATCA Form 8938

The final requirement that I wish to discuss today is the FATCA Form 8938. Born out of the Foreign Account Tax Compliance Act, Form 8938 occupies a unique role in US international tax compliance. On the one hand, it may result in the duplication of a taxpayer’s US tax disclosures (especially with respect to the accounts already disclosed on FBAR). On the other hand, however, Form 8938 is a “catch-all” form that fills the compliance gaps with respect to other US international tax forms.

For example, if a taxpayer holds a paper bond certificate, this asset would not be reported on FBAR, because it is not an account. For the Form 8938 purposes, however, the IRS would consider this certificate as part of assets that fall within the definition of the Specified Foreign Financial Assets (“SFFA”).

Hence, the scope of Form 8938 is very broad. It requires a specified person (this term is almost equivalent to a US tax resident) to disclose all SFFA as long as these SFFA, in the aggregate, exceed the applicable filing threshold.

SFFA includes a huge variety of foreign financial assets which are divided into two sub-categories: (a) foreign bank and financial accounts; and (b) “other” foreign financial assets. The definition of the “other” assets is impressive in its breadth: bonds, stocks, ownership interest in a closely-held business, beneficiary interest in a foreign trust, an interest rate swap, currency swap; basis swap; interest rate cap, interest rate floor, commodity swap; equity swap, equity index swap, credit default swap, or similar agreement with a foreign counterparty; an option or other derivative instrument with respect to any currency or commodity that is entered into with a foreign counterparty or issuer; and so on.

Form 8938 requires not only the reporting of SFFA, but also the income generated by the SFFA. In essence, the worldwide income reporting requirement is incorporated directly into the form.

The filing threshold for Form 8938 is more reasonable than that of FBAR for specified persons who reside in the United States, but it is still fairly low (especially for individuals). For example, if a taxpayer lives in the United States, he will need to file Form 8938 if he has SFFA of $50,000 ($100,000 for a married couple) or higher at the end of the year or $75,000 ($150,000 for a married couple) or higher during any time during the year. Specified persons who reside outside of the United States enjoy much higher thresholds.

Form 8938 has its own penalty system which contains some unique elements. First of all, a failure to comply with the Form 8938 requirements may allow the IRS to impose a $10,000 failure-to-file penalty which may go up to as high as $50,000 in certain circumstances. Second, Form 8938 noncompliance will lead to an imposition of much higher accuracy-related penalties on the income tax side – 40% of the additional tax liability. Third, Form 8938 noncompliance will limit the taxpayer’s ability to utilize the Foreign Tax Credit.

Finally, a failure to file Form 8938 will directly affect the Statute of Limitations of the entire tax return by extending the Statute to the period that ends only three years after the form is filed. In other words, Form 8938 penalties may allow the IRS to audit tax years which otherwise would normally be outside of the general three-year statute of limitations.

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

Sherayzen Law Office’s core area of practice is international tax compliance, including offshore voluntary disclosures – i.e. helping US taxpayers with foreign assets and foreign income to stay in US tax compliance and, if a taxpayer fails failed to comply with US tax laws in the past, bring him into compliance through an offshore voluntary disclosure. We can help You!

Contact Us Today to Schedule Your Confidential Consultation!

2017 Tax Reform Seminar | U.S. International Tax Lawyer & Attorney

On April 19, 2018, Mr. Eugene Sherayzen, an international tax lawyer, co-presented with an attorney from KPMG at a seminar entitled “The 2017 U.S. Tax Reform: Seeking Economic Growth through Tax Policy in Politically Risky Times” (the “2017 Tax Reform Seminar”). This seminar formed part of the 2018 International Business Law Institute organized by the International Business Law Section of the Minnesota State Bar Association.

The 2017 Tax Reform Seminar discussed, in a general manner, the main changes made by the 2017 Tax Cuts and Jobs Act to the U.S. international tax law. Mr. Sherayzen’s part of the presentation focused on two areas: the Subpart F rules and the FDII regime.

Mr. Sherayzen provided a broad overview of the Subpart F rules, the types of income subject to these rules and the main exceptions to the Subpart F regime. He emphasized that the tax reform did not repeal the Subpart F rules, but augmented them with the GILTI regime (the discussion of GILTI was done by the KPMG attorney during the same 2017 Tax Reform Seminar).

Then, Mr. Sherayzen turned to the second part of his presentation during the 2017 Tax Reform Seminar – the Foreign Derived Intangible Income or FDII. After reviewing the history of several tax regimes prior to the FDII, the tax attorney concluded that the nature of the current FDII regime is one of subsidy. In essence, FDII allows a US corporation to reduce its corporate income by 37.5% of the qualified “foreign derived” income (after the year 2025, the percentage will go down to 21.875%). Mr. Sherayzen explained that, in certain cases, there is an additional limitation on the FDII deduction.

Qualifying income includes: sales to a foreign person for foreign use, dispositions of property to foreign persons for foreign use, leases and licenses to foreign persons for foreign use and services provided to a foreign person. There are also a number exceptions to qualifying income.

Mr. Sherayzen concluded his presentation at the 2017 Tax Reform Seminar with a discussion of the reaction that FDII produced in other countries. In general this reaction was not favorable; China and the EU even threatened to sue the United States over what they believed to be an illegal subsidy to US corporations.