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The IRS Hiring Spree in 2019 and 2020 | Tax Lawyer & Attorney

The IRS stated in December of 2019 that it hired about 9,500 people during the fiscal year 2019 and it is trying to add another about 5,300 employees as soon as possible. This new IRS hiring spree is meant to reverse the long-term declining trend in IRS employment.

The IRS Hiring Spree: 2009-2018 Trend

Between 2009 and 2017, the IRS suffered a spectacular loss in employees. From about 95,000 employees in 2009, the number of employees dropped to less than 75,000 in 2018. In other words, the IRS lost about 20,000 employees during these years. These losses were mostly due to budget cuts.

The IRS Hiring Spree: 2019-2020 Trend Change

While the IRS did not receive all of the funds it requested, the Trump administration was able to secure sufficient funds for the agency to start hiring again. The fiscal year 2019 saw a complete reversal in the trend with about 9,500 employees added. This is definitely not the end of the IRS hiring spree – the IRS is planning to add another 5,300 employees in early 2020.

The IRS Hiring Spree: What It Means to US Taxpayers

This huge hiring spree at the IRS will have a direct impact on US taxpayers. On the one hand, the IRS customer service should improve with the larger number of representatives.

On the other hand, such a huge inflow of future IRS agents means an inevitable rise in IRS enforcement efforts, particularly IRS audits. Reinforced by hundreds of additional examiners, the IRS will be able to expand audits everywhere, including international tax audits concerning FBAR and FATCA compliance.

US taxpayers with undisclosed foreign assets and foreign income should keep in mind this impending wave of IRS FBAR and FATCA audits. Rather than just wait for the IRS to discover their prior noncompliance with US tax laws, these taxpayers should explore their offshore voluntary disclosure options with an experienced international tax attorney as soon as possible.

Contact Sherayzen Law Office for Professional Help with IRS International Tax Audits

Mr. Eugene Sherayzen is a highly experienced international tax attorney and owner of international tax law firm, Sherayzen Law Office, Ltd. He and his law firm have successfully helped hundreds of US taxpayers to resolve their prior noncompliance with US international tax laws. We can help you!

Contact Us Today to Schedule Your Confidential Consultation!

Main Worldwide Income Reporting Myths | International Tax Attorney St Paul

In a previous article, I discussed the worldwide income reporting requirement and I mentioned that I would discuss the traps or false myths associated with this requirement in a future article. In this essay, I will keep my promise and discuss the main worldwide income reporting myths.

Worldwide Income Reporting Myths: the Source of Myths

I would like to begin by reminding the readers about what the worldwide income reporting rule requires. The worldwide income reporting requirement states that all US tax residents are obligated to disclose all of their US-source income and foreign-source income on their US tax returns.

This rule seems clear and straightforward. Unfortunately, it does not coincide with the income reporting requirements of many foreign tax systems. It is precisely this tension between the US tax system and tax systems of other countries that gives rise to numerous false myths which eventually lead to the US income tax noncompliance. Let’s go over the four most common myths.

Worldwide Income Reporting Myths: Local Taxation

Many US taxpayers incorrectly believe that their foreign-source income does not need to be disclosed in the United States because it is taxed in the local jurisdiction. The logic behind this myth is simple – otherwise, the income would be subject to double taxation. There is a variation on this myth which relies on various tax treaties between the United States and foreign countries on the prevention of double-taxation.

The “local taxation” myth is completely false. US tax law requires US tax residents to disclose their foreign-source income even if it is subject to foreign taxation or foreign tax withholding. These taxpayers forget that they may be able to use the foreign tax credit to remedy the effect of the double-taxation.

Where the foreign tax credit is unavailable or subject to certain limitations, the danger of double taxation indeed exists. This is why you need to consult an international tax attorney to properly structure your transactions in order to avoid the effect of double-taxation. In any case, the danger of double taxation does not alter the worldwide income reporting requirement – you still need to disclose your foreign-source income even if it is taxed locally.

The tax-treaty variation on the local taxation myth is generally false, but not always. There are indeed tax treaties that exempt certain types of income from US taxation; the US-France tax treaty is especially unusual in this aspect. These exceptions are highly limited and usually apply only to certain foreign pensions.

Generally, however, tax treaties would not prevent foreign income from being reportable in the United States. In other words, one should not turn an exception into a general rule; the existence of a tax treaty would not generally modify the worldwide income reporting requirement.

Worldwide Income Reporting Myths: Territorial Taxation

Millions of US taxpayers were born overseas and their understanding of taxation was often formed through their exposure to much more territorial systems of taxation that exist in many foreign countries. These taxpayers often believe that they should report their income only in the jurisdictions where the income was earned or generated. In other words, the followers of this myth assert that US-source income should be disclosed on US tax returns and foreign-source income on foreign tax returns.

This myth is false. US tax system is unique in many aspects; its invasive worldwide reach stands in sharp contrast to the territorial or mixed-territorial models of taxation that exist in other countries. Hence, you cannot apply your prior experiences with a foreign system of taxation to the US tax system. With respect to individuals, US tax laws continue to mandate worldwide income reporting irrespective of how other countries organize their tax systems.

Worldwide Income Reporting Myths: De Minimis Exception

The third myth has an unclear origin; most likely, it comes from human nature that tends to disregard insignificant amounts. The followers of this myth believe that small amounts of foreign source income do not need to be disclosed in the United States, because there is a de minimis exception to the worldwide income reporting requirement.

This is incorrect: there is no such de minimis exception. You must disclose your foreign income on your US tax return no matter how small it is.

This myth has a special significance in the context of offshore voluntary disclosures. The Delinquent FBAR Submission Procedures can only be used if there is no income noncompliance. Oftentimes, taxpayers cannot benefit from this voluntary disclosure option, because they failed to disclose an interest income of merely ten or twenty dollars.

Worldwide Income Reporting Myths: Foreign Earned Income Exclusion

Finally, the fourth myth comes from the misunderstanding of the Foreign Earned Income Exclusion (the “FEIE”). The FEIE allows certain taxpayers who reside overseas to exclude a certain amount of earned income on their US tax returns from taxation as long as these taxpayers meet either the physical presence test or the bona fide residency test.

Some US taxpayers misunderstand the rules of the FEIE and believe that they are allowed to exclude all of their foreign income as long as they reside overseas. A variation on this myth ignores even the residency aspect; the taxpayers who fall into this trap believe that the FEIE excludes all foreign income from reporting.

This myth and its variation are wrong in three aspects. First of all, even in the case of FEIE, all of the foreign earned income must first be disclosed on a tax return and then, and only then, would the taxpayer be able to take the exclusion on the tax return. Second, the FEIE applies only to earned income (i.e. salaries or self-employment income), not passive income (such as bank interest, dividends, royalties and capital gains). Finally, as I already stated, in order to be eligible for the FEIE, a taxpayer must satisfy one of the two tests: the physical presence test or the bona fide residency test.

Contact Sherayzen Law Office for Professional Help With Your Worldwide Income Reporting

Worldwide income reporting can be an incredibly complex requirement despite its appearance of simplicity. In this essay, I pointed out just four most common traps for US taxpayers; there are many more.

Hence, if you have foreign income, contact Sherayzen Law Office for professional help. Our highly-experienced tax team, headed by a known international tax lawyer, Mr. Eugene Sherayzen, has helped hundreds of US taxpayers to bring themselves into full compliance with US tax laws. We can help You!

Contact Us Today to Schedule Your Confidential Consultation!

2019 Tax Filing Season Will Begin on January 28, 2019 | Tax Lawyer News

On January 7, 2019, the IRS confirmed that the 2019 tax filing season will begin on January 28, 2019. In other words, the 2019 tax filing season will begin on schedule despite the government shutdown.

2019 Tax Filing Season for 2018 Tax Returns and 2018 FBAR

During the 2019 tax filing season, US taxpayers must file their required 2018 federal income tax returns and 2018 information returns. Let me explain what I mean here.

One way to look at the US federal tax forms is to group them according to their tax collection purpose. The income tax returns are the tax forms used to calculate a taxpayer’s federal tax liability. The common example of this type of form is Form 1040 for individual taxpayers.

The information returns are a group of federal tax forms (and, separately, FBAR) which taxpayers use to disclose certain required information about their assets and activities. These forms are not immediately used to calculate a federal tax liability. A common example of this form is Form 8938. FinCEN Form 114, the Report of Foreign Bank and Financial Account, commonly known as FBAR, also belongs to this category of information returns even though it is not a tax form.

There is a third group of returns that consists of hybrid forms – i.e. forms used for both, income tax calculation and information return, purposes. Form 8621 for PFICs has been a prominent example of this type of a form since tax year 2013.

2019 Tax Filing Season Deadline and Available Extensions for Individual Taxpayers

Individual US taxpayers must file their required income tax and information returns by Monday, April 15, 2019. An interesting exception exists for residents of Maine and Massachusetts. Due to the Patriots’ Day holiday on April 15 in these two states and the Emancipation Day holiday on April 16 in the District of Columbia, the residents of Maine and Massachusetts will have until April 17, 2019 to file their US tax returns.

Taxpayers who reside overseas get an automatic extension until June 17 , 2019, to file their US tax returns.  The reason why the deadline is on June 17 is because June 15 falls on a Saturday. The taxpayers still must pay their estimated tax due by April 15, 2019.

Taxpayers can also apply for an automatic extension until October 15, 2019, to file their federal tax returns. Again, these taxpayers must still pay their estimated tax due by April 15, 2019, in order to avoid additional penalties.

Finally, certain taxpayers who reside overseas may ask the IRS for additional discretionary extension to file their 2018 federal tax return by December 16 (because December 15 is a Sunday this year), 2019. These taxpayers should send their request for the discretionary extension before their automatic extension runs out on October 15, 2019.

2019 Tax Filing Season Refunds

In light of the ongoing government shutdown, one of the chief concerns for US taxpayers is whether they will be able to get their tax refunds during the 2019 Tax Filing Season. The IRS assured everyone that it has the power to issue refunds during the government shutdown.

The IRS has been consistent in its position that, under the 31 U.S.C. 1324, the US Congress provided a permanent and indefinite appropriation for refunds. In 2011, the Office of Management and Budget (“OMB”) disagreed with the IRS and ordered it not to pay any refunds. It appears, however, that the OMB changed its position sometime after 2011.

Determining the Residency of a Trust in Cross-Border Situations

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!