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Offshore Voluntary Disclosure: Client Records | International Tax Lawyer

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One of the first things a client must get in order to pursue an offshore voluntary disclosure are all of the client records from his former accountant. Sometimes, however, the clients are having difficulty obtaining their documents from their accountants. In this article, I would like to briefly describe an accountant’s obligations with respect to the return of client records to their clients.

Return of Client Records: General Obligation to Return All Client Documents

Subsection 10.28(a) of Circular 230 requires an accountant to promptly return, upon a client’s request, any and all of the records of the client that are necessary for the client to comply with his federal tax obligations. Hence, a failure of an accountant to return all clients records to his or her client is a violation of the accountant’s IRS obligations.

Return of Client Records: Documents Included

31 CFR §10.28(b) defines the documents that an accountant must return to his client:

  1. All documents or written or electronic materials provided to the practitioner, or obtained by the practitioner in the course of the practitioner’s representation of the client, that preexisted the retention of the practitioner by the client;
  2. All materials that were prepared by the client or a third party (not including an employee or agent of the practitioner) at any time and provided to the practitioner with respect to the subject matter of the representation; and
  3. Any return, claim for refund, schedule, affidavit, appraisal or any other document prepared by the practitioner, or his or her employee or agent, that was presented to the client with respect to a prior representation if such document is necessary for the taxpayer to comply with his or her current federal tax obligations.

Return of Client Records: Documents Excluded

31 CFR §10.28(b) also expressly excludes from the definition of client records “any return, claim for refund, schedule, affidavit, appraisal or any other document prepared by the practitioner or the practitioner’s firm, employees or agents if the practitioner is withholding such document pending the client’s performance of its contractual obligation to pay fees with respect to such document”.

Hence, in most cases, it is important for a client to pay his outstanding fees to the accountant in order to make sure that he has all relevant documents. Later, if he wishes, the client may file a lawsuit against the accountant for negligence (if there are legal grounds for such a lawsuit) to recover the fees paid.

Contact Sherayzen Law Office to Help With the Voluntary Disclosure of Your Prior US Tax Noncompliance

If you have not disclosed your foreign income and/or foreign assets to the IRS in violation of your US tax obligations, you should contact Sherayzen Law Office as soon as possible for professional help.  We have helped hundreds of US taxpayers to bring their tax affairs into compliance with US tax laws, including through a voluntary disclosure such as SDOP (Streamlined Domestic Offshore Procedures), SFOP (Streamlined Foreign Offshore Procedures), DFSP (Delinquent FBAR Submission Procedures), DIIRSP (Delinquent International Information Return Submission Procedures), IRS VDP (IRS Voluntary Disclosure Practice) and Reasonable Cause disclosures. We can help you!

Contact Us Today to Schedule Your Confidential Consultation!

2023 IRS Quarterly Interest Rates on Overpayment/Underpayment of Tax

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The 2023 IRS quarterly interest rates IRS interest rates are relevant for a great variety of purposes. Let’s highlight three of its most important uses. First, these rates will determine the interest a taxpayer will get on any IRS refunds.

Second, the 2023 IRS quarterly interest rates will also be used to establish the interest to be added to any additional US tax liability on amended or audited tax returns. This also applies to the tax returns that were amended under the Streamlined Domestic Offshore Procedures and Streamlined Foreign Offshore Procedures.

Finally, the 2023 IRS quarterly interest rates will be used to calculate PFIC interest on any relevant §1291 PFIC tax. This PFIC interest will be reported on the relevant Form 8621 and ultimately Form 1040.

We at Sherayzen Law Office constantly deal with the IRS interest rates on overpayments and underpayments of tax. This is why we closely follow any changes in these IRS interest rates, including the 2023 IRS quarterly interest rates.

Below, I lay our the 2023 IRS quarterly interest rates for each quarter.

How the 2023 IRS quarterly Interest Rates Are Calculated

Internal Revenue Code (“IRC”) §6621 establishes the IRS interest rates on overpayments and underpayments of tax. Under §6621(a)(1), the overpayment rate is the sum of the federal short-term rate plus 3 percentage points for individuals and 2 percentage points in cases of a corporation. There is an exception to this rule: with respect to a corporate overpayment of tax exceeding $10,000 for a taxable period of time, the rate is the sum of the federal short-term rate plus one-half of a percentage point.

Under §6621(a)(2), the underpayment rate is the sum of the federal short-term rate plus 3 percentage points. Again, there is an exception for a large corporate underpayment: in such cases, §6621(c) requires the underpayment rate to be the sum of the relevant federal short-term rate plus 5 percentage points. The readers should see §6621(c) and §301.6621-3 of the Regulations on Procedure and Administration for the definition of a large corporate underpayment and for the rules for determining the applicable date.

2023 First Quarter IRS Interest Rates

On November 29, 2022, the IRS announced another increase in the IRS interest rates on overpayment and underpayment of tax.

This means that, effective on January 1, 2023 the First Quarter 2023 IRS interest rates are as follows:

seven (7) percent for overpayments (six (6) percent in the case of a corporation);

seven (7) percent for underpayments;

nine (9) percent for large corporate underpayments; and

four and a half (4.5) of a percent for the portion of a corporate underpayment exceeding $10,000.

2023 Second Quarter IRS Interest Rates

On February 13, 2023, the Internal Revenue Service announced that interest rates would remain the same for the calendar quarter beginning April 1, 2023.  In other words, the first quarter and the second quarter IRS interest rates were exactly the same.

2023 Third Quarter IRS Interest Rates

On May 22, 2023, the Internal Revenue Service announced that interest rates would remain the same for the calendar quarter beginning July 1, 2023.  In other words, the IRS interest rates remained the same for the first three quarters of 2023.

2023 Fourth Quarter IRS Interest Rates

On August 25, 2023, the Internal Revenue Service announced that it would increase the interest rates for the calendar quarter beginning October 1, 2023.

  • This means that, the Fourth Quarter 2023 IRS interest rates are as follows:
  • eight (8) percent for overpayments (seven (7) percent in the case of a corporation);
  • eight (8) percent for underpayments;
  • ten (10) percent for large corporate underpayments; and
  • five and a half (5.5) of a percent for the portion of a corporate underpayment exceeding $10,000.

Offshore Voluntary Disclosure Seminar | MSBA, February 22 2022

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On February 22, 2022, Mr. Eugene Sherayzen, an international tax attorney and founder of Sherayzen Law Office, Ltd., presented at a seminar “IRS Voluntary Disclosure Options for U.S. Owners of a Foreign Business” (the “Offshore Voluntary Disclosure Seminar”). The Offshore Voluntary Disclosure Seminar was sponsored by the International Business Law Section of the Minnesota State Bar Association. Due to the ongoing COVID-19 pandemic restrictions, the seminar was conducted online.

Offshore Voluntary Disclosure Seminar: Focus on Business Lawyers’ Needs

The seminar’s structure was shaped by its audience’s needs. Since Mr. Sherayzen presented to a group of mostly international business lawyers, he adopted a relatively broad approach in his presentation in attempt to cover a large number of topics rather than discuss a few points in depth. The idea behind the seminar was to provide international business lawyers with analytical tools to understand if there was problem with a client’s US international tax compliance that would require a utilization of an offshore voluntary disclosure option.

Offshore Voluntary Disclosure Seminar: Three Main Parts

Mr. Sherayzen divided the Offshore Voluntary Disclosure seminar into three parts. In the first and smallest part, he discussed the link between Offshore Voluntary Disclosures and international business law. The second part focused on US international tax reporting requirements. Finally, in the third part, the international tax attorney provided a broad overview of the existing offshore voluntary disclosure options.

Offshore Voluntary Disclosure Seminar: Link between Offshore Voluntary Disclosures and International Business Law

In the first part of the seminar, Mr. Sherayzen discussed the potential relevance of the IRS offshore voluntary disclosure options and US international tax law in general to the audience’s international business law practice. The international tax attorney even described three main scenarios where international business lawyers will need to have awareness of: US international tax reporting requirements and IRS offshore voluntary disclosure options for US owners of a foreign business. At that point, Mr. Sherayzen gave an example from his own practice illustrating his main points.

Offshore Voluntary Disclosure Seminar: Overview of US International Tax Reporting Requirements for US Owners of a Foreign Business

In the next part of the Offshore Voluntary Disclosure seminar, Mr. Sherayzen provided a broad overview of two major categories of US international tax reporting requirements for individual US taxpayers: US international information returns and income tax recognition.

The international tax attorney first focused on international information returns. After defining the term “information return”, Mr. Sherayzen stated that the type of an information return one needs to file should correspond to the type of a foreign entity for which the return is filed. Then, he described three types of entities that may exist under US international tax law: corporations, partnerships and disregarded entities. Mr. Sherayzen proceeded with a discussion of the most common information returns associated with each of them.

Moreover, the attorney explained that FinCEN Form 114 or FBAR is the main form for reporting of foreign bank and financial accounts in a business context. He also warned the audience against a potential tax trap associated with FBAR reporting for foreign business entities.

Then, Mr. Sherayzen proceeded with an explanation of three major categories of income recognition: distributions, passthrough income and US anti-deferral tax regimes. The latter received the most attention due to their complexity. Three anti-deferral tax regimes were covered: PFICs, Subpart F rules and GILTI.

Offshore Voluntary Disclosure Seminar: Offshore Voluntary Disclosure Options

Mr. Sherayzen began this last major part of his presentation with a definition of the term “offshore voluntary disclosure”. Then, he focused on explaining two critical factors in choosing a voluntary disclosure option: (a) willfulness vs. non-willfulness; and (b) reasonable cause.

After defining these highly-important terms, the attorney laid out all major offshore voluntary disclosure options available to US owners of a foreign business. The presentation covered: IRS Voluntary Disclosure Practice, Streamlined Domestic Offshore Procedures, Streamlined Foreign Offshore Procedures, Delinquent FBAR Submission Procedures, Delinquent International Information Return Submission Procedures and Reasonable Cause (Noisy) Disclosure.

Mr. Sherayzen also discussed the concept of quiet disclosure and why it presented potentially huge risks to noncompliant taxpayers. He emphasized that the IRS stated in the past that it would specifically target this type of a disclosure.

Offshore Voluntary Disclosure Seminar: Conclusion

The international tax attorney concluded the seminar with a concise due diligence plan of action for business lawyers. He emphasized that, upon discovery of potential US international tax noncompliance, business lawyers should not attempt to fix it themselves. Rather, he argued, they need to contact an international tax attorney for professional help.

Contact Sherayzen Law Office for Professional Help

If you are a US owner of a foreign business and you have not properly complied with your US international tax reporting requirements, contact Sherayzen Law Office for professional help. We have helped hundreds of US taxpayers around the globe to bring their US tax affairs into full compliance with US international tax law, and we can help you!

Contact Us Today to Schedule Your Confidential Consultation!

The Tinkov Case: Concealment of Foreign Assets During Expatriation

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On March 5, 2020, the Internal Revenue Service (“IRS”) and the U.S. Department of Justice (“DOJ”) announced that Mr. Oleg Tinkov was arrested in London in connection with an indictment concerning concealment of about $1 billion in foreign assets and the expatriation income in connection with these assets. Let’s discuss the Tinkov case in more detail.

The Tinkov Case: Alleged Facts

According to the indictment, Oleg Tinkov was the indirect majority shareholder of a branchless online bank that provided its customers with financial and bank services. The indictment alleges that, as a result of an initial public offering (IPO) on the London Stock Exchange in 2013, Tinkov beneficially owned more than $1 billion worth of the bank’s shares. He allegedly owned these shares through a British Virgin Island (“BVI”) structure.

The indictment further alleges that three days after the IPO, Mr. Tinkov renounced his U.S. citizenship or expatriated. Expatriation is a taxable event subject to the expatriation tax. As a an expatriated individual, Mr. Tinkov should have reported to the IRS the gain from the constructive sale of his worldwide assets and pay the expatriation tax on such a gain to the IRS. Yet, he allegedly never did it.

Instead, Mr. Tinkov filed an allegedly false 2013 tax return with the IRS that reported income of less than $206,000. Moreover, the IRS further alleges that he filed a false 2013 Initial and Annual Expatriation Statement reporting that his net worth was $300,000.

The Tinkov Case: Potential Noncompliance Penalties

If convicted, Mr. Tinkov faces a maximum sentence of three years in prison on each count. He also faces a period of supervised release, restitution, and monetary penalties. Other penalties (including Form 5471, Form 8938 and FBAR penalties) may be imposed.

The Tinkov Case: Presumption of Innocence

The readers should remember that an indictment is a mere allegation that crimes have been committed. The defendant (in this case, Mr. Tinkov) is presumed innocent until proven guilty beyond a reasonable doubt.

The Tinkov Case: Lessons from This Case

The Tinkov Case offers a number of useful lessons concerning US international tax compliance, particularly U.S. expatriation tax laws. Let’s concentrate on the three most important lessons.

First, a U.S. citizen or a long-term U.S. permanent resident must carefully consider all tax consequences of expatriation. Such a taxpayer must engage in careful, detailed tax planning prior to expatriation. Mr. Tinkov did not do such planning and renounced his U.S. citizenship merely three days before the IPO. By that time, the value of his assets was already easily established beyond reasonable dispute.

Second, one must be very careful and accurate with one’s disclosure to the IRS. Mr. Tinkov’s 2013 U.S. tax return and the Expatriation Statement contained information vastly different from the one that the IRS was able to acquire during its investigation. It is no wonder that the IRS concluded that he willfully filed false returns to the IRS, especially since it does not appear that his submissions to the IRS attempted to explain the gap between the returns and the information that IRS had or acquired later during an investigation.

Finally, expatriation cases involving sophisticated tax structures, especially those incorporated in an offshore tax-free jurisdiction, are likely to face a closer scrutiny and even a criminal investigation by the IRS. We have seen the confirmation of this fact in many cases already. In this case, Mr. Tinkov’s BVI corporation, which protected his indirect ownership of his online bank, was a huge red flag. His attorneys should have predicted that this structure alone would invite an IRS investigation of his expatriation.

Contact Sherayzen Law Office for Professional Help With Your U.S. International Tax Compliance and Offshore Voluntary Disclosures

If you are a U.S. taxpayer with assets in a foreign country, contact Sherayzen Law Office for professional help with your U.S. international tax compliance. If you have already violated U.S. international tax laws concerning disclosure of your foreign assets, foreign income or expatriation, then you need to secure help as soon as possible to conduct an offshore voluntary disclosure to lower your IRS penalties.

We have helped hundreds of US taxpayers around the globe with their U.S. international tax compliance and offshore voluntary disclosures. We can help you!

Contact Us Today to Schedule Your Confidential Consultation!

§318 Entity-Member Attribution Summary | International Tax Lawyer

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In a previous article, I discussed the IRC (Internal Revenue Code) §318 sidewise attribution limitation. This limitation was the last piece in the jigsaw puzzle of the §318 entity-member attribution rules; now, we are ready to summarize these rules in light of this exception. This is the purpose of this article – state the §318 Entity-Member Attribution summary.

§318 Entity-Member Attribution Summary: Definition of Member

For the purpose of this §318 Entity-Member Attribution summary, I am using the word “member” to describe partners, shareholders and beneficiaries.

§318 Entity-Member Attribution Summary: Limitations

This summary of §318 entity-member attribution rules is limited only to situations where a member owns at 50% of the value of stock (in case of a corporation) and a beneficiary of a trust does not hold a remote and contingent interest in a trust. The readers need to keep these limitations in mind as they apply the summary below to a particular fact pattern.

Moreover, the readers must remember that this summary of the §318 Entity-Member attribution rules may be altered when one applies it within the context of a specific tax provision. Hence, the readers must check for any modification of these §318 attribution rules contained in that specific tax provision.

§318 Entity-Member Attribution Summary

Now that we understand the limitations above, we can state the following summary of the §318 Entity-Member attribution rules:

  1. All corporate stock is attributed to an entity from its member irrespective of whether the member owns this stock actually or constructively;
  2. If corporate stock is attributed from an entity to its member, such attribution will be done on a proportionate basis; and
  3. The following corporate stock is attributed from an entity to its member on a proportionate basis:
    (a). Corporate stock which the entity actually owns;
    (b). Corporate stock which the entity constructively owns under the option rules; and
    (c). Corporate stock which the entity constructively owns because it is a member of some other entity.

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

US international tax law is incredibly complex and the penalties for noncompliance are exceptionally severe. This means that an attempt to navigate through the maze of US international tax laws without assistance of an experienced professional will most likely produce unfavorable and even catastrophic results.

Contact Sherayzen Law Office for professional help with US international tax law. We are a highly experienced, creative and ethical team of professionals dedicated to helping our clients resolve their past, present and future US international tax compliance issues. We have helped clients with assets in over 70 countries around the world, and we can help you!

Contact Us Today to Schedule Your Confidential Consultation!