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Italian Bank Accounts | International Tax Lawyer & Attorney New York New Jersey

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US tax requirements concerning Italian bank accounts can be quite burdensome and complex. The chief three US reporting requirements applicable to Italian bank accounts are: worldwide income reporting, FBAR and FATCA Form 8938. Let’s discuss each of these requirements in more depth.

Italian Bank Accounts: US Tax Residents and US Persons

Before we delve into the discussion of these requirements, we need to identify who is required to comply with these requirements. This task is complicated by the fact that each of aforementioned three requirements has its own definition of a required filer.

Nevertheless, we can readily identify the categories of required filers shared by all three requirements. These categories correspond most closely, but not exactly to the concept of US tax residents. “US tax residency” is a broad term which includes US citizens, US permanent residents, residents who satisfy the Substantial Presence Test and individuals who declare themselves as US tax residents.

This definition of a US tax resident is fully applicable to the worldwide income reporting requirement and very closely corresponds to the concept of the Specified Person of Form 8938. FBAR’s concept of “US Persons”, however, does differ more significantly from the definition of a “US tax resident”, but only in more unusual circumstances. The most common differences arise with respect to the treaty “tie-breaker” provisions to escape US tax residency and persons who declare themselves tax residents of the United States.

Additionally, I wish to caution the readers that even the definition of US tax residents which I just stated has a number of important exceptions, such as visa exemptions (for example, an F-1 visa five-year exemption for foreign students) from the Substantial Presence Test.

In other words, the issue of who the required filer is, requires careful analysis of the facts and circumstances of an individual. This is definitely the job of your international tax attorney; it is just too dangerous to attempt to do it yourself.

Italian Bank Accounts: Worldwide Income Reporting

All US tax residents must report their worldwide income on their US tax returns. In other words, US tax residents must disclose both US-source and foreign-source income to the IRS. In the context of the Italian bank accounts, foreign-source income means all bank interest income, dividends, royalties, capital gains and any other income generated by these accounts.

Italian Bank Accounts: FBAR Reporting

The official name of the Report of Foreign Bank and Financial Accounts (“FBAR”) is FinCEN Form 114. FBAR requires all US Persons to disclose their ownership interest in or signatory authority or any other authority over Italian bank and financial accounts if the aggregate highest balance of these accounts exceeds $10,000.

I wish to emphasize again that, while the term “US persons” is very close to “US tax residents”, it is not the same. The term “US tax residents” is slightly broader than “US persons”. I encourage you to search our website – sherayzenlaw.com – for articles concerning the definition of a US Person.

One aspect of the FBAR requirement, however, deserves a special mention here – the definition of an “account”. The FBAR definition of an account is substantially broader than how this word is generally understood in our society. “Account” for FBAR purposes 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, whenever there is a custodial relationship between a foreign financial institution and a US person’s foreign asset, there is a very high probability that the IRS will find that an account exists for FBAR purposes.

Finally, no discussion of FBAR can be considered complete without mentioned the much-dreaded FBAR penalty system. It is complex and severe to an astonishing degree. The most feared penalties are criminal FBAR penalties with up to 10 years in jail (of course, these penalties come into effect only in the most egregious situations). The next layer of penalties are FBAR willful civil penalties which can easily exceed a person’s net worth. Finally, FBAR imposes penalties even on non-willful taxpayers.

All of the civil FBAR penalties have their own complex web of penalty mitigation layers, which depend on the facts and circumstances of one’s case. One of the most important factors is the size of the Italian bank accounts subject to FBAR penalties. Additionally, since 2015, the IRS has added another layer of limitations on the FBAR penalty imposition. These self-imposed limitations of course help, but one must keep in mind that they are voluntary IRS actions and may be disregarded under certain circumstances (in fact, there are already a few instances where this has occurred).

Italian Bank Accounts: FATCA Form 8938

FATCA Form 8938 has been in existence since 2011. Unlike FBAR, it is filed with a federal tax return and considered to be an integral part of the return. This means that a failure to file File 8938 may render the entire tax return incomplete and potentially subject to an IRS audit.

Form 8938 requires “Specified Persons” to disclose on their US tax returns all of their Specified Foreign Financial Assets (“SFFA”) as long as these Persons meet the applicable filing threshold. The filing threshold depends on a Specified Person’s tax return filing status and his physical residency. For example, if he is single and resides in the United States, he needs to file Form 8938 as long as the aggregate value of his SFFA is more than $50,000 at the end of the year or more than $75,000 at any point during the year.

The IRS defines SFFA very broadly to include an enormous variety of financial instruments, including foreign bank accounts, foreign business ownership, foreign trust beneficiary interests, bond certificates, various types of swaps, et cetera. In some ways, FBAR and Form 8938 require the reporting of the same assets, but these two forms are completely independent from each other. This means that a taxpayer may have to do duplicate reporting on FBAR and Form 8938.

Specified Persons consist of two categories: Specified Individuals and Specified Domestic Entities. You can find a detailed explanation of both categories by searching our website sherayzenlaw.com.

Finally, Form 8938 has its own penalty system which has far-reaching consequences for income tax liability (including disallowance of foreign tax credit and imposition of higher accuracy-related income tax penalties). There is also a $10,000 failure-to-file penalty.

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

Worldwide income reporting, FBAR and Form 8938 do not constitute a complete list of US reporting requirements that may apply to Italian bank accounts. There may be many more.

This is why, if you have Italian bank accounts, should contact Sherayzen Law Office. We have a highly knowledgeable international tax compliance team headed by an experienced international tax attorney, Mr. Eugene Sherayzen. We have helped hundreds of US taxpayers with their US international tax issues, including reporting Italian bank accounts, and We can help You!

Contact Us Today to Schedule Your Confidential Consultation!

Worldwide Income Reporting Requirement | IRS International Tax Lawyer

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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!

Personal Services Income Sourcing | International Tax Lawyer & Attorney

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This article continues our series of articles on the source of income rules. Today, I will explain the general rule for individual personal services income sourcing. I want to emphasize that, in this essay, I will focus only on individuals and provide only the general rule with two exceptions. Future articles will cover more specific situations and exceptions.

Personal Services Income Sourcing: General Rule

The main governing law concerning individual personal services income sourcing rules is found in the Internal Revenue Code (“IRC”) §861 and §862. §861 defines what income is considered to be US-source income while §862 explains when income is considered to be foreign-source income.

The general rule for the individual personal services income is that the location where the services are rendered determines whether this is US-source income or foreign-source income. If an individual performs his services in the United States, then this is US-source income. §861(a)(3). On the other hand, if this individual renders his services outside of the United States, then, this will be a foreign-source income. §862(a)(3).

In other words, the key consideration in income sourcing with respect to personal services is the location where the services are performed. Generally, the rest of the factors are irrelevant, including the residency of the employee, the place of incorporation of the employer and the place of payment.

As always in US tax law, there are exceptions to this general rule. In this article, I will cover only two statutory exceptions; in the future, I will also discuss other exceptions as well as the rule with respect to situations where the work is partially done in the United States and partially in a foreign country.

Personal Services Income Sourcing: De Minimis Exception

IRC §861(a)(3) provides a statutory exception to the general rule above specifically for nonresident aliens whose income meet the de minimis rule. The de minimis rule states that the US government will not consider the services of a nonresident alien rendered in the United States as US-source income as long as the following four requirements are met:

1. The nonresident alien is an individual;

2. He was only temporarily in the United States for a period or periods of time not exceeding a total of 90 days during the tax year;

3. He received $3,000 or less in compensation for his services in the United States; AND

4. The services were performed for either of two persons:

4a. “A nonresident alien, foreign partnership, or foreign corporation, not engaged in trade or business within the United States”. §861(a)(3)(C)(i); OR

4b. “an individual who is a citizen or resident of the United States, a domestic partnership, or a domestic corporation, if such labor or services are performed for an office or place of business maintained in a foreign country or in a possession of the United States by such individual, partnership, or corporation.” §861(a)(3)(C)(ii).

Personal Services Income Sourcing: Foreign Vessel Crew Exception

The personal services income performed by a nonresident alien individual in the United States will not be deemed as US-source income if the following requirements are satisfied:

1. The individual is temporarily present in the United States as a regular member of a crew of a foreign vessel; and

2. The foreign vessel is engaged in transported between the United States and a foreign country or a possession of the United States. See §861(a)(3).

Contact Sherayzen Law Office for Professional Help Concerning US International Tax Law, Including Personal Services Income Sourcing Rules

Sherayzen Law Office is a leading international tax law firm in the United States that has successfully helped hundreds of US taxpayers with their US international tax compliance issues. Contact Us Today to Schedule Your Confidential Consultation!

EU Tax Harmonization Initiative Stalled by Ireland and Hungary | Tax News

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The EU Tax Harmonization initiative faced a joint opposition of Ireland and Hungary in early January of 2018. Both countries are vehemently opposed to any effort that would “tie their hands” in terms of their corporate tax policies.

The EU Tax Harmonization Initiative

Tax Harmonization is basically a policy that aims to adjust the tax systems of various jurisdictions in order to achieve one tax goal. The adjustment usually implies equalization of tax treatment.

In the past, the EU tax harmonization efforts were mostly limited to Value-Added Tax (“VAT”) and certain parent-subsidiary taxation issues. Since at least 2016, however, the EU Tax Harmonization policy seeks to regulate corporate income taxes among its members in order to limit intra-EU tax competition.

In 2016, the European Commission released two proposed directives addressing the issues of a common corporate tax base and a common consolidated corporate tax base. Neither directive establishes a minimum corporate tax rate. Neither directive passed the internal EU opposition.

Irish and Hungarian Opposition to the EU Tax Harmonization of Corporate Taxation

Today, the EU internal opposition to the EU tax harmonization initiatives consists of Ireland and Hungary. Both Hungary and Ireland have very low (by EU standards) corporate tax rates. The Irish corporate tax rate is 12.5% and the Hungarian corporate tax rate is only 9% (the EU average corporate tax rate is about 22%).

In early January of 2018, the Hungarian Prime Minister Viktor Orbán and Irish Prime Minister Leo Varadkar both stated that their countries have the right to set their corporate tax policies and that this area should not be subject to the EU tax harmonization efforts. “Taxation is an important component of competition. We would not like to see any regulation in the EU, which would bind Hungary’s hands in terms of tax policy, be it corporate tax, or any other tax,” Mr. Orbán said. He further added that “we do not consider tax harmonization a desired direction.”

Both countries view the aforementioned proposed 2016 European Commission directives as a threat, because harmonizing of the tax base could lead to corporate income tax rate harmonization.

Impact of Brexit on the EU Tax Harmonization Initiatives

The United Kingdom used to be in the same opposition camp as Ireland and Hungary. Given the size of its economy and its political influence, the United Kingdom was an almost insurmountable barrier to the proponents of greater EU unity (mainly France and Germany). In essence, the UK was enough of a counterweight to keep the balance of power within the European Union from tilting in favor of the EU unity proponents.

Everything has changed with Brexit. The exit of the United Kingdom from the EU automatically led to the shift of the balance of power in favor of Germany. Brexit also means that Ireland and Hungary are now alone in their resistance against the Franco-German efforts to achieve greater EU unity. The political pressure of these outliers is now enormous.

In fact, it appears that, rather than suspending the unanimity requirement by invoking the so-called “passerelle clauses” (which would be a highly controversial step), the proponents of the EU Tax Harmonization initiative will simply wait until this political pressure forces Ireland and Hungary to modify their positions on this issue.

Tax Cuts & Jobs Act: 2018 Standard Deduction and Exemptions

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The Tax Cuts and Jobs Act of 2017 made dramatic changes that affected pretty much every US taxpayer. This is the first article of the series of articles on the Act. I will start this series with the discussion of simple US domestic issues (such as 2018 standard deduction and personal exemptions), then gradually turn to more and more complex US domestic and international tax issues, and finish with the examination of the highly complex issues concerning E&P income recognition for US owners of foreign corporations and the new type of Subpart F income.

Today, I will focus on the 2018 standard deduction and exemptions.

Standard Deduction for the Tax Year 2017

Standard deduction is the amount of dollars by which you can reduce your adjusted gross income (“AGI”) in order to lower your taxable income and, hence, your federal income tax. The standard deduction is prescribed by Congress. If you use standard deduction, you cannot itemize your deductions (i.e. try to reduce your AGI by the amount of actual allowed itemized deductions) – you have to choose between these two options.

Standard deduction varies based on your filing status (there is an additional standard deductions of individuals over the age of 65 or who are blind).

For the tax year 2017, the standard deduction are as follows: $6,350 for single taxpayers and married couples filing separately, $12,700 for married couples filing a joint tax return and $9,350 for heads of household.

2018 Standard Deduction and Exemptions

Under the Tax Cuts and Jobs Act of 2017, the 2018 standard deduction will virtually double in size: $12,000 for single taxpayers and married couples filing separately, $24,000 for married couples filing a joint tax return and $18,000 for heads of household. All of these amounts will be indexed for inflation.

It is important to point out, however, that these increased standard deduction amounts will only last until 2025. Then, the standard deduction should revert to the old pre-2018 law.

Personal Exemptions & Impact of 2018 Standard Deduction

Personal exemption is an additional amount of dollars by which the Congress will allow you to reduce your AGI (already reduced by either standard deduction or itemized deductions). When IRC Section 151 was enacted in 1954, the idea behind a personal exemption was to exempt from taxation a certain minimal amount a person needs to survive at a subsistence level.

Personal exemption can be claimed for you and your qualified dependents; in case of joint tax returns, each spouse is granted a personal exemption. However, a personal exemption for a spouse can be claimed even if the spouses are filing separate tax returns, but certain requirements have to be met.

For the tax year 2017, the personal exemption amount is $4,050. The exemption is subject to a phase-out at a certain level of income.

The Tax Cuts and Jobs Act of 2017 repeals personal exemptions for the tax years 2018-2025. After 2025, the law reverts to the one that existed as of the tax year 2017. In other words, the increase in 2018 standard deduction will be at least partially offset by the elimination of 2018 personal exemption.

In some cases, where taxpayers claim many personal exemptions for their dependants, the elimination of personal exemptions may actually result in the increase in taxation (compared to the 2017 law) despite the increase of 2018 standard deduction. Of course, such an increase in taxation needs to take into account potential increase in child tax credit under the new law. Hence, in order to assess the full tax impact of the tax reform for large families, one needs to consider other factors in addition to just 2018 standard deduction.