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Interest Income Sourcing | International Tax Lawyer & Attorney

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This article is a continuation of a recent series of articles on the US source of income rules. In this article, I would like to introduce the readers to the interest income sourcing rules.

Interest Income Sourcing: Definition of “Interest”

Let’s first understand what is meant by the word “interest”. It is very curious that there is no definition of this term in the Internal Revenue Code nor in the Treasury regulations. Indeed, when applied to real life situations, the tax definition of interest spreads to items which do not at first appear as interest income (the most famous example is the original issue discount); the contrary is also true – sometimes an income that appears to be interest income is not considered to be such by the IRS (for example, commitment fees).

Generally, “interest” is a payment for the use of money. In most cases, there is a relationship of indebtedness that accompanies the requirement to pay interest; however, this is not always the case. In fact, there are numerous rules and rulings that one must know in order to properly determine how the IRS will treat a certain payment.

Interest Income Sourcing: General Rule

Generally, the interest is sourced at the residence of the obligor. IRC § 861(a)(1). Thus, if the obligor resides in the United States, then the interest paid on the obligation will be considered as US-source income. This is the case even if the obligor is a foreign national who resides in the United States. On the other hand, if a US citizen resides in a foreign country, then the interest that he pays to his lender is a foreign-source income.

This rule may lead to a paradoxical situation. For example, if a US citizen resides in Spain and pays interest to a Spaniard, this interest would be considered as Spanish-source income. At the same time, if a Spaniard resides in the United States and pays interest to a US citizen who resides in Spain, then the interest would be considered as US-source income.

Generally, interest paid by domestic corporations and domestic partnerships follows the same interest income sourcing rules. There are, however, some exceptions to this rule. For example, with respect to banks, interest on deposits with a foreign branch of a domestic corporation is not considered to be US-source income. IRC § 861(a)(1)(A)(i).

I wish to emphasize that I am stating here a general rule only. There are various exceptions, especially with respect to the portfolio interest. Most of these exceptions are especially relevant to nonresident aliens who receive interest from the United States.

Contact Sherayzen Law Office for Professional Help With US International Tax Law, Including Interest Income Sourcing Rules

Sherayzen Law Office is a leading international tax law firm in the United States which has helped hundreds of US taxpayers with their US international tax issues. We can help you!

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October 15 2018 Deadline for FBARs and Tax Returns | US Tax Law Firm

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With just a week left before October 15 2018 deadline, it is important for US taxpayers to remember what they need to file with respect to their income tax obligations and information returns. I will concentrate today on four main requirements for US tax residents.

1. October 15 2018 Deadline for Federal Tax Returns and Most State Tax Returns

US taxpayers need to file their extended 2017 federal tax returns and most state tax returns by October 15, 2018. Some states (like Virginia) have a later filing deadline. In other words, US taxpayers need to disclose their worldwide income to the IRS by October 15 2018 deadline. The worldwide income includes all US-source income, foreign interest income, foreign dividend income, foreign trust distributions, PFIC income, et cetera.

2. October 15 2018 Deadline for Forms 5471, 8858, 8865, 8938 and Other International Information Returns Filed with US Tax Returns

In addition to their worldwide income, US taxpayers also may need to file numerous international information returns with their US tax returns. The primary three categories of these returns are: (a) returns concerning foreign business ownership (Forms 5471, 8858 and 8865); (b) PFIC Forms 8621 – this is really a hybrid form (i.e. it requires a mix of income tax and information reporting); and (c) Form 8938 concerning Specified Foreign Financial Assets. Other information returns may need to be filed by this deadline; I am only listing the most common ones.

3. October 15 2018 Deadline for FBARs

As a result of the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, the due date of FinCEN Form 114, The Report of Foreign Bank and Financial Accounts (also known as “FBAR”) was adjusted (starting tax year 2016) to the tax return deadline. Similarly to tax returns, the deadline for FBAR filing can also be extended to October 15; in fact, under the current law, the FBAR extension is automatic. Hence, October 15 2018 deadline applies to all 2017 FBARs which have not been filed by April 15, 2018.

The importance of filing this form cannot be overstated. The FBAR penalties are truly draconian even if they are mitigated by the IRS rules. Moreover, an intentional failure to file the form by October 15 2018 may have severe repercussions to your offshore voluntary disclosure options.

4. October 15 2018 Deadline for Foreign Trust Beneficiaries and Grantors

October 15 2018 deadline is also very important to US beneficiaries and US grantors (including deemed owners) of a foreign trust – the extended Form 3520 is due on this date. Similarly to FBAR, while Form 3520 is not filed with your US tax return, it follows the same deadlines as your income tax return.

Unlike FBARs, however, Form 3520 does not receive an automatic extension independent of whether you extended your tax return. Rather, its April 15 deadline can only be extended if your US income tax return was also extended.

Sherayzen Law Office warns US taxpayers that a failure to file 2017 Form 3520 by October 15 2018 deadline may result in the imposition of high IRS penalties.

EU Automatic Exchange of Banking and Beneficial Ownership Data Approved

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On November 22, 2016, the European Parliament approved the automatic exchange of banking and beneficial ownership data across the European Union. The directive received an overwhelming support from the Parliament: 590 members voted “yes”, 32 – “no”, and 64 did not vote.

Since the original proposal was already approved by the EU Council on November 8, 2016, the only issue left before the directive will come into force will be the final adoption of the directive by EU Council. Once the directive on the automatic exchange of banking and beneficial ownership data is adopted by the Council, the member states will have until December 31, 2017, to implement it.

The directive represents a major undertaking with respect to the automatic exchange of banking and beneficial ownership data. Once it is adopted, the directive will allow tax authorities of every EU member state to automatically share the banking information such as account balances, interest income and dividends. Moreover, the directive also requires the EU member states to create registers recording the beneficial ownership of companies and trusts. This means that the tax authorities of all EU member states will finally acquire access to the information regarding the true beneficiaries of foreign trusts and opaque corporate structures.

The idea behind the new legislation on the automatic exchanges of banking and beneficial ownership data is to provide the EU member states with tools to fight cross-border fraud and tax evasion, preserving the integrity of their domestic tax systems.

However, it appears that there are still serious implementation issues with respect to the new directive. The most serious problem is that the directive merely allows the automatic exchange of banking and beneficial ownership date in the EU, but it does not obligate the member states to do so. Furthermore, the banking industry’s role in the facilitation of tax evasion is not addressed at all by the legislature.

After the directive on the automatic exchange of banking and beneficial ownership date is adopted, the European Parliament is going to take up the legislation to provide for a cross-border method for accessing the shared information.

An interesting question for US taxpayers is whether any of the information acquired through the EU sharing mechanism will be shared with the IRS through FATCA. The likelihood of this scenario is fairly strong and may further expose noncompliant US taxpayers to IRS detection.

Indian FATCA Letters

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As the FATCA deadline to report Indian preexisting accounts approaches for Indian foreign financial institutions, more and more Indian-Americans and Indians who live and work in the United States receive Indian FATCA Letters (i.e. FATCA letters from Indian foreign financial institutions).

Many U.S. taxpayers of Indian origin are completely unprepared for Indian FATCA Letters and do not understand what they need to do. In this article, I would like to discuss the origin and purpose of Indian FATCA Letters as well as what you should do if you received such a letter.

Indian FATCA Letters

Indian FATCA Letters are the tools used by Indian foreign financial institutions to comply with their FATCA obligations. Since its enaction into law in 2010, the Foreign Account Tax Compliance Act (FATCA) has had a tremendous impact on global tax information exchange, forcing foreign financial institutions from more than 110 jurisdictions to comply with FATCA provisions.

One of the most prominent aspects of FATCA is the fact that it forces foreign financial institutions to report (directly or indirectly) certain information regarding U.S. owners of foreign bank and financial accounts. In essence, foreign financial institutions around the world are now forced to play the role of IRS informants, actively spying and turning over information regarding foreign financial activities of U.S. taxpayers to the IRS.

FATCA is implemented worldwide through a network of bilateral treaties. India signed such a treaty which came into force on August 31, 2015, forcing Indian foreign financial institutions to adopt FATCA-compliant procedures.

Indian FATCA Letters represent this compliance effort by Indian foreign financial institutions. In particular, Indian FATCA Letters are designed to collect various information required by FATCA, such as: the name and address of a U.S. taxpayer, the tax identification number of a U.S. taxpayer, and other information required to determine the U.S. tax status of the accountholder.

Indian FATCA Letters and Undisclosed Indian Bank and Financial Accounts

Indian FATCA Letters may have profound impact on U.S. taxpayers with undisclosed bank and financial accounts in India. First of all, Indian FATCA Letters automatically establish the awareness of U.S. tax requirements on the part of U.S. taxpayers – i.e. after receiving these letters, the taxpayers must take prudent steps to assure current and future U.S. tax compliance if they wish to avoid willful noncompliance with consequent imposition of heavy IRS penalties. This is especially important for taxpayers who receive Indian FATCA letters right before the tax return and FBAR filing deadlines.

Second, Indian FATCA Letters “start the clock” for U.S. taxpayers who wish to do voluntary disclosure. This is done in two ways – direct and indirect.

The direct impact of Indian FATCA Letters is the FATCA requirement that foreign financial institutions report the required FATCA information to the IRS with respect to their U.S. (or suspected U.S.) accountholders within certain limited period of time. If the taxpayer refuses to answer his Indian FATCA Letters, the financial institutions will report him to the IRS as a “recalcitrant” taxpayer. This, in turn, may lead to a subsequent IRS examination which may deprive the taxpayer of the ability to take advantage of any type of a voluntary disclosure option.

The indirect impact of Indian FATCA Letters is linked to the “knowledge” issue described above – Indian FATCA Letters start the clock for the taxpayers to do their voluntary disclosure. If they do not do it within reasonable period of time (which may differ depending on circumstances), the IRS may proceed based on the assumption that prior noncompliance with U.S. tax requirements by the procrastinating taxpayers was willful.

Contact Sherayzen Law Office if You Received Indian FATCA Letters

If you received one or more Indian FATCA Letters from foreign financial institutions, contact Sherayzen Law Office as soon as possible. Our experienced legal team is led by one of the leading experts in offshore voluntary disclosures in the world – attorney Eugene Sherayzen. He will personally analyze your situation, advise you with respect to your FATCA Letter, and develop your voluntary disclosure strategy. Then, our legal team will implement this strategy, including the preparation of all required tax forms.

Call Us Today to Schedule Your Confidential Consultation!

Privatbank Von Graffenried AG Signs Non-Prosecution Agreement

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On July 2, 2015, the US Department of Justice announced that Privatbank Von Graffenried AG became the fifteenth bank to sign a Non-Prosecution Agreement under the DOJ’s Swiss Bank Program. It also became the 27th bank on the 50% penalty list for US taxpayers who wish to enter the OVDP.

Background Information

Von Graffenried is a private bank founded in 1992 and based in Bern, Switzerland. Starting in at least July 1998, Von Graffenried, through certain practices, assisted U.S. taxpayer-clients in evading their U.S. tax obligations, filing false federal tax returns with the Internal Revenue Service (IRS) and otherwise hiding assets maintained overseas from the IRS.

Von Graffenried opened and maintained undeclared accounts for U.S. taxpayers when it knew or should have known that, by doing so, it was helping these U.S. taxpayers violate their legal duties. Von Graffenried offered a variety of traditional Swiss banking services that it knew could assist, and that did assist, U.S. clients in the concealment of assets and income from the IRS. For example, Von Graffenried would hold all mail correspondence, including periodic statements and written communications for client review, thereby keeping documents reflecting the existence of the accounts outside the United States. Von Graffenried also offered numbered account services, replacing the accountholder’s identity with a number on bank statements and other documentation that was sent to the client.

In late 2008 and early 2009, Von Graffenried accepted accounts from two European nationals residing in the United States who had been forced to leave UBS and Credit Suisse, respectively. At the time it accepted the accounts, Von Graffenried knew that UBS was the target of an investigation by the Department of Justice. It also knew that both individuals had been forced to leave their respective banks because the banks were closing their accounts, and that both individuals had U.S. tax obligations and did not want the accounts disclosed to U.S. authorities. Senior management at Von Graffenried approved the opening of these accounts.

When Von Graffenried compliance personnel sought to obtain an IRS Form 8802, Application for U.S. Residency Certification, from one of the accountholders, that accountholder replied that completing the form would be problematic for him and that he believed the relationship manager knew why. The beneficial owner of the second account was referred by an external fiduciary, who handled the account at Credit Suisse. The fiduciary told a Von Graffenried relationship manager that Credit Suisse was attempting to exit its U.S. offshore clients to other banks if the clients would not sign an IRS Form W-9. The relationship manager agreed to take on the account, which was held by a Liechtenstein “stiftung,” or foundation, with the beneficial owner as the primary beneficiary and U.S. citizens as other beneficiaries.

Between July 1998 and July 2000, Von Graffenried accepted approximately two dozen accounts from a specific external asset manager. Von Graffenried was aware that the external asset manager seemed to be targeting U.S. clientele. Sixteen of the accounts were beneficially owned by individuals with U.S. tax and reporting obligations, and most of those accounts were held by U.S. citizens residing in the United States. At the time, Von Graffenried did not have a policy in place that required U.S. clients to show tax compliance. Consequently, Von Graffenried accepted these accounts without obtaining IRS Forms W-9 or assurances that the accounts were in fact tax compliant. By early 2009, Von Graffenried determined that some of the external asset manager’s accountholders likely were attempting to evade U.S. tax requirements. In 2010, Von Graffenried began to close the existing U.S.-related accounts that originated with the external asset manager. Von Graffenried did not complete the exit process for these accounts until late 2012.

Non-Prosecution Agreement with DOJ

According to the terms of the non-prosecution agreement signed on July 2, 2015, Von Graffenried agreed to cooperate in any related criminal or civil proceedings, demonstrate its implementation of controls to stop misconduct involving undeclared U.S. accounts and pay penalties in return for the department’s agreement not to prosecute Von Graffenried for tax-related criminal offenses.

Since August 1, 2008, Von Graffenried held a total of 58 U.S.-related accounts with approximately $459 million in assets. Von Graffenried will pay a penalty of $287,000.

In accordance with the terms of the Swiss Bank Program, Von Graffenried mitigated its penalty by encouraging U.S. accountholders to come into compliance with their U.S. tax and disclosure obligations.

Consequences for US Taxpayers With Undisclosed Accounts at Von Graffenried

There are two major consequences (for US taxpayers with undisclosed accounts) of the Von Graffenried’s participation in the Swiss Bank Program. First, as it was mentioned above, if such taxpayers with undisclosed financial accounts at Von Graffenried wish to enter the 2014 IRS Offshore Voluntary Disclosure Penalty, their penalty rate will now go up to 50% of the highest value of the accounts.

Second, as part of its participation in the Swiss Bank Program, Von Graffenried also had provided to the IRS certain account information related to U.S. taxpayers that will enable the IRS to make requests under the 1996 Convention between the United States of America and the Swiss Confederation for the Avoidance of Double Taxation with Respect to Taxes on Income for, among other things, the identities of U.S. accountholders. If the IRS is successful, then, these accountholders are likely to be rejected from the OVDP participation and may face draconian civil and criminal FBAR and income tax penalties.

Contact Sherayzen Law Office for Professional Help With Undisclosed Foreign Accounts

The number of banks which are coming forward to disclose their US clients’ accounts is growing rapidly with each passing month. Moreover, the great majority of the banks worldwide are also attempting to comply with various FATCA requirements.

This means that the longer US taxpayers with undisclosed foreign accounts wait, the more likely it is that their situation will worsen. The risk of the IRS discovery is higher today than ever before, and the consequences of such a discovery may be truly grisly.

This is why, if you have undisclosed foreign accounts or any other assets, contact Sherayzen Law Office as soon as possible. Our professional legal team is highly experienced in handling all types of offshore voluntary disclosures. We can handle the entire process of your voluntary disclosure from the beginning to the end, including the preparation of all tax forms and legal documents.

So, Contact Us Now to Schedule Your Confidential Consultation Now! We Can Help You!