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2022 2Q IRS Interest Rates | US International Tax Lawyers

On February 23, 2022, the Internal Revenue Service (“IRS”) announced that the 2022 Second Quarter IRS underpayment and overpayment interest rates (“2022 2Q IRS Interest Rates”) will increase from the first quarter of 2022. This means that, the 2022 2Q IRS interest rates will be as follows:

  • four (4) percent for overpayments (three (3) percent in the case of a corporation);
  • one and one-half (1.5) percent for the portion of a corporate overpayment exceeding $10,000;
  • four (4) percent for underpayments; and
  • six (6) percent for large corporate underpayments.

The second quarter will start on April 1, 2022.

Under the Internal Revenue Code, these interest rates are determined on a quarterly basis. The IRS used the federal short-term rate for February of 2022 to determine the 2022 2Q IRS interest rates. The IRS interest is compounded on a daily basis.

The 2022 2Q IRS interest rates are important for many reasons for US domestic and international tax purposes. For example, the IRS will use these rates to determine how much interest a taxpayer needs to pay on an additional tax liability that arose as a result of an amendment of his US tax return through Streamlined Domestic Offshore Procedures and Streamlined Foreign Offshore Procedures. The IRS will also utilize 2022 2Q IRS interest rates with respect to the calculation of PFIC interest on Section 1291 tax.

As an international tax law firm, Sherayzen Law Office keeps track of the IRS underpayment and overpayment interest rates on a regular basis. Since our specialty is offshore voluntary disclosures, we often amend our client’s tax returns as part of an offshore voluntary disclosure process and calculate the interest owed on any additional US tax liability. In other words these interest rates are relevant to Streamlined Domestic Offshore Procedures, Streamlined Foreign Offshore Procedures, IRS Voluntary Disclosure Practice, Delinquent International Information Return Submission Procedures and Reasonable Cause Disclosures. We also need to take interest payments into account with respect to additional tax liability that arises out of an IRS audit.

Moreover, we regularly have to do PFIC calculations for our clients under the default IRC Section 1291 methodology. This calculation requires the usage of the IRS underpayment interest rates in order to determine the amount of PFIC interest on the IRC Section 1291 tax.

Finally, it is important to point out that the IRS will use the 2022 2Q IRS interest rates to determine the amount of interest that needs to be paid to a taxpayer who is due a tax refund as a result of an IRS audit or amendment of the taxpayer’s US tax return. This situation may also often arise in the context of offshore voluntary disclosures.

Thus, the IRS underpayment and overpayment interest rates have an impact on a lot of basic items in US tax law. Hence, it is important to keep track of changes in these rates on a quarterly basis.

2022 Offshore Voluntary Disclosure Options | US International Tax Lawyers

While the year 2021 has ended, numerous taxpayers continue to be substantially noncompliant with various US international tax laws. Hence, it is important for US taxpayers with undisclosed foreign assets to consider their 2022 offshore voluntary disclosure options. In this essay, I would like to provide an overview of these 2022 offshore voluntary disclosure options.

2022 Offshore Voluntary Disclosure Options: What is Offshore Voluntary Disclosure

The term “offshore voluntary disclosure” refers to a series of legal processes established by the IRS to allow noncompliant US taxpayers to voluntarily come forward and disclose their prior US international tax noncompliance in exchange for more lenient IRS treatment. This leniency can express itself in various ways: avoidance of criminal prosecution, lower and even zero penalties, a shorter voluntary disclosure period, ability to make certain retroactive tax elections, et cetera.

In general, the benefits of a voluntary disclosure usually far outweigh the consequences of a disclosure during a potential IRS audit. There are exceptions, but they are usually limited to mishandled cases where either an improper voluntary disclosure path was chosen or the process of the disclosure was mishandled by the taxpayer (usually) or his tax attorneys. This is why it is important that you chose the right international tax attorney to help you with your offshore voluntary disclosure.

Let’s review the main 2022 offshore voluntary disclosure options and briefly describe them.

2022 Offshore Voluntary Disclosure Options: Streamlined Foreign Offshore Procedures

While Streamlined Foreign Offshore Procedures (“SFOP”) was created already in 2012, it exists in its current form since June of 2014. It is a true tax amnesty program, because its participants do not pay IRS penalties of any kind, even on income tax due. The participants only need to pay the extra tax due on the amended tax returns plus interest on the tax.

Moreover, SFOP preserves SDOP’s non-invasive and limited scope of voluntary disclosure (see below). For example, you only need to amend the tax returns for the past three years and file FBARs for the past six years.

SFOP, however, is available to a limited number of US taxpayers who are able to satisfy its eligibility requirements, particularly those related to non-willfulness certification and physical presence outside of the United States. You should contact Sherayzen Law Office to help you determine whether you meet the eligibility requirements of SFOP.

2022 Offshore Voluntary Disclosure Options: Streamlined Domestic Offshore Procedures

Streamlined Domestic Offshore Procedures (“SDOP”) is currently the flagship voluntary disclosure option for US taxpayers who reside in the United States. While not as generous as SFOP, SDOP is still a very good voluntary disclosure option for non-willful taxpayers: it is simple, limited (in terms of the voluntary disclosure period for which tax returns and FBARs must be filed) and mild (in terms of its penalty structure). There are some drawbacks to SDOP, such as the potential imposition of the Miscellaneous Offshore Penalty on income-tax compliant foreign accounts, but the benefits offered by this option outweigh its deficiencies for most taxpayers.

The reason why the IRS is so generous lies in the fact that this voluntary disclosure option is open only to taxpayers who can certify under the penalty of perjury that they were non-willful with respect to their prior income tax noncompliance, FBAR noncompliance and noncompliance with any other US international information tax return (such as Form 3520, 5471, 8938 et cetera). It will be up to your international tax lawyer to make the determination on whether you are able to make this certification.

Moreover, a taxpayer cannot file a delinquent Form 1040 under the SDOP. SDOP only accepts amended tax returns (i.e Forms 1040X), not original late tax returns.

2022 Offshore Voluntary Disclosure Options: Delinquent FBAR Submission Procedures

Delinquent FBAR Submission Procedures (“DFSP”) is another voluntary disclosure option that fully eliminates IRS penalties. This is not a new option; in fact, in one form or another, officially or unofficially, it has always existed within the IRS procedures. Prior to 2019, it was even written into the OVDP (IRS Offshore Voluntary Disclosure Program) as FAQ#17 (though in a modified version).

While DFSP is highly beneficial to noncompliant US taxpayers, it is available to even fewer number of taxpayers than those who are eligible for SDOP and SFOP. This is the case due to two factors. First, DFSP has a very narrow scope – it applies only to FBARs. Second, DFSP has extremely strict eligibility requirements; even de minimis income tax noncompliance may deprive a taxpayer of the ability to use this option if it is sufficient to require an amendment of a tax return. In other words, DFSP only applies where SDOP, SFOP and VDP (see below) are irrelevant due to absence of unreported income.

2022 Offshore Voluntary Disclosure Options: Delinquent International Information Return Submission Procedures

Delinquent International Information Return Submission Procedures (“DIIRSP”) has a similar history to DFSP. In fact, it was “codified” into OVDP rules as FAQ#18. Similarly to DFSP, DIIRSP also offers the possibility of escaping IRS Penalties. DIIRSP has a broader scope than DFSP and applies to international information returns other than FBAR, such as Form 8938, 3520, 5471, 8865, 926, et cetera.

Since it turned into an independent voluntary disclosure option in 2014, DIIRSP’s eligibility requirements became much harsher. US taxpayers are now required to provide a reasonable cause explanation in order to escape IRS penalties under this option. On the other hand, the fact that there may be unreported income associated with international information returns is not an impediment by itself to participation in DIIRSP.

2022 Offshore Voluntary Disclosure Options: IRS Voluntary Disclosure Practice

The traditional IRS Offshore Voluntary Disclosure practice has existed for a very long time. However, it faded into complete obscurity once the IRS opened its first major OVDP option in 2009. The closure of the 2014 OVDP in September of 2018 has brought this option back to life.

On November 20, 2018, the IRS has completely revamped this traditional voluntary disclosure option, modified its procedural structure and imposed a new tough (but relatively clear) penalty structure. This new version of the traditional voluntary disclosure is now officially called IRS Voluntary Disclosure Practice (“VDP”).

The chief advantage of VDP is that it is specifically designed to help taxpayers who willfully violated their US tax obligations to come forward to avoid criminal prosecution and lower their civil willful penalties. In other words, VDP is now the main voluntary disclosure option for willful taxpayers.

2022 Offshore Voluntary Disclosure Options: Reasonable Cause Disclosure

Since 2014, the popularity of Reasonable Cause disclosure (also known as “Noisy Disclosure”) has declined substantially due to the introduction of SDOP and SFOP. Nevertheless, Reasonable Cause disclosure continues to be a highly important voluntary disclosure alternative to official IRS voluntary disclosure options. It is now primarily used when SDOP and SFOP are not available for technical reasons (i.e. some of their eligibility requirements are not met).

Reasonable Cause disclosure is based on the actual statutory language; it is not part of any official IRS program. Special care must be taken in using this option, because this is a high-risk, high-reward option. If a taxpayer is able to satisfy this high burden of proof, then, he will be able to avoid all IRS penalties. If the IRS audits the Reasonable Cause disclosure and disagrees, this taxpayer may face significant IRS penalties and, potentially, years of IRS litigation.

Contact Sherayzen Law Office for Professional Analysis of Your 2022 Offshore Voluntary Disclosure Options

If you have undisclosed foreign assets, contact Sherayzen Law Office for professional help as soon as possible. We have successfully helped hundreds of US taxpayers from over 70 countries with their voluntary disclosures of foreign assets to the IRS, and we can help you!

Contact Us Today to Schedule Your Confidential Consultation!

Happy New Year 2022 From Sherayzen Law Office!!!

Dear clients, followers, readers and colleagues:

From the bottom of our heart, Sherayzen Law Office wishes you a very Happy New Year 2022!!!

We wish you good health, economic prosperity and full compliance with US international tax laws!

For those of you who are currently not in compliance with their US international tax reporting obligations, including FBAR or FinCEN Form 114, we wish you to successfully resolve your prior noncompliance in this new year 2022 with a minimal amount of IRS penalties!

Dear friends, in the year 2022, you can continue to rely on Sherayzen Law Office for your annual US international tax compliance (including the preparation of FBAR and other US international tax compliance forms such as: Forms 3520, 3520-A, 5471, 8621, 8865, 8938 and 926), your international tax planning (inbound and outbound) and your offshore voluntary disclosures (including: Streamlined Domestic Offshore Procedures (SDOP), Streamlined Foreign Offshore Procedures (SFOP), Delinquent FBAR Submission Procedures, Delinquent International Information Return Submission Procedures, IRS Voluntary Disclosure Practice and Reasonable Cause Disclosures).

In 2022, we will also continue to help you with your IRS audits and examination, including audits of: your prior SDOP and SFOP submissions (as well as other voluntary disclosure options) and your annual international tax compliance. We can also help you fight the imposition of IRS penalties for prior international tax noncompliance, including Form 3520 and 3520-A penalties, Form 5471 penalties, Form 5472 penalties, Form 8865 penalties, Form 926 penalties, et cetera.

In 2022, the US international tax compliance requirements are going to grow more complex, detailed and extensive. The IRS will continue to demand more and more information from US taxpayers, introducing heretofore unknown reporting obligations such as Schedules K-2 and K-3.

In order to deal with this ever-increasing US tax compliance burden, you will need the professional help of Sherayzen Law Office. In this New Year 2022, we can help you!

Your professional US international tax help is but a phone call away from you! Contact us today to schedule a confidential consultation in this New Year 2022!

HAPPY NEW YEAR 2022 EVERYONE!!!

2022 Streamlined Domestic Offshore Procedures: Pros and Cons

As the year 2021 winds down, US taxpayers with undisclosed foreign assets and foreign income need to consider their 2022 offshore voluntary disclosure options. As it has been the case since the second half of 2014 (really the year 2018 when the 2014 OVDP was closed), I expect that Streamlined Domestic Offshore Procedures will continue to be the flagship voluntary disclosure option in 2022 for US taxpayers who reside in the United States. This is why noncompliant US taxpayers should understand well the main advantages and disadvantages of participating in the 2022 Streamlined Domestic Offshore Procedures.

2022 Streamlined Domestic Offshore Procedures: Background Information and Purpose

The IRS created the Streamlined Domestic Offshore Procedures (usually abbreviated as “SDOP”) on June 18, 2014, though the Certification forms became available only a few months later. Since its introduction, Streamlined Domestic Offshore Procedures quickly eclipsed the then-existing IRS Offshore Voluntary Disclosure Program (“OVDP”) and became the most popular offshore voluntary disclosure option for US taxpayers who reside in the United States. As we discuss the advantages of the 2022 SDOP, you will quickly understand the reason for this meteoric rise in popularity of the SDOP.

The main purpose of the Streamlined Domestic Offshore Procedures is to encourage non-willful US taxpayers to voluntarily resolve their prior noncompliance with US international tax reporting requirements in exchange for a reduced penalty, simplified disclosure procedure and a shorter disclosure period. Pretty much any non-willful US international tax noncompliance can be resolved through SDOP: foreign income, FBAR, Form 8938, Form 5471, Form 8621, Form 926, et cetera.

2022 Streamlined Domestic Offshore Procedures: Main Advantages

In exchange for a voluntary disclosure of their prior tax noncompliance through SDOP, US taxpayers escape income tax penalties and pay only a one-time Miscellaneous Offshore Penalty with respect to their prior failures to file the required US international information returns. It is important to emphasize that the Miscellaneous Offshore Penalty replaces not only FBAR penalties, but also penalties for noncompliance with respect to other US international information returns, such as Forms 5471, 8865, 926, et cetera. Depending on the specific circumstances of a case, the Miscellaneous Offshore Penalty is usually below the combined potential penalties normally associated with failure to file these forms. In other words, noncompliant taxpayers can greatly reduce their IRS noncompliance penalties through their participation in the Streamlined Domestic Offshore Procedures. This is one of the most important SDOP benefits.

Another advantage of the Streamlined Domestic Offshore Procedures is the limited procedural scope of this voluntary disclosure option. What I mean by this is that the taxpayers should only submit the forms covered by the general statute of limitations unless they choose (i.e. not required, actually choose to do so) to do otherwise. The taxpayers only need to file three (sometime even less) amended US tax returns and six FBARs (sometimes seven and sometimes less than six). This limited disclosure stands in stark contrast with other major voluntary disclosure initiatives, such as 2014 OVDP (which required filings for the past eight years).

Moreover, despite the limited scope of the SDOP filings, taxpayers who utilize the Streamlined Domestic Offshore Procedures are usually able to fully resolve their prior US international tax noncompliance issues even if these years are not included in the actual SDOP filings. This means that the participating taxpayers are able “wipe the slate clean” – i.e. to erase their prior US international tax noncompliance from the time when it began. I should warn, however, that this is not necessarily always the case; I have already encountered efforts from the IRS to open years for which amended tax returns were not submitted (there were specific circumstances, however, in all of these cases that resulted in this increased IRS interference).

The last major advantage of the Streamlined Domestic Offshore Procedures is that this option only requires to establish non-willfulness rather than reasonable cause. Non-willfulness is a much easier legal standard to satisfy (be careful, this is NOT an “easy standard”, just an easier one) than reasonable cause.

2022 Streamlined Domestic Offshore Procedures: Main Disadvantages

Usually, participation in the Streamlined Domestic Offshore Procedures is highly advantageous to noncompliance taxpayers. However, there are some disadvantages and shortcomings in this program. In this article, I will concentrate only on the three most important of them.

First, this voluntary disclosure option is open only to taxpayers who filed their US tax returns for prior years. This requirement is the exact opposite of the Streamlined Foreign Offshore Procedures (“SFOP”) which allows for the late filing of original returns.

The problem is that there is a large segment of taxpayers who were perfectly non-willful in their prior US international tax noncompliance, but they never filed their US tax returns either due to special life circumstances (such as death in the family, illness, unemployment, et cetera), they were negligent or they believed that they were not required to file them (especially in situations where all of their income comes from foreign sources). These taxpayers would be barred from participating in the SDOP.

Second, when they participate in the Streamlined Domestic Offshore Procedures, the taxpayers have the burden of proof to establish their non-willfulness with respect to their inability to timely report their foreign income as well as file FBARs and other US international information returns. Outside of the SDOP, the IRS has the burden of proof to establish willfulness; if it cannot carry this burden, then the taxpayer is automatically considered non-willful.

The problem is that most cases have positive and negative facts at the same time. This means that a lot of taxpayers are actually in the “gray” area between willfulness and non-willfulness. In many of these cases, the burden of proof may play a critical role in determining whether a taxpayer is eligible to participate in the Streamlined Domestic Offshore Procedures. By the way, this decision should be made only by an experienced international tax attorney who specializes in this area of law, such as Mr. Eugene Sherayzen of Sherayzen Law Office.

Finally, participation in the Streamlined Domestic Offshore Procedures does not provide a definitive closure to its participants. Unlike OVDP, SDOP does not offer a Closing Agreement without an audit; there may be a follow-up audit after the IRS processes your voluntary disclosure package This means that going through Streamlined Domestic Offshore Procedures may not be the end of your case; the IRS can actually audit you over the next three years. If this happens, the audit of your voluntary disclosure will focus not only on the correctness of your disclosure, but also on the truthfulness and correctness of your non-willfulness certification.

Contact Sherayzen Law Office for Professional Help With 2022 Streamlined Domestic Offshore Procedures

If you have undisclosed foreign accounts or any other foreign assets, contact Sherayzen Law Office for professional help with your offshore voluntary disclosure. We have successfully helped hundreds of US taxpayers around the world with their offshore voluntary disclosures, including Streamlined Domestic Offshore Procedures. We can also help you!

Contact Us Today to Schedule Your Confidential Consultation!

Pakistani Bank Accounts FBAR & FATCA Compliance | International Tax Lawyer

Over the past couple of years, I have seen a rise in the number of clients with Pakistani bank accounts. This increase is undoubtedly tied to the last year’s changes to Pakistani tax laws, which now require a disclosure of certain foreign assets for certain Pakistani tax residents. These new laws created for the very first time awareness among Pakistani taxpayers that foreign assets may be subject to a separate disclosure. For Pakistanis who are also US Persons, this awareness created further inquiries into their US tax reporting of their Pakistani bank accounts. In this article, I will discuss the two most important US tax reporting requirements that may be applicable to US taxpayers with Pakistani bank accounts – FBAR and FATCA Form 8938.

Pakistani Bank Accounts: Income-Reporting Requirements

Before we delve into our discussion of FBAR and FATCA, it is important to address the income tax reporting requirements concerning foreign accounts in general as well as Pakistani accounts in particular. If you are a tax resident of the United States, you are subject to the worldwide income reporting requirement and you must disclose all income generated by your Pakistani bank accounts on your personal US tax return.

This is an absolute rule with almost no exceptions. It does not matter whether you live outside of the United States or reside in the United States, whether this income is brought to the United States or if it continues to accumulate in your foreign bank accounts, or whether you already paid Pakistani taxes on this income or not. As long as you are a tax resident of the United States, you must comply with the worldwide income reporting requirement.

This requirement applies to all reportable income as determined by US tax rules. I want to emphasize this point: the worldwide income reporting rule requires US tax residents to disclose all of their foreign income deemed reportable under the US tax rules, not the Pakistani rules. Since there are huge differences between the Pakistani tax code and the US Internal Revenue Code, this is a potential tax trap for US taxpayers with Pakistani bank accounts.

Pakistani Bank Accounts: Asset Disclosure In General

As I mentioned above, under FATCA (Foreign Account Tax Compliance Act) as well as the BSA (Bank Secrecy Act of 1970), Pakistani bank accounts may be subject to multiple asset disclosure requirements. FinCEN Form 114 (FBAR) and FATCA Form 8938 are undoubtedly the most important among these requirements.

Pakistani Bank Accounts: FBAR

The most important requirement that applies to US taxpayers with Pakistani bank accounts is FinCEN Form 114, the Report of Foreign Bank and Financial Accounts, commonly known as “FBAR”. As long they meet the filing threshold (see below), US taxpayers are required to disclose all of their Pakistani bank accounts over which they have signatory authority or in which they have a financial interest (i.e. they own an account directly or indirectly, either individually or jointly).

FBAR is a unique information return. The anomaly begins with the fact that FBAR is not technically a tax form, but a BSA form which has been administered by the IRS since the year 2001. This is why FBAR is not filed together with the tax return, but has to be e-filed separately through BSA website.

Second, FBAR also has a very low filing threshold – just $10,000. Moreover, this threshold is determined by taking the highest balances during a calendar year of all of the taxpayer’s foreign accounts (even if these accounts are located in another country in addition to Pakistan) and adding them all up. Sometimes, this results in significant over-reporting of a person’s actual balances, which easily satisfies the reporting threshold.

Finally, FBAR has the most severe noncompliance penalties among all information returns concerning foreign asset disclosure. Its penalties range from non-willful penalties (i.e. potentially a situation where a person simply did not know about FBAR’s existence) to extremely high civil willful penalties and even criminal penalties. In other words, in certain circumstances, FBAR noncompliance may result in actual jail time.

Pakistani Bank Accounts: FATCA Form 8938

While a relative newcomer, FATCA Form 8938 quickly occupied a special place in US international tax compliance. It may appear that Form 8938 duplicates FBAR with respect to foreign bank account reporting, but there are very important differences between these forms. Let’s focus on the top five differences.

First of all, unlike FBAR, it is filed with a US tax return and forms part of the return. This means that the Form 8938 noncompliance may keep the statute of limitations open on the entire tax return indefinitely, potentially subjecting it to an IRS audit indefinitely.

Second, there are differences in how information concerning foreign accounts is being disclosed on FBAR and Form 8938. Form 8938 forces US taxpayers to disclose not only most of the information that is required to be reported on FBAR, but also such details as whether an account was opened or closed in the reporting year, whether it produced any income, how much income was produced, et cetera. This may give the IRS additional information necessary to determine if there was prior tax noncompliance with respect to these accounts.

Third, there are important substantive differences between these two forms with respect to what accounts have to be disclosed. For example, signatory authority accounts must be disclosed on FBAR, but Form 8938 has no such requirement. On the other hand, a bond certificate may not need to be reported on FBAR, but it must be disclosed on Form 8938. In general, Form 8938 is likely to apply to a wider range of Pakistani assets than FBAR; this is why it is often called the “catch-all” form.

Fourth, while FBAR penalties are extremely severe, Form 8938 sports its own arsenal of noncompliance penalties. While they are theoretically lower than FBAR penalties, the Form 8938 penalties may have an equivalent impact due to the fact that they have a much wider range. For example, Form 8938 noncompliance may lead to higher accuracy-related penalties with respect to income-tax noncompliance. A taxpayer’s ability to utilize foreign tax credit may also be impacted by the Form 8938 penalties.

Finally, unlike FBAR, Form 8938 comes with a third-party FATCA verification mechanism. Under FATCA, the IRS should receive foreign-account information not only from taxpayers who file Forms 8938, but also from their foreign financial institutions. This means that it is much easier for the IRS to identify Form 8938 noncompliance than that of FBAR. It also means that Form 8938 noncompliance may have a higher chance to be investigated and penalized by the IRS.

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

If you are a US Person who has undisclosed Pakistani bank accounts, contact Sherayzen Law Office for professional help as soon as possible. We have helped hundreds of US taxpayers around the globe to resolve their past FBAR and FATCA noncompliance, including with respect to financial accounts in Pakistan We can help you!

Contact Us Today to Schedule Your Confidential Consultation!