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South African Bank Accounts | International Tax Lawyer & Attorney Los Angeles California

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Due to various waves of emigration from South Africa since early 1990s, there is a significant number of South Africans who live in the United States. Many of these new US taxpayers continue to maintain their South African bank accounts even to this very day. These taxpayers need to be aware of the potential US tax compliance requirements which may apply to these South African bank accounts. This is exactly the purpose of this article – I intend to discuss the three most common US tax reporting requirements which may apply to South African bank accounts held by US persons. These requirements are: worldwide income reporting, FBAR and Form 8938.

South African Bank Accounts: US Tax Residents, US Persons and Specified Persons

Prior to our discussion of these reporting requirements, we need to identify the persons who must comply with them. It turns out that this task is not that easy, because different reporting requirements have a different definition of “filer”.

The most common and basic definition is the one that applies to the worldwide income reporting requirement – US tax residency. A US tax resident is a broad term that covers: US citizens, US permanent residents, persons who satisfy the Substantial Presence Test and individuals who declare themselves as US tax residents. This general definition of US tax residents is subject to 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.

FBAR defines its filers as “US Persons” and Form 8938 filers are “Specified Persons”. These concepts are fairly similar to US tax residency, but there are important differences. Both terms apply to US citizens, US permanent residents and persons who satisfy the Substantial Presence Test. The differences arise mostly with respect to persons who declare themselves as US tax residents. A common example are the treaty “tie-breaker” provisions, which foreign persons use to escape the Substantial Presence Test for US tax residency purposes.

Determination of your US tax reporting requirements is the primary task of your international tax lawyer. I strongly recommend that you do not even attempt to do this yourself or use an accountant for this purpose. It is simply too dangerous.

South African Bank Accounts: Worldwide Income Reporting

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

South African Bank Accounts: FBAR Reporting

FinCEN Form 114, the Report of Foreign Bank and Financial Accounts (“FBAR”), requires all US Persons to disclose their ownership interest in or signatory authority or any other authority over South African (and any other foreign country) bank and financial accounts if the aggregate highest balance of these accounts exceeds $10,000. I encourage you to read this article (click on the link) concerning the definition of a “US Person”. You can also search our firm’s website, sherayzenlaw.com, for the explanation of other parts of the required FBAR disclosure.

The definition of “account”, however, deserves special attention here. The FBAR definition of an account is substantially broader than what this word generally means 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, FBAR has a very complex and severe penalty system. The most feared penalties are criminal FBAR penalties with up to 10 years in jail (of course, these penalties come into effect in extreme situations). On the civil side, the most dreaded penalties are FBAR willful civil penalties which can easily exceed a person’s net worth. Even FBAR non-willful penalties can wreak a havoc in a person’s financial life.

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 South African 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).

South African Bank Accounts: FATCA Form 8938

Form 8938 is filed with a federal tax return and forms part of the tax return. This means that a failure to file Form 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 of filers: 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 income tax consequences (including disallowance of foreign tax credit and imposition of 40% 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 South African Bank Accounts

If you have South African bank accounts, contact Sherayzen Law Office for professional help with your US international tax compliance. We have helped hundreds of US taxpayers with their US international tax issues, and We can help You!

Contact Us Today to Schedule Your Confidential Consultation!

Mexican Bank Accounts & US Tax Obligations | International Tax Lawyers

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In this essay, I would like to discuss three main US tax obligations concerning Mexican bank accounts: the worldwide income reporting requirement, FBAR and Form 8938. I will only concentrate on the obligations concerning individuals, not business entities.

Mexican Bank Accounts and US Tax Residents

Before we delve into the discussion concerning US tax obligations, we should establish who is required to comply with these obligations. In other words, who needs to report their Mexican bank accounts to the IRS?

The answer to this question is clear: US tax residents. Only US tax residents must disclose their worldwide income and report their Mexican bank accounts on FBAR and Form 8938. Non-resident aliens who have never declared themselves as US tax residents do not need to comply with these requirements.

US tax residents include US citizens, US Permanent Residents, an individual who satisfied the Substantial Presence Test and an individual who properly declares himself a US tax resident. This is, of course, the general rule; important exceptions exist to this rule.

Mexican Bank Accounts: Worldwide Income Reporting Requirement

US tax residents must disclose their worldwide income on their US tax returns, including any income generated by Mexican bank accounts. In other words, all interest, dividend and royalty income produced by these accounts must be reported on Form 1040. Similarly, any capital gains from sales of investments held in Mexican bank accounts should also be disclosed on Form 1040. US taxpayers should pay special attention to the reporting of PFIC distributions and PFIC sales.

It is also possible that you may have to disclose passive income generated by your Mexican business entities through the operation of Subpart F rules and the GILTI regime, but this is a topic for a separate discussion.

Mexican Bank Accounts: FBAR

US tax residents must disclose on FBAR their ownership interest in or signatory authority or any other authority over Mexican bank and financial accounts if the aggregate highest balance of these accounts exceeds $10,000. FBAR is a common acronym for the Report of Foreign Bank and Financial Accounts, FinCEN Form 114. Even though this is a FinCEN Form, the IRS is charged with the enforcement of this form since 2001.

While seemingly simple, FBAR contains a number of traps for the unwary. One of the most common trap is the definition of “account”. For the FBAR purposes, “account” has a much broader definition than what people generally think of as an account. ‘Account” includes not just regular checking and savings accounts, but also investment accounts, life insurance policies with a cash surrender value, precious metals accounts, earth mineral accounts, et cetera. In fact, it is very likely that the IRS will find that an account exists whenever there is a custodial relationship between a financial institution and a US person’s foreign asset.

FBAR is a very dangerous form. Not only is the filing threshold very low, but there are huge penalties for FBAR noncompliance. For a willful violation, the penalties can go up to $100,000 (adjusted for inflation) per account per year or 50% of the highest value of the account per year, whichever is higher. In special circumstances, the IRS may refer FBAR noncompliance to the US Department of Justice for criminal prosecution. Even non-willful FBAR penalties may go up to $10,000 (again, adjusted for inflation) per account per year.

Mexican Bank Accounts: FATCA Form 8938

The final requirement that I wish to discuss today is the FATCA Form 8938. Born out of the Foreign Account Tax Compliance Act, Form 8938 occupies a unique role in US international tax compliance. On the one hand, it may result in the duplication of a taxpayer’s US tax disclosures (especially with respect to the accounts already disclosed on FBAR). On the other hand, however, Form 8938 is a “catch-all” form that fills the compliance gaps with respect to other US international tax forms.

For example, if a taxpayer holds a paper bond certificate, this asset would not be reported on FBAR, because it is not an account. For the Form 8938 purposes, however, the IRS would consider this certificate as part of assets that fall within the definition of the Specified Foreign Financial Assets (“SFFA”).

Hence, the scope of Form 8938 is very broad. It requires a specified person (this term is almost equivalent to a US tax resident) to disclose all SFFA as long as these SFFA, in the aggregate, exceed the applicable filing threshold.

SFFA includes a huge variety of foreign financial assets which are divided into two sub-categories: (a) foreign bank and financial accounts; and (b) “other” foreign financial assets. The definition of the “other” assets is impressive in its breadth: bonds, stocks, ownership interest in a closely-held business, beneficiary interest in a foreign trust, an interest rate swap, currency swap; basis swap; interest rate cap, interest rate floor, commodity swap; equity swap, equity index swap, credit default swap, or similar agreement with a foreign counterparty; an option or other derivative instrument with respect to any currency or commodity that is entered into with a foreign counterparty or issuer; and so on.

Form 8938 requires not only the reporting of SFFA, but also the income generated by the SFFA. In essence, the worldwide income reporting requirement is incorporated directly into the form.

The filing threshold for Form 8938 is more reasonable than that of FBAR for specified persons who reside in the United States, but it is still fairly low (especially for individuals). For example, if a taxpayer lives in the United States, he will need to file Form 8938 if he has SFFA of $50,000 ($100,000 for a married couple) or higher at the end of the year or $75,000 ($150,000 for a married couple) or higher during any time during the year. Specified persons who reside outside of the United States enjoy much higher thresholds.

Form 8938 has its own penalty system which contains some unique elements. First of all, a failure to comply with the Form 8938 requirements may allow the IRS to impose a $10,000 failure-to-file penalty which may go up to as high as $50,000 in certain circumstances. Second, Form 8938 noncompliance will lead to an imposition of much higher accuracy-related penalties on the income tax side – 40% of the additional tax liability. Third, Form 8938 noncompliance will limit the taxpayer’s ability to utilize the Foreign Tax Credit.

Finally, a failure to file Form 8938 will directly affect the Statute of Limitations of the entire tax return by extending the Statute to the period that ends only three years after the form is filed. In other words, Form 8938 penalties may allow the IRS to audit tax years which otherwise would normally be outside of the general three-year statute of limitations.

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

Sherayzen Law Office’s core area of practice is international tax compliance, including offshore voluntary disclosures – i.e. helping US taxpayers with foreign assets and foreign income to stay in US tax compliance and, if a taxpayer fails failed to comply with US tax laws in the past, bring him into compliance through an offshore voluntary disclosure. We can help You!

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.

Boston Foreign Trust Lawyer | International Tax Attorney

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Bostonians who are beneficiaries or owners of a foreign trust face a large number of very complex US tax requirements. Failure to properly identify and comply with these requirements may result in imposition of severe tax penalties. For this reason, these Bostonians need to secure the help of a Boston Foreign Trust Lawyer in order to assure timely and correct compliance with all of the US tax requirements associated with foreign trusts. How does one choose the right Boston Foreign Trust Lawyer? Who is considered to be a Boston Foreign Trust Lawyer? Answering these two questions is the purpose of this article.

Boston Foreign Trust Lawyer Definition: Legal Foreign Trust Services Provided in Boston, Massachusetts

In order to answer a question about who is considered to be a Boston Foreign Trust Lawyer, it is important to first explore the legal origin of the foreign trust laws for which the compliance is required. Since Form 3520, Form 3520-A, Form 8938 and all other related forms are administered by the US Department of Treasury, it becomes clear that Bostonian foreign trust owners and foreign trust beneficiaries are dealing with federal law, not just the local state or city laws.

This means that any international tax lawyer who is licensed to practice in any state of the United States can offer his foreign trust tax services in Massachusetts – i.e. the physical presence in Boston, Massachusetts, is not necessary.

This conclusion clarifies the definition of a Boston Foreign Trust Lawyer. First, the definition includes all of the international tax lawyers who reside in Boston. Second, the definition extends to all US international tax lawyers who offer their tax services with respect to foreign trust compliance who reside outside of Boston or even the State of Massachusetts. This means that your lawyer can physically reside in Minneapolis and still be considered as a Boston Foreign Trust Lawyer.

Boston Foreign Trust Lawyer Must Be an International Tax Lawyer

Throughout the last paragraph, I repeatedly referred to “international tax lawyers”. This is not accidental; on the contrary, it was intentional – a Boston Foreign Trust Lawyer should be an international tax lawyer whose main area of practice is US international tax law and who deeply knows various international tax provisions related to US foreign trust tax compliance.

Where does such a strict competence criteria come from? As it was explained above, US foreign trust compliance is part of a much larger US federal law. However, this is a very specific part of US federal law – US international tax law. We can see now why only an international tax lawyer can be a Boston Foreign Trust Lawyer.

Sherayzen Law Office Can Be Your Boston Foreign Trust Lawyer

Sherayzen Law Office is an international tax law firm that specializes US international tax compliance, including foreign trusts. Its legal team, headed by international tax lawyer Eugene Sherayzen, Esq., has extensive experience concerning all major relevant areas of US international tax law relevant to foreign trust compliance including Form 3520, Form 3520-A, foreign business ownership by a foreign trust, FBAR and FATCA compliance and other relevant requirements.

This is why, if you are looking for a Boston Foreign Trust Lawyer, contact Sherayzen Law Office today to schedule Your Confidential Consultation!

IRS OVDPs Comparison For the Years 2009-2016

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Between the years 2009-2016, the IRS created three different Offshore Voluntary Disclosure Programs (IRS OVDPs) for U.S. taxpayers to voluntarily disclose their undeclared foreign accounts: 2009 Offshore Voluntary Disclosure Program (2009 OVDP), 2011 Offshore Voluntary Disclosure Initiative (2011 OVDI), and 2012 Offshore Voluntary Disclosure Program (2012 OVDP). 2012 OVDP was subsequently profoundly modified in the year 2014 in what, in essence, became the new 2014 Offshore Voluntary Disclosure Program (2014 OVDP). In this article, I will do a comparative analysis of the different IRS OVDPs based on five factors: application period, disclosure period, principal miscellaneous offshore penalty, reduced offshore penalty options and other penalties.

Application Period of the IRS OVDPs

Application period means the period of time during which the IRS must receive the application from the taxpayer in order for the taxpayer to be considered for acceptance into a voluntary disclosure program.

All of the IRS OVDPs until 2012 had a clearly defined application period. The 2009 OVDP application period ran from March 23, 2009 through October 15, 2009. The 2011 OVDI application period was from February 8, 2011 to September 9, 2011 (actually, the original period was supposed to end on August 30, 2011, but the IRS extended the deadline by 9 days during to an East Coast hurricane).

Since January 9, 2012, however, the 2012 OVDP and its 2014 version have operated without a set closing date. Instead, the IRS has reserved the right to end the 2014 OVDP at any time. While this is always a possibility, it is not likely that the IRS will make such a drastic decision for various administrative reasons as well as due to the fact that OVDP is very profitable.

Disclosure Period of the IRS OVDPs

The disclosure period means the number of tax years or specific tax years which are covered by (i.e. included in) the voluntary disclosure. The disclosure period determines the years for which FBARs and amended tax returns need to be submitted as well as the years involved in the calculation of the Offshore Penalty.

The disclosure period varied greatly among the IRS OVDPs. The 2009 OVDP disclosure period included the six-year period between 2003 and 2008 (which is equivalent to the extended statute of limitations). The 2011 OVDI expanded the disclosure period to eight years to cover the years 2003-2010.

The 2012 OVDP differed from the prior programs, because the program did not have a fixed closing date and, hence, no fixed voluntary disclosure years. Instead, the disclosure period for the 2012 OVDP and its 2014 version apply to the most recent eight years for which the due date has already passed – i.e. the last closed tax year plus the previous seven tax years.

This flexibility on the part of the 2012 and 2014 IRS OVDPs may allow for a certain degree of strategy planning where a decision has to be made with respect to which is the eighth year that is more beneficial to be included. The OVDP application is then submitted in accordance with this strategy.

Principal Miscellaneous Offshore Penalty (the Default Penalty of IRS OVDPs)

All of the IRS OVDPs contain the default or “principle” Miscellaneous Offshore Penalty (the “OVDP Penalty”). The OVDP Penalty is calculated based on the assets subject to penalty (so-called “OVDP penalty base”) as a percentage of these assets.

This percentage of the OVDP Penalty has been steadily going up with each program. The 2009 OVDP Penalty rate was 20%; it grew to 25% for 2011 OVDI and 27.5% to 2012 OVDP.

The 2014 version of the 2012 OVDP introduced a dual Principal OVDP Penalty. It kept the 27.5% penalty rate as a default rate, but it introduced a 50% penalty rate for taxpayers with an account in a foreign financial institution (“FFI”) that had or has been publicly identified by the DOJ as being under investigation or as an entity cooperating with a DOJ investigation. The same 50% penalty rate also applied to facilitators who helped the taxpayer establish or maintain an offshore arrangement.

All such FFIs and facilitators are listed separately by the IRS on the OVDP website.

Reduced Offshore Penalty Options under IRS OVDPs

In addition to the Principal OVDP Penalty, almost all IRS OVDPs (except the 2014 OVDP) contained various Reduced OVDP Penalty options.

Already the 2009 OVDP introduced a reduction to a 5% penalty for so-called “passive account holders”. However, the 2009 OVDP’s definition of the 5% penalty category was fairly primitive and this was the only option for a reduced penalty.

The 2011 OVDI was really the program that perfected the concept of the Reduced OVDP Penalty. It contained and expanded the 5% penalty option defining the “passive account holders” as the taxpayers who: (a) did not open the account or cause the account to be opened, (b) exercised minimal, infrequent contact with respect to the account, (c) did not withdraw more than $1,000 from the account in any year covered by the voluntary disclosure, except in the case of a withdrawal closing the account and transferring the funds to an account in the U.S., and (d) could establish that all applicable U.S. taxes had been paid on the funds deposited to the account (i.e., where only account earnings escaped U.S. taxation).

The 5% penalty option also applied to US citizens who resided overseas and did not know that they were US citizens until the 2011 OVDI.

Furthermore, the 2011 OVDI introduced a new Reduced OVDP Penalty of 12.5% available to taxpayers with the highest aggregate account balance (which was really expanded to more than just bank accounts and included various assets) in each of the eight years covered by the OVDI less than $75,000.

The 2012 OVDP was the last program so far to adopt the Reduced OVDP Penalty structure. It borrowed it completely unchanged from the 2011 OVDI with both 5% and 12.5% options available.

In 2014, the OVDP was modified to remove all Reduced OVDP Penalty options. The reason for such a drastic change was the introduction of the Streamlined Compliance Options (both SDOP and SFOP) which operated under the reduced (in the case of SFOP, reduced to zero) penalty structure for non-willful taxpayers.

Indeed, the non-willful taxpayers won more than anyone else from the changes introduced by 2014 OVDP. However, the willful taxpayers with small bank accounts were the biggest losers from these changes. The 2014 OVDP also marked the rise of the “willfulness vs. non-willfulness” concept to the dominant position in the world of offshore voluntary disclosures.

Other Penalties under the IRS OVDPs

With respect to other penalties (such as failure to file, failure to pay and accuracy related penalties), all of the IRS OVDPs were similar in their structure.

Contact Sherayzen Law Office for Help with Your Voluntary Disclosure of Offshore Accounts and Other Foreign Assets

If you have undisclosed accounts or other assets overseas, you are in grave danger of an IRS discovery and the imposition of draconian noncompliance penalties. This is why you need professional help to evaluate your voluntary disclosure options, including the 2014 OVDP and the Streamlined Compliance Procedures.

The highly experienced team of Sherayzen Law Office Ltd. can help you with your entire voluntary disclosure, including the initial evaluation of your case and your penalty exposure, identification of your voluntary disclosure options, preparation of the chosen voluntary disclosure option including the preparation of all legal and tax documents, and the final negotiations with the IRS.

We have helped hundreds of US taxpayers worldwide and we can help you. Contact Us Today to Schedule Your Confidential Consultation!