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Personal Services Income Sourcing | International Tax Lawyer & Attorney

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!

Streamlined Submission Audit | SDOP Audit Tax Lawyer

An increasing number of submissions under the Streamlined Domestic Offshore Procedures are subject to an IRS audit (hereinafter “Streamlined Submission Audit”). In this article, I will explain what a Streamlined Submission Audit is and what a taxpayer should expect during the Audit.

Streamlined Submission Audit: Background Information on Streamlined Domestic Offshore Procedures

Streamlined Domestic Offshore Procedures (“SDOP”) is a voluntary disclosure option offered by the IRS since June of 2014 to noncompliant US taxpayers to settle their past tax noncompliance concerning foreign assets and foreign income at a reduced penalty rate. In order to participate in SDOP, a taxpayer must meet three main eligibility requirements – US tax residency, non-willfulness of prior noncompliance and absence of IRS examination.

SDOP is likely to be the most convenient and the least expensive voluntary disclosure option for taxpayers whose prior tax noncompliance was non-willful. SDOP is very popular; in fact, it has quickly surpassed the traditional IRS Offshore Voluntary Disclosure Program (“OVDP”) in the number of participants with over 18,000 submissions just in 2016.

The Origin of the Streamlined Submission Audit

Streamlined Submission Audit originates within the very nature of SDOP. Unlike OVDP, SDOP voluntary disclosures are not immediately subject to a comprehensive IRS review of tax return items (although, there is a review process which may lead to a Streamlined Submission Audit, but it is not as comprehensive as that of the OVDP prior to the Audit). Hence, the IRS reserved the right to audit any SDOP submission at any point within three years after the submission of the original SDOP voluntary disclosure package.

Streamlined Submission Audit: Process

The exact process of a Streamlined Submission Audit varies from case to case, but all of such audits have a similar format: initial letter with request for a meeting, meeting with an interview, review of submitted documents and (very likely) additional requests for information, interview of other involved individuals (such as a tax preparer) and, finally, the results of an audit are provided by the IRS to taxpayer(s) and/or the representative indicated on Form 2848.

A Streamlined Submission Audit commences in a way very similar to a regular IRS audit: a letter is sent to taxpayers and (if there is a Form 2848 on file) to their representative. The letter explains that the IRS decided to examine certain tax returns (usually all three years of amended tax returns) and asks for submission of all documentation and work papers that were used to prepare the amended returns. Additionally, the letter requests that the taxpayers’ representative (or taxpayers if not represented) contact the IRS agent in charge of the audit to schedule the initial meeting.

During the initial meeting, the IRS agent will review (at least to make sure he or she has what is needed) the documents supplied. In larger cases, the IRS will need a lot more time to later examine all of the submitted documents and see if additional documents are needed. If a case is very small, it is possible for an agent to cover everything in the first meeting, but it is very rare.

Also, during an initial meeting, there is going to be an interview of the taxpayer(s). I will discuss the interview separately in a different article.

Once the review of the initial package of documents is concluded, it is very likely that the IRS agent will have questions and additional document requests. The questions may be answered by the taxpayers’ attorney during a separate meeting with the agent; smaller questions may be settled over the phone.

If additional documentation is needed, an IRS agent will send out an additional request to taxpayers and/or their attorney. The answer will most likely need to be provided in writing.

Once the IRS completes its interview of other involved parties and reviews all evidence, it will make its decision and submit the results of the audit to the taxpayers and their tax attorney in writing. The taxpayers’ attorney will need to build a strategy with respect to the taxpayers’ response to the audit results depending on whether the taxpayers agree or disagree with the results of the audit.

Differences Between Streamlined Submission Audit and Regular IRS Audit

At first, it may seem that there are no big differences between a regular IRS audit and a Streamlined Submission Audit. While procedurally this may be correct, substantively it is not.

The greatest difference between the two types of IRS audits is the subject-matter involved. While a regular IRS audit will concentrate on the tax returns only, a Streamlined Submission Audit will involve everything: amended tax returns, FBARs, other information returns and, most importantly, Non-Willfulness Certification. In other words, a Streamlined Submission Audit will focus not only on whether the tax forms are correct, but also on whether the taxpayer was actually non-willful with respect to his prior tax noncompliance.

This difference in the subject-matter examination will carry over to other aspects of a Streamlined Submission Audit: the taxpayers’ interview will focus on their non-willfulness arguments, third-party interviews of original tax preparers become a regular feature (this is very different from a regular IRS audit when tax preparers may never be interviewed), and the final IRS results must necessarily make a decision on whether to challenge the taxpayers’ non-willfulness arguments.

Failure by a taxpayer to sustain his non-willfulness arguments may result in a disaster during a Streamlined Submission Audit with a potential referral to the Tax Division of the US Department of Justice for a criminal investigation.

This is why it is so important for a taxpayer subject to a Streamlined Submission Audit to retain the services of an experienced international tax lawyer to handle the audit professionally.

Contact Sherayzen Law Office for Professional Help With A Streamlined Submission Audit

If your submission under the Streamlined Domestic Offshore Procedures is being audited by the IRS, you need to contact Sherayzen Law Office as soon as possible. Our international tax law firm is highly experienced in offshore voluntary disclosures (including OVDP, SDOP, SFOP, “noisy disclosures”, “quiet disclosures”, et cetera) and the IRS audits of a voluntary disclosure.
In fact, we have handled voluntary disclosure cases at every stage of the process of a Streamlined Submission Audit described above. We can Help You!

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UK Tax Haven May Be the Result of Brexit | US International Tax Attorney

In her January 17, 2017 speech, the British Prime Minister Theresa May confirmed that the United Kingdom (“UK”) will leave the European Union (“EU”) and seek a free trade deal with the EU. The Prime Minister also appears to have made the threat of creating a UK Tax Haven if the deal is not struck.

UK Tax Haven: UK is Leaving the EU

Since the ground-breaking referendum vote to leave the EU in June of 2016, many analysts have predicted that the UK will not leave and seek some sort of a partial participation in the EU.

On January 17, 2017, the Prime Minister’s response to these doubters was clear: “No, the United Kingdom is leaving the European Union.” She also stated: “We do not seek to hold on to bits of membership as we leave.”

She also outlined the procedural roadmap to how the UK will leave the EU. In particular, the Prime Minister stated that the government would bring the final withdrawal agreement to the Parliament for a vote before the Agreement comes into force. Furthermore, the UK government will repeal the European Communities Act. Surprisingly, the Prime Minister further said that the existing body of the EU law will be converted into British law.

UK Tax Haven: The Freedom to Set Competitive Tax Rates

The Prime Minister’s speech also contained something of great interest to international tax lawyers. She stated that, once the UK leaves the EU, it will “have the freedom to set the competitive tax rates and embrace the policies that would attract the world’s best companies and biggest investors to Britain.”

Not surprisingly, the reporters, the opposition and some foreign leaders had interpreted this statement as a threat of converting the UK into a major tax haven for the European companies. It appears that the UK government plans to materializes this threat of the UK tax haven only if the UK is excluded from the EU single economic market as a result of a punitive EU action.

This threat of creating a major UK tax haven echos a similar threat made by the Chancellor of the Exchequer Philip Hammond. In his interview with a German newspaper “Welt am Sonntag”, Mr. Hammond stated that, if the UK is excluded from the EU market, the government will try to contain the damage of such a move by switching away from the European model of taxation.

Is the UK Tax Haven Likely to Become a Reality?

So, is the UK Tax Haven a certainty at this point? Probably not. I view this threat more as a negotiation tool rather than the certainty of enacting a certain plan. The UK economy is one of the most important and complex economies in the world; it is very unlikely that the British government will be even able to pursue a course of action of turning the UK into a full tax haven.

On the other hand, it is obvious that the British government will take advantage of the situation and seek to improve the country’s competitiveness through enaction of certain tax strategies. There is a high likelihood that the corporate tax rate may be lowered to a level where it is better than in most other EU countries, but cannot yet be considered as that of a tax haven.

Furthermore, it is possible that the UK tax haven will materialize only with respect to certain classes of taxpayers from certain countries. For example, the United States can be readily considered as a tax shelter for foreign individuals. The UK may be tempted to adopt a similar approach.

Finally, it is important to remember that the UK is already an attractive country from tax perspective. Its corporate rate is not high (it can even be called relatively low), there is no dividend withholding tax, favorable rules for expats, wide treaty network, and so on. Furthermore, the UK did not enact certain beneficial ownership transparency rules that other European countries already have in place.

Most likely, the UK just wishes to keep its options open for now and there is not going to be a UK tax haven in a traditional sense of this word, despite its threats to do so. International tax lawyers, however, should closely follow the UK developments for any tax opportunities that may become available to their clients.

HSBC FATCA Letter

In a previous article, I explained why FATCA Letters mark a critical event for the voluntary disclosure process of a US taxpayer with undisclosed foreign accounts. While I mentioned that the content of a FATCA letter is usually more or less the same, I emphasized that the actual format of a FATCA letter may differ dramatically from bank to bank. With this article, I am starting a series of article devoted to various FATCA letter formats adopted by various banks around the world. Today, I wish to concentrate on the HSBC FATCA Letter.

HSBC FATCA Letter: General Format

HSBC FATCA Letter follows what I call a “reference format”. Unlike the “comprehensive format” usually followed by FATCA letters issued by Swiss banks, the reference format of the HSBC FATCA Letter means that the HSBC FATCA Letter is fairly concise but it references (hence the name) various forms that need to be completed by the HSBC customers.

Basically, this means that the HSBC FATCA Letter itself does not ask any questions, but it acts as kind of a checklist for various supplementary forms that need to be completed by the account holder in order to provide the bank with the information necessary for its own FATCA compliance. Failure to provide such information would result in the bank classifying the US taxpayer as a “recalcitrant account holder”.

An interesting aspect about the format that the HSBC FATCA Letter follows is that some (but not all) of the supplementary forms were developed and modified by the bank for the sole purpose of FATCA compliance. Thus, there are two types of supplementary forms that are referenced by HSBC FATCA letter: US standard forms (W-8, W-9, et cetera) and proprietary forms developed by the HSBC itself (SW, S1, S3, et cetera).

HSBC FATCA Letter: US Supplementary Forms

Similar to every FATCA letter issued by other banks around the world, HSBC FATCA letter references the main relevant forms developed by the US government – Form W8 (usually, W8BEN) and Form W9. Form W9 is of course the critical form that must be provided to a foreign bank in order to verify the US taxpayer’s social security number. Form W8, on the other hand, provides the critical information for the foreign bank for the purpose of tax withholding under relevant tax treaties. It also allows the bank to indirectly confirm the account holder’s non-US tax status.

HSBC FATCA Letter: Proprietary Forms Developed by HSBC

HSBC FATCA letter references a variety of forms developed or modified by HSBC according to FATCA requirements. The most common documents are S1, S2 and S3. Form S1 is basically asks for a government-issued ID establishing non-US status. Form S2 is a copy of Individual Certification of Loss of Nationality (again for establishing the Non-US Citizenship status) which is very relevant in the limited 9(though, rapidly growing) situation where a US taxpayer gives up his US citizenship.

Form S3 is one of the most important forms referenced by the HSBC FATCA letter. Officially titled as “Explanation of a US address and/or US Phone Number”, Form S-1 requires a fairly intrusive explanation of whether the account holder has US phone number and US telephone address, and why. What is very interesting about Form S3 issued by HSBC is that it requires the taxpayer to make a detailed determination whether the substantial presence test has been met. It even contains a fairly detailed explanation of the test itself.

Contact Sherayzen Law Office for Help with HSBC FATCA Letter

If you have undisclosed bank accounts with HSBC (whether Hong Kong, India, or any other country except the United States itself), you should immediately begin the exploration of your voluntary disclosure options before HSBC discloses your account to the IRS.

This is why you will need the professional help of Mr. Eugene Sherayzen, an experienced international tax lawyer who already has helped hundreds of US taxpayers around the world with respect to their US tax compliance. We can also help you!

Contact US to Schedule Your Confidential Consultation Now!

Foreign Tax Credit for Individuals: Who Can Take It?

If you paid or accrued foreign taxes to a foreign country on foreign source income and are subject to U.S. tax on the same income, you may be able to take these qualified foreign taxes as a tax credit to offset (in part or in full) your U.S. tax liability. An important questions arises for foreign tax credit attorneys: who is eligible to claim a foreign tax credit on his individual U.S. tax returns.

The first and most obvious category consists of U.S. citizens. If you are a U.S. citizen, you would usually be entitled to take a credit for foreign taxes that you paid or accrued. Part of the reason for this eligibility is the fact that, as a U.S. citizen, you are taxed by the U.S. government on your worldwide income irrespective of where you live.

Resident aliens constitute the second eligible category to claim foreign tax credit. Same reasoning applies as to U.S. citizens.

In most cases, nonresident aliens would not be able to take a foreign tax credit. However, there are important exceptions. The two major exceptions are: Puerto Rico residency or ECI (Effectively Connected Income).

The latter exception requires a bit more explanation. If you are a non-resident alien who pays or accrues tax to a foreign country or a U.S. possession on income from foreign sources that is effectively connected (here where the “ECI” term comes into play) with a trade or business in the United States, then you may be able to claim foreign tax credit on your individual U.S. tax return. ECI is a term of art and whether your foreign income is effectively connected with a trade or business in the United States is a complex legal question that should be reviewed by an international tax attorney.

Note that, where a non-resident alien pays foreign taxes on income from U.S. sources only because he is a citizen or resident of that foreign country, then this tax cannot be used in figuring the amount of the foreign tax credit.

Contact Sherayzen Law Office for Professional Help with Your Foreign Tax Credit

Claiming a foreign tax credit can be a very complex tax question and you need the right professionals to help you. Contact Sherayzen Law Office for experienced professional help with your foreign tax credit issues.