Posts

Closer Connection Exception | International Tax Lawyer & Attorney

/in , , /by

The Closer Connection Exception is a very important provision in US international tax law, because it provides a potential way for individuals who meet the Substantial Presence Test to still be treated as nonresident aliens for US income tax purposes. This article explores the Closer Connection Exception, its requirements and its implications for US and foreign taxpayers.

Understanding the Closer Connection Exception

The Closer Connection Exception is found in Internal Revenue Code (IRC) §7701(b)(3)(B) and is further elaborated in Treasury Regulation §301.7701(b)-2. This exception allows an individual who would otherwise be considered a US tax resident under the Substantial Presence Test to be treated as a nonresident alien for income tax purposes if he can demonstrate a “closer connection” to a foreign country.

Key Requirements for the Closer Connection Exception

IRC § 7701(b)(3)(B) and Treas. Reg. § 301.7701(b)-2(a) lay out the Closer Connection Exception eligibility criteria that an an individual must meet:

1.The individual must be present in the United States for fewer than 183 days in the current calendar year;

2.The individual must maintain a tax home in a foreign country during the year;

3.The individual must have a closer connection to that foreign country than to the United States; and

4. An individual must be an eligible individual.

Let’s explore each of these three requirements in detail.

Closer Connection Exception: The 183-Day Rule

The first requirement of the Closer Connection Exception is fairly straightforward: the individual must be present in the United States for fewer than 183 days in the current calendar year. This is a hard limit. Even one additional day of presence will disqualify an individual from claiming this exception.

It is important to emphasize that this 183-day threshold is different from the count of days used in the Substantial Presence Test, which includes a lookback period. For the Closer Connection Exception, only days of physical presence in the United States in the current year are considered. Treas. Reg. §301.7701(b)-2(a)(1).

Closer Connection Exception: Foreign Tax Home Requirement

The second requirement for the Closer Connection Exception is that the individual must maintain a tax home in a foreign country during the year.  IRC §911(d)(3) defines the concept of “tax home” as an individual’s principal place of business.  “If the individual has no regular or principal place of business because of the nature of the business, or because the individual is not engaged in carrying on any trade or business within the meaning of section 162(a), then the individual’s tax home is the individual’s regular place of abode in a real and substantial sense.” Treas. Reg. §301.7701(b)-2(c)(1).  This is obviously a very fact-dependent definition of tax home, which requires exploration of all relevant circumstances (such as the location of the individual’s permanent home, family and even personal belongings).

The individual’s foreign tax home must be in existence for the entire current year. It must also be located in the same foreign country for which the individual is claiming to have the closer connection. Treas. Reg. §301.7701(b)-2(c)(2).

Closer Connection Exception: Closer Connection to Foreign Country

The third and often most complex requirement of the Closer Connection Exception is demonstrating a closer connection to a foreign country than to the United States.  Treasury Regulations state that this requires establishing “that the individual has maintained more significant contacts with the foreign country than with the United States”. Treas. Reg. §301.7701(b)-2(d).  

This analysis of course requires a detailed exploration of all relevant facts and circumstances. Treas. Reg. § 301.7701(b)-2(d)(1) provide the following non-exclusive list of key factors that one must consider in determining whether a closer connection to a foreign country exists:

1.The location of the individual’s permanent home;

2.The location of the individual’s family;

3.The location of personal belongings;

4.The location of social, political, cultural, or religious organizations with which the individual has a relationship;

5.The location where the individual conducts routine personal banking activities;

6.The location where the individual conducts business activities;

7.The location of the jurisdiction in which the individual holds a driver’s license;

8.The location of the jurisdiction in which the individual votes;

9.The country of residence designated by the individual on his forms and documents; and

10. The types of official forms and documents filed by the individual, such as Form 1078 (Certificate of Alien Claiming Residence in the United States), Form W-8 (Certificate of Foreign Status) or Form W-9 (Payer’s Request for Taxpayer ldentification Number).

Regarding the first factor, individual’s permanent home, it does not matter whether a permanent home is a house, an apartment or a furnished room. It also does not matter whether the individual owns or rents his home. “It is material, however, that the dwelling be available at all times, continuously, and not solely for stays of short duration.” Treas. Reg. §301.7701(b)-2(d)(1).

Closer Connection Exception: Multiple Foreign Countries

A question arises in this context: what if an individual has connections not to just one, but  two foreign countries? Can an individual have a tax home in two or more countries?

Generally, an individual can have a closer connection to only one foreign country. However, it is possible to have a closer connection to two foreign countries in a single year if the individual moved their tax home during the year. In such cases, the individual can have a closer connection to each country for the part of the year they maintained a tax home in that country.

Treas. Reg. §301.7701(b)-2(e) lays out a detailed legal test in this case of multiple foreign country connections.  In order for an individual to be able to claim the Closer Connection Exception in cases of close contacts with more than one foreign country, this individual must satisfy the following conditions:

(1) The individual maintains a tax home beginning on the first day of the current year in one foreign country;

(2) The individual changes his or her tax home during the current year to a second foreign country;

(3) The individual continues to maintain his or her tax home in the second foreign country for the remainder of the current year;

(4) The individual has a closer connection to each foreign country than to the United States for the period during which the individual maintains a tax home in that foreign country; and

(5) The individual is subject to taxation as a resident pursuant to the internal laws of either foreign country for the entire year or subject to taxation as a resident in both foreign countries for the period during which the individual maintains a tax home in each foreign country.

Closer Connection Exception: Eligible Individual

As stated above, the final condition for the Exception is that an individual must be an eligible individual. Ineligible individuals include: (a) individuals who have applied for status as a lawful permanent resident of the United States (i.e., applied for a green card), and (b) individuals who have an application pending for adjustment of status. IRC §7701(b)(3)(C). 

Treas. Reg. §301.7701(b)-2(f) specifically sets forth the following list of actions which would make an individual ineligible to claim the Closer Connection Exception:

“Affirmative steps to change status to that of a permanent resident include, but are not limited to, the following—

(1) The filing of Immigration and Naturalization Form I-508 (Waiver of Immunities) by the alien;

(2) The filing of Immigration and Naturalization Form I-485 (Application for Status as Permanent Resident) by the alien;

(3) The filing of Immigration and Naturalization Form I-130 (Petition for Alien Relative) on behalf of the alien;

(4) The filing of Immigration and Naturalization Form I-140 (Petition for Prospective Immigrant Employee) on behalf of the alien;

(5) The filing of Department of Labor Form ETA-750 (Application for Alien Employment Certification) on behalf of the alien; or

(6) The filing of Department of State Form OF-230 (Application for Immigrant Visa and Alien Registration) by the alien.”

Closer Connection Exception: Form 8840

To claim the Closer Connection Exception, eligible individuals must file Form 8840, Closer Connection Exception Statement for Aliens, with the IRS. This form must be filed by the due date of the individual’s nonresident alien income tax return (Form 1040-NR), including extensions. Form 8840 requires detailed information about the individual’s presence in the United States, tax home, and factors demonstrating a closer connection to a foreign country. Failure to timely file this form may result in the individual being unable to claim the exception. Treas. Reg. §301.7701(b)-8(c).

Closer Connection Exception: Interaction with Tax Treaties

It’s important to note that the Closer Connection Exception is separate from any residency determinations under tax treaties. An individual who does not qualify for the Closer Connection Exception may still be able to claim nonresident status under a tax treaty’s tie-breaker rules. Conversely, qualifying for the Closer Connection Exception may eliminate the need to rely on treaty provisions. See Treas. Reg. §301.7701(b)-7.

Closer Connection Exception: Implications for Other Reporting Requirements

While the Closer Connection Exception can significantly alter an individual’s US income tax obligations, it is very important to understand that it may not exempt the individual from all US reporting requirements, particularly information returns such as FBAR and Form 8938.

Contact Sherayzen Law Office for Professional Help With US International Tax Law

US international tax law is extremely complex.  The Closer Connection Exception and its potential impact on an individual’s tax status is just an example of this complexity. This is why, if you have assets in or income from foreign countries, you need to seek the professional help of Sherayzen Law Office.  We are a leading US international tax law firm which offers comprehensive support in US international tax compliance (including IRS offshore voluntary disclosures) and US international tax planning. Our deep understanding of and extensive experienced in US international tax law allows us to proffer a professional advice tailored to your specific circumstances.

Contact Us Today to Schedule Your Confidential Consultation!

Digital Currency Final Regulations: Broad Overview | Cryptocurrency Tax Attorney

/in , /by

On June 28, 2024, the U.S. Department of the Treasury and the Internal Revenue Service (IRS) have issued final regulations requiring brokers to report sales and exchanges of digital assets, including cryptocurrency. These digital currency final regulations aim to improve tax compliance and provide taxpayers with necessary information for accurate tax reporting.

Digital Currency Final Regulations: Scope and Implementation

The new regulations will apply to transactions beginning in calendar year 2025, with reports to be filed on the new Form 1099-DA. These rules primarily affect custodial brokers who take possession of digital assets being sold by their customers, including:

  • Operators of custodial digital asset trading platforms
  • Certain digital asset hosted wallet providers
  • Digital asset kiosks
  • Certain processors of digital asset payments (PDAPs)

Notably, the regulations do not currently include reporting requirements for non-custodial or decentralized brokers. The Treasury and IRS plan to address these entities in a separate set of regulations in the future.

Digital Currency Final Regulations: Key Provisions

There are six key areas addressed in the final regulations:

  1. Basis, Gain, and Loss Determination: The regulations provide rules for taxpayers to determine their basis, gain, and loss from digital asset transactions. This is very important, because we will now have a more or less clear set of rules to follow.
  2. Backup Withholding: New rules for backup withholding on certain digital asset transactions are included. This is a critical issue, especially in the context of US international tax law.
  3. Real Estate Transactions: Real estate professionals must report the fair market value of digital assets used in real estate transactions with closing dates on or after January 1, 2026. Another key provision aimed to improve tax compliance in this area.
  4. Aggregate Reporting: An optional aggregate reporting method is provided for certain sales of stablecoins and non-fungible tokens (NFTs) that exceed specified thresholds.
  5. PDAP Transactions: Reporting is required on a transactional basis only if customer sales exceed a de minimis threshold.
  6. Basis Reporting: Certain brokers must report basis for transactions occurring on or after January 1, 2026. This is a very good provision for US taxpayers, because cost-basis determination is often very cumbersome when it comes to digital asset gain reporting.

Digital Currency Final Regulations: Transitional Relief and Exceptions

Obviously, the new reporting requirements is an increased compliance burden on affected custodial brokers. In order to ease this burden, the IRS is providing the following transitional and penalty relief:

  1. Notice 2024-56 offers general transitional relief from reporting penalties and backup withholding for brokers making good faith efforts to comply during calendar year 2025.
    Limited relief from backup withholding is provided for certain digital asset sales in 2026 for brokers using the IRS TIN-matching system.
  2. Notice 2024-57 temporarily exempts six types of transactions from reporting requirements, including wrapping and unwrapping transactions, liquidity provider transactions and staking transactions, among others.
  3. Revenue Procedure 2024-28 allows taxpayers to use reasonable allocation methods for unused basis across wallets or accounts holding the same digital asset.

Digital Currency Final Regulations: IRS Rationale

IRS Commissioner Danny Werfel emphasized the importance of these regulations in addressing potential noncompliance in digital currency transactions. The new reporting requirements are expected to improve detection of noncompliance and provide taxpayers with information to simplify their reporting process.

Werfel also highlighted the need for adequate IRS funding to keep pace with the evolving complexity of the tax system, particularly in relation to new digital assets.

Digital Currency Final Regulations: Impact

These Digital Currency Final Regulations represent a major development in the taxation and reporting of digital asset transactions, in particular with respect to integration of digital assets into the existing tax framework. As the digital asset landscape continues to evolve, further refinements and additional regulations are likely to follow, particularly regarding non-custodial and decentralized brokers. While the regulations provide clarity for many custodial brokers and taxpayers, the full impact of these regulations will become clearer as implementation begins in 2025 and beyond.

Contact Sherayzen Law Office for Professional Tax Help With US International Tax Aspects of Digital Currencies

Given the complex and evolving nature of digital currency regulations, it is crucial to seek expert guidance. Sherayzen Law Office specializes in US international tax law and can provide invaluable assistance in navigating the intricate landscape of digital currency taxation across borders. Contact us today to schedule your confidential consultation!

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

/in , /by

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!

IMF Wants “Modern” Croatian Real Estate Tax | Tax Lawyer News

/0 Comments/in , /by

On January 16, 2018, the International Monetary Fund (“IMF”) released its 2017 Article IV consultation notes with respect to Croatia. Among its recommendations is the introduction of a modern Croatian Real Estate Tax.

Croatian Real Estate Tax: IMF assessment of Croatian Economy

The IMF began on the positive note stating that, in 2017, Croatia continued its third year of positive economic growth, mostly supported by tourism, private consumption, trade partner growth and improved confidence. The IMF also noted that the fiscal consolidation was progressing at a much faster pace than originally anticipated with Croatia leaving the European Union’s Excessive Deficit Procedure in June of 2017. The international organization made other positive comments, particularly stressing that Croatia was overcoming its Agrokor crisis.

Then, the IMF turned increasingly negative. It first noted that, while the balance risks has improved, it was not satisfied with the high level of Croatian public and external debt levels. Then, it stated that the full impact of the Agrokor restructuring is not yet known. The IMF was also unhappy about the pace of structural reforms since 2013 (when Croatia became a member of the EU), further stating that Croatia’s GDP per capita stood at about 60% of the EU average and Croatian business environment remained less favorable than that of its peers.

Finally, the IMF expressed its concerns over the fact that the output did not recover from its pre-recessing level and stated that, in the medium-term, the Croatia’s economic growth is expected to decelerate. Hence, the IMF emphasized that Croatia needed to do more to improve its economic prospects.

Croatian Real Estate Tax: IMF Recommendations

What precisely does Croatia need to do in the IMF opinion? Mainly reduction of public debt.

How does the IMF recommend that Croatia accomplish this task? The IMF made a number of proposals that can be consolidated into five courses of action. First, enhance the efficiency of public services by streamlining public services. Second, keep the wages low and reform the welfare state policies (here, it probably means either slashing the state benefits or privatizing them). Third, relaxing the labor regulations, particularly in the areas of hiring and temporary employment. Fourth, enhancement of legal and property rights. Finally, improvement of the structure of revenue and expenditure.

This last enigmatic phrase is the keyword for reducing the expenses and the introduction of new taxes. In particular, the IMF wants to see an introduction of a modern Croatian real estate tax.

What is a “Modern” Croatian Real Estate Tax According to IMF

The IMF defined a “modern” Croatian real estate tax as a “real estate tax that is based on objective criteria” and the one that “would be more equitable and would yield more revenue than the existing communal fees.” The idea is that “a modern more equitable property tax could allow for a reduction of less growth-friendly taxes.” In fact, the additional revenue derived from this tax “could compensate for a further reduction in the income tax burden, the parafiscal fees, or even VAT.”

It should be noted that the Croatian government already listened to the IMF and tried to impose a Croatian real property tax starting January of 2018, but the implementation of the law was suspended in light of strong public opposition.

Sherayzen Law Office will continue to monitor the situation.

Credinvest Bank Signs Non-Prosecution Agreement

/0 Comments/in , /by

On June 3, 2015, the US Department of Justice (“DOJ”) announced that Banca Credinvest SA (Credinvest Bank), together with Rothschild Bank, signed a Non-Prosecution Agreement that finalized Credinvest Bank’s participation in the DOJ Program for Swiss Banks.

Credinvest Bank History

Located in Lugano, Switzerland, Credinvest Bank started operations as a fully licensed bank in 2005. Credinvest Bank offered a variety of services that it knew could assist, and that did assist, U.S. clients in concealing assets and income from the IRS, including hold mail service and numbered accounts. Credinvest Bank did not set up any formalized internal reporting regarding U.S. clients and did not adopt any procedures to ascertain or monitor the compliance of its U.S. clients with their U.S. tax obligations. In late 2008, an external asset manager referred 11 accounts to Credinvest Bank, all of which were for U.S. clients who had left UBS. The bank delegated to that external asset manager the primary management of those accounts and failed to ascertain the compliance of those clients with their U.S. tax obligations. The bank thus aided and assisted those clients in concealing their accounts from U.S. authorities. Since August 1, 2008, Credinvest Bank had 31 U.S.-related accounts with just over $24 million in assets.

Credinvest Bank Penalty and Disclosures

As other banks in the DOJ Program for Swiss Banks, Credinvest Bank mitigated some of its penalties, but it will still have to pay a penalty of $3.022 million.

In addition, as part of its participation in the DOJ Program for Swiss Banks, Credinvest Bank made a complete disclosure of its cross-border activities, provided detailed information on an account-by-account basis for accounts in which US taxpayers have a direct or indirect interest, and provided detailed information regarding transferred funds to other banks. It is not known at this point if the IRS made any treaty requests to Credinvest Bank.

The most immediate impact of Rothschild Bank Non-Prosecution Agreement will be felt by US accountholders who wish to enter OVDP after June 3, 2015 – their penalty rate will go up from 27.5 percent of the highest value of their foreign accounts and other assets included in the OVDP penalty base to a whopping 50 percent penalty rate.

What Credinvest Bank Non-Prosecution Agreement Means to US Taxpayers

Credinvest Bank Non-Prosecution Agreement is likely to have three important consequences for US taxpayers with undisclosed accounts. First, US taxpayers with undisclosed accounts at Credinvest Bank will now face the higher 50% penalty rate in the OVDP program, instead of the regular 27.5% penalty rate.

Second, US taxpayers who attempted to conceal their Credinvest Bank accounts by closing them and transferring them to other banks will now face an increased risk of IRS detection due to the fact that the IRS now has the transfer information from Credinvest Bank. It is also possible that they may have received this information as part of another Swiss bank’s disclosure under the DOJ Program for Swiss Banks.

Finally, Credinvest Bank participation in the DOJ Program for Swiss Banks is one more reminder that, in this FATCA world, US taxpayers with undisclosed foreign accounts are playing a Russian roulette with their future by persevering in their non-compliance. The IRS may receive information regarding their accounts from various sources – DOJ Program is just one of them.

US Taxpayers With Undisclosed Foreign Accounts Should Explore Voluntary Disclosure

At this point, if you are a US taxpayer with undisclosed foreign accounts, please consult the experienced international tax team of Sherayzen Law Office. Our professional legal team has helped hundreds of US taxpayers around the world and we can help you!

Contact US to Schedule Your Confidential Consultation Now!