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Voluntary Compliance with US Tax Laws | International Tax Attorney Austin

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The IRS has repeatedly stated that the US tax system is a voluntary compliance system. Yet, what does “voluntary compliance” mean in this context? Does it mean that US taxpayers only need to comply with US tax laws whenever they wish to do it? Does it mean that any US taxpayer has a right to refuse to comply with US tax laws or file his tax returns whenever he feels like doing it?

A lot of people tried to take this position and failed. The IRS has always won on the issue that US taxpayers have an obligation to comply with US tax laws, whether they want to do it or not.

Then, what is so “voluntary” about our tax system? Let’s explore this question in more detail.

Voluntary Compliance with US Tax Laws is Obligatory

Let us start with the affirmative statement that the word “voluntary” does not refer to the actual obligation of US taxpayers to comply with US tax laws. In other words, the compliance with US tax laws is compulsory and any noncompliance with US tax laws is punishable to the extent permitted by the law. Intentional noncompliance may even result in incarceration of a noncompliant taxpayer.

The IRS Inability to Engage in Full Enforced Tax Compliance

Since the word “voluntary” does not apply to the actual obligation to comply with US tax laws, we must look at the assessment of US tax liability to understand what voluntary compliance means. In particular, our focus should be on what is known as “enforced tax compliance” – i.e. direct assessment of tax liability and the audit of tax returns.

Here, we encounter an obvious yet interesting fact: the IRS does not have the resources to audit every one of the hundreds of millions of US taxpayers (resident and non-resident, individual and business), especially on an annual basis. Similarly, the IRS also lacks the ability to audit every single tax return every year; in fact, it only audits about 3% of all tax returns per year.

This means that the IRS does not have the capacity to sustain a system of enforced tax compliance and the vast majority of US taxpayers operate outside of this system.

The Definition of Voluntary Compliance

This lack of the IRS ability to engage in 100% enforced tax compliance leads to the inevitable conclusion that it has to rely on US taxpayers to timely file their own tax returns, assess their own tax liability and pay this tax liability to the IRS. It is precisely in this sense that US tax compliance system is “voluntary”.

In other words, voluntary compliance means that US taxpayers do their own self-assessment of their US tax liability (hopefully, in accordance with the IRS guidance) instead of the IRS doing it for each of them. Underlying this voluntary compliance, however, is the threat that the IRS can audit the tax returns and impose noncompliance penalties.

Contact Sherayzen Law Office for Professional Help with Your Voluntary Compliance Concerning US International Tax Laws

The IRS focus on the enforced tax compliance regarding the US international tax obligations of US taxpayers has caused an unprecedented rise in the voluntary compliance in this area of law. Noncompliant US taxpayers are at a historically-high risk of detection by the IRS and may face draconian IRS penalties, including jail time.

This means that, if you have foreign assets and foreign income, you need the professional help of Sherayzen Law Office to bring your tax affairs into full compliance with US tax laws. Our firm is highly experienced in the area of US international tax compliance with hundreds of successful cases closed and millions of dollars saved in US taxes and potential penalties! We can help you!

Contact Us Today to Schedule Your Confidential Consultation!

Determining the Residency of a Trust in Cross-Border Situations

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One of the most important tax aspects involving trusts in cross-border tax situations is the determination of the residency of a trust- i.e. whether it is a domestic or foreign trust for US tax purposes. This determination of the residency of a trust will have important tax consequences for US taxpayers.

In this article we will do a general exploration of how the residency of a trust in cross-border situations is determined; this article is not intended to convey tax or legal advice. Please contact Eugene Sherayzen an experienced tax attorney at Sherayzen Law Office, Ltd. if you have questions concerning trust planning or compliance.

General Criteria for Determining the Residency of a Trust

The general determination of the residency of a trust is described in the Internal Revenue Code (IRC) Section 7701 and Regulation Section 301.7701-7. Under these tax provisions, a trust will be deemed to be a U.S. person if: “(i) A court within the United States is able to exercise primary supervision over the administration of the trust (court test); and (ii) One or more United States persons have the authority to control all substantial decisions of the trust (control test).” (See explanations of the court test and the control test in the paragraphs below). Under the regulation, a trust will be a U.S. person for the purposes of the IRC on any day that the trust meets both of these tests. If a trust does not satisfy both of these tests, it will be considered to be a foreign trust for U.S. reporting purposes.

Determining the Residency of a Trust: The Court Test

In determining the residency of a trust under the Court Test, we need to consult the Treasury Regulations. Regulation Section 301.7701-7(c)(1) provides a safe harbor in which a trust will satisfy this (i.e. US residency) test if: “(i) The trust instrument does not direct that the trust be administered outside of the United States; (ii) The trust in fact is administered exclusively in the United States; and (iii) The trust is not subject to an automatic migration provision…”. For the purposes of the regulation, the term “court” is defined in the regulation to mean any federal, state, or local court, and the United States is used a geographical manner (thus including only the States and the District of Columbia, and not a court within a territory or possession of the United States or within a foreign country).

The term primary supervision means that a court has or would have the authority to determine substantially all issues regarding the administration of the entire trust.” The term “administration” is defined in the regulation to mean, “the carrying out of the duties imposed by the terms of the trust instrument and applicable law, including maintaining the books and records of the trust, filing tax returns, managing and investing the assets of the trust, defending the trust from suits by creditors, and determining the amount and timing of distributions.” The regulations further provide examples of situations that will cause a trust to fail or satisfy the court test.

Determining the Residency of a Trust: The Control test

The Control Test is often the key area of dispute in determining the residency of a trust. “Control” in the control test is explained in the regulation to mean, “having the power, by vote or otherwise, to make all of the substantial decisions of the trust, with no other person having the power to veto any of the substantial decisions.” Critically important – it is required under the regulation to consider all individuals who may have authority to make “substantial decisions”, and not simply the trust fiduciaries.

Under the regulation, the term “substantial decisions” (see usage in first paragraph) is defined to mean, “those decisions that persons are authorized or required to make under the terms of the trust instrument and applicable law and that are not ministerial.” (Some examples of “ministerial” decisions are provided in the regulation, including, bookkeeping, the collection of rents, and the execution of investment decisions).

The regulation further provides numerous examples of substantial decisions: “(A) Whether and when to distribute income or corpus; (B) The amount of any distributions; (C) The selection of a beneficiary; (D) Whether a receipt is allocable to income or principal; (E) Whether to terminate the trust; (F) Whether to compromise, arbitrate, or abandon claims of the trust; (G) Whether to sue on behalf of the trust or to defend suits against the trust; (H) Whether to remove, add, or replace a trustee; (I) Whether to appoint a successor trustee to succeed a trustee who has died, resigned, or otherwise ceased to act as a trustee…; and (J) Investment decisions; however, if a United States person under section 7701(a)(30) hires an investment advisor for the trust, the investment decisions made by the investment advisor will be considered substantial decisions controlled by the United States person if the United States person can terminate the investment advisor’s power to make investment decisions at will.”

Contact Sherayzen Law Office for Tax and Legal Help With Issues Involving Foreign Trusts

Determination of the residency of a trust is just one of a myriad of highly complex issues than an international tax attorney can help you resolve with respect to U.S. tax compliance, tax planning and estate planning. If you are an owner or a beneficiary of a foreign trust, contact Sherayzen Law Office for professional legal and tax help.

Contact Us Today to Schedule Your Confidential Consultation!