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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!

Worldwide Income Reporting Requirement | IRS International Tax Lawyer

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Worldwide income reporting is at the core of US international tax system. Yet, every year, a huge number of US taxpayers fail to comply with this requirement. While some of these failures are willful, most of this noncompliance comes from misunderstanding of the worldwide income reporting requirement. In this essay, I will introduce the readers to the worldwide income reporting requirement and explain who must comply with it.

Worldwide Income Reporting Requirement: Who is Affected

It is important to understand that the worldwide income reporting requirement applies to all US tax residents. US tax residents include US citizens, US Permanent Residents (the so-called “green card” holders), taxpayers who satisfied the Substantial Presence Test and non-resident aliens who declared themselves US tax residents on their US tax returns. This is the general definition and there are certain exceptions, including treaty-based exceptions.

Worldwide Income Reporting Requirement: What Must Be Disclosed

The worldwide income reporting requirement mandates US tax residents to disclose all of their US-source income and all of their foreign-source income on their US tax returns. This seems like a very straightforward rule, but its practical application creates many tax traps for the unwary, which I will discuss in a future article.

Worldwide Income Reporting Requirement: Constructive Income and Anti-Deferral Regimes

It is important to emphasize that the worldwide income reporting requirement requires the disclosure not only of the income that you actually received, but also the income that you are deemed to have received by the operation of law. In other words, US tax residents must also disclose their constructive income.

One of the most common sources of constructive income in US international tax law are Anti-Deferral regimes that arise from the ownership of a foreign corporation. The two most common regimes are Subpart F rules (which apply only to a Controlled Foreign Corporation) and the brand-new GILTI  regime. You can find out more about these two highly-complex US tax laws by searching the articles on our website.

Contact Sherayzen Law Office for Professional Help With the Worldwide Income Reporting Requirement

The worldwide income reporting requirement can be extremely complex; you can easily get yourself into trouble with the IRS over this issue. In order to avoid making costly mistakes and correct prior US tax noncompliance in the most efficient manner, you should contact Sherayzen Law Office help. We have helped hundreds of US taxpayers to comply with their US international tax obligations with respect to foreign income and foreign assets, and we can help you!

Contact Us Today to Schedule Your Confidential Consultation!

SLO’s 2017 Seminar on Business Lawyers’ International Tax Mistakes

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On February 23, 2017, Mr. Eugene Sherayzen, an international tax lawyer and owner of Sherayzen Law Office (“SLO”), conducted a seminar titled “Top 5 International Tax Mistakes Made by Business Lawyers”. The seminar was sponsored by the Corporate Counsel Section and International Business Law Section of the Minnesota State Bar Association.

Mr. Sherayzen commenced the seminar by asking a question about why business lawyers should be concerned with making international tax mistakes. After identifying the main answers, the tax attorney stated that he would focus on the strategic mistakes, rather than any specific U.S. international tax requirements.

Mr. Sherayzen first discussed the Business Purity Trap, a situation where business lawyers view a business transaction as something exclusively within the business law domain and with no relation whatsoever to U.S. tax law. The tax attorney stated that all business transactions have tax consequences, even if the effect is not immediate and there is no actual income tax impact.

Then, Mr. Sherayzen discussed the Tax Dabble Trap. This trap describes a situation where a business lawyer attempts to provide an advice on an international tax issue. The tax attorney explained why business lawyers often fall into this trap and the potentially disastrous consequences this trap may have for the business lawyers’ clients.

The Tax Law Uniformity Trap was the third trap discussed by the tax attorney. One of the most common international tax mistakes that business lawyers (and also many accountants) make is to believe that U.S. domestic tax law and U.S. international tax law are similar. Mr. Sherayzen also pointed out that there is a variation on this trap with respect to foreign owners of U.S. entities.

The discussion of the fourth trap, the Tax Professional Equality Trap, turned out be very fruitful. Mr. Sherayzen drew a sharp distinction between the role played by a general accountant versus the role of an international tax attorney. He also specifically focused on the potentially disastrous consequences the reliance on a domestic accountant may have in the context of offshore voluntary disclosures.

Finally, Mr. Sherayzen discussed the Foreign Exceptionalism Trap. This trap deals with a false belief that certain foreign transactions that occur completely outside of the United States have no tax consequences for the U.S. clients involved in these transactions. Mr. Sherayzen also pointed out that danger of relying solely on foreign accountants and lawyers in this context.

He concluded the seminar with a short examination of another “bonus” tax trap called the Linguistic Uniformity Trap. The description of all tax traps was accompanied by real-life examples from Mr. Sherayzen’s international tax law practice.

Contact Sherayzen Law Office for Professional U.S. International Tax Advice to Avoid Costly International Tax Mistakes

If you are a business lawyer who deals with international business transactions or transactions involving tax residents of a foreign country, please contact Sherayzen Law Office to avoid costly international tax mistakes. Our law firm has worked with many business lawyers, helping them to properly structure international business transactions in a way that avoids making international tax mistakes. Remember, it is much easier and cheaper to avoid making international tax mistakes than fixing them later.

Contact Us Today to Schedule Your Confidential Consultation!

Indian Bank Accounts : Key US Tax Obligations | International Tax Lawyer

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Due to ongoing implementation of FATCA as well as the tax reform in India, more and more Indian Americans and US tax residents of Indian nationality are learning that they are required to disclose to the IRS their Indian bank accounts. Yet, there are still many more US taxpayers left who are either completely unaware of this requirement or they are confused with respect to what is required to be disclosed and how. This essay intends to clarify who is required to report their Indian bank accounts to the IRS and explain the most common US international tax requirements applicable to Indian bank accounts.

Indian Bank Accounts: Who Needs to Report Them to the US Government?

All US tax residents with Indian bank accounts need to disclose them to IRS. Warning: “US tax resident” is not equivalent to the immigration concept of “US Permanent Resident”. The confusion over these two concepts is a frequent cause of US tax noncompliance, because many Indian immigrants who come to the United States on a work visa assume that they are not US tax residents since they do not have the status of a US Permanent Resident. This assumption is completely false.

The definition of US tax residency includes US permanent residents, but it is much broader. In general, this term includes: US citizens, US Permanent Residents, any person who satisfied the Substantial Presence Test and any person who declared himself as a tax resident. There are exceptions to this rule, but you will need to consult with an international tax lawyer before making use of any of these exceptions.

Indian Bank Accounts: Indian Income Must Be Disclosed on US Tax Returns

All US tax residents must comply with the numerous US tax reporting requirements, including the worldwide income reporting requirement. All Indian-source income generated by the Indian bank accounts of US tax residents must be disclosed on their US tax returns.

The worldwide income reporting requirement applies to any kind of income: bank interest income, dividends, capital gains, et cetera. This income should be reported on US tax returns even if it was already disclosed on Indian tax returns or subject to Indian tax withholding. This income should be disclosed in the United States even if it never left India.

Indian Bank Accounts: FBAR

The Report of Foreign Bank and Financial Accounts, FinCEN Form 114 (popularly known as “FBAR”) is one of the most important and dangerous reporting requirements that applies to Indian bank accounts. Generally, a US person is required to file FBAR if he has a financial interest in or signatory authority or an authority over foreign bank and financial accounts which, in the aggregate, exceed $10,000 at any point during a calendar year.

FBAR has an extremely severe penalty system, and US taxpayers should strive to do everything in their power to make sure that they comply with this requirement.

Indian Bank Accounts: FATCA Form 8938

US tax residents are also required to disclose their Indian bank accounts on Form 8938. The Foreign Account Tax Compliance Act (“FATCA”) led to the creation of Form 8938; US taxpayers should have filed their first Forms 8938 with their 2011 US tax returns.

Form 8938 requires US tax residents to report all of their Specified Foreign Financial Assets (“SFFA”) as long as the Form’s filing threshold is met. SFFA includes a very diverse set of financial instruments, including foreign bank and financials accounts, bonds, swaps, ownership interest in a foreign business, beneficiary interest in a foreign trust and many other types of financial assets. In other words, with the exception of signatory authority accounts, Form 8938 not only duplicates FBAR, but covers a much broader range of financial instruments that would not be required to be reported on FBAR.

It should be pointed out that, even when FBAR and Form 8938 cover the same assets, both forms must be filed despite the duplication of the disclosure.

While Form 8938 has a much higher filing threshold than FBAR, it may still be easily exceeded, especially by taxpayers who reside in the United States. For example, if a taxpayer resides in the United States and his tax return filing status is “single”, then he would only need to have $50,000 or higher at the end of the year or $75,000 or higher at any point during the year in order to trigger the Form 8938 filing requirement. A lot of US taxpayers with Indian bank accounts easily exceed this threshold, especially if they are helping their parents or buying properties in India.

Finally, it should be remembered that Form 8938 has its own penalty structure for failure to file the form. Furthermore, Form 8938 forms an integral part of a federal tax return; this means that a failure to file the form may extend the IRS Statute of Limitations for an IRS audit indefinitely for the entire return.

Contact Sherayzen Law Office for Professional Help With Reporting of Your Indian Bank Accounts in the United States

In this essay, I just listed the most common US tax reporting requirements that may apply to US owners of Indian bank accounts. There is a plethora of other requirements that may apply to these taxpayers.

Contact Sherayzen Law Office for professional help with your US tax compliance. We have worked extensively with our Indian clients with respect to reporting of their Indian bank accounts, including offshore voluntary disclosure for late filings.

The stakes in international tax compliance are high, and you need to be able to rely on the knowledge, experience and professionalism of Sherayzen Law Office in order to make sure that you protect yourself from draconian IRS tax penalties. We have successfully helped hundreds of US taxpayers to deal with their US international tax compliance, and We can help You!

Contact Us Today to Schedule Your Confidential Consultation!

Personal Services Income Sourcing | International Tax Lawyer & Attorney

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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!