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Second Quarter 2025 IRS Interest Rates on Overpayment & Underpayment of Tax

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On March 6, 2025, the IRS announced that the Second Quarter 2025 IRS interest rates on overpayment and underpayment of tax will remain the same as in the First Quarter of 2025.

This means that, the Second Quarter 2025 IRS interest rates will be as follows:

seven (7) percent for overpayments (six (6) percent in the case of a corporation);

seven (7) percent for underpayments;

nine (9) percent for large corporate underpayments; and

four and a half (4.5) percent for the portion of a corporate overpayment exceeding $10,000.

How the IRS Calculated Second Quarter 2025 IRS Interest Rates

The IRS calculates the IRS interest rates based on specific tax provisions. We begin with the Internal Revenue Code (“IRC”) §6621, which establishes the IRS interest rates on overpayments and underpayments of tax. Under §6621(a)(1), the overpayment rate is the sum of the federal short-term rate plus 3 percentage points for individuals and 2 percentage points in cases of a corporation. There is an exception to this rule: with respect to a corporate overpayment of tax exceeding $10,000 for a taxable period of time, the rate is the sum of the federal short-term rate plus one-half of a percentage point.

Additionally, under §6621(a)(2), the underpayment rate is the sum of the federal short-term rate plus 3 percentage points. Similarly to overpayments, there is an exception for a large corporate underpayment: in such cases, §6621(c) requires the underpayment rate to be the sum of the relevant federal short-term rate plus 5 percentage points. Also, the readers should see §6621(c) and §301.6621-3 of the Regulations on Procedure and Administration for the definition of a large corporate underpayment and for the rules for determining the applicable date.

Finally, pursuant to the IRC §6621(b)(1), the IRS computed the Second Quarter 2025 IRS interest rates based on federal short-term rates in January of 2025.

Importance of the Second Quarter 2025 IRS Interest Rates

The IRS interest rates are relevant for a great variety of purposes. Let’s highlight three of its most important uses. Firstly, these rates will determine the interest a taxpayer will get on any IRS refunds.

Second, the IRS and the taxpayers use these rates to calculate the interest on any additional US tax liability on amended or audited tax returns. This also applies to the amended (and, in case of SFOP, original) tax returns that the taxpayers submit pursuant to Streamlined Domestic Offshore Procedures and Streamlined Foreign Offshore Procedures.

Finally, the Second Quarter 2025 IRS interest rates will be used to calculate PFIC interest on any relevant §1291 PFIC tax. This PFIC interest will be reported on the relevant Form 8621 and ultimately Form 1040.

We at Sherayzen Law Office constantly deal with the IRS interest rates on overpayments and underpayments of tax. This is why we closely follow any changes in these IRS interest rates.

Substantial Presence Test | US International Tax Lawyer & Attorney

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The substantial presence test is one of the most important legal tests in the Internal Revenue Code (IRC), because it determines whether a person is a US tax resident solely by virtue of his physical presence in the United States.  Additionally, this Test is essential to the determination of whether a person is a “US Person” for FBAR and Form 8938 purposes. In this article, I will explain the substantial presence test and highlight its main exceptions.

Substantial Presence Test: The Main Rule

In reality, there are two substantial presence tests; if either test is met, a person is considered to be a US tax resident unless an exception applies.

The first substantial presence test is met if a person is physically present in the United States for at least 183 days during the calendar year. 26 USC §7701(b)(3).  

The second substantial presence test (the so-called “lookback test”) is satisfied if two conditions are met: (1) the person is present in the United States for at least 31 days during the calendar year; and (2) the sum of the days on which this person was present in the United States during the current and the two preceding calendar years (multiplied by the fractions found in §7701(b)(3)(A)(ii)) equals to or exceeds 183 days. 26 USC 7701(b)(3)(A).  

Let’s discuss how exactly the lookback test works.  The way to determine to determine whether the 183-day test is met is to add: (a) all days present in the United States during the current calendar year (i.e. the year for which you are trying to determine whether the Substantial Presence Test is met) + (b) one-third of the days spent in the United States in the year immediately preceding the current year + (c) one-sixth of the days spent in the United States in the second year preceding the current calendar year. See 26 USC §7701(b)(3).

Substantial Presence Test: Presence

As one can easily see, a critical issue in the substantial presence test is to determine during which days a person is considered to be “present in the United States”. Pursuant to 26 USC §7701(b)(7)(A), a person is considered to be present in the United States if he is physically present in the United States at any time, however short, during the day, including the days of arrival and departure.

There are limited exceptions under 26 USC §§7701(b)(7)(B) and 7701(b)(7)(C) for: commuters from Canada and Mexico, foreign vessel crew members and persons who travel between two foreign countries with a less than a 24-hour layover in the United States.

Substantial Presence Test: Exempt Persons

In addition to the exceptions above, the Internal Revenue Code contains a large number of categories of persons exempt from the Substantial Presence Test. 26 USC §§7701(b). In other words, the days that these “exempt persons” spend in the United States do not count toward the Substantial Presence Test. Here is a most common list of exempt persons:

Foreign government-related individuals and their immediate family (26 USC §7701(b)(5)(B))

Teachers and trainees and their immediate family (26 USC §7701(b)(5)(C))

Foreign students on F-, J-, M- or Q-visas (26 USC §7701(b)(5)(D))

Professional athletes temporarily in the US for charitable sporting events (26 USC §7701(b)(5)(A)(iv))

Individuals unable to leave the US due to medical conditions (26 USC §7701(b)(3)(D)(ii))

A couple of notes on these categories. First, for the “professional athletes who are temporarily present in the United States to compete in a charitable sporting event” category, the sports event must meet the following requirements for the exemption to apply: (1) it must be organized primarily to benefit §503(c)(3) tax-exempt organization; (2) the net proceeds from the event must be contributed to the benefitted tax-exempt organization; and (3) the event must be carried out substantially by volunteers.

Second, concerning the last category “foreign aliens who are unable to leave the United States because of a medical condition”, Rev. Proc. 2020-20 expanded this medical condition exception to include “COVID-19 Medical Condition Travel Exception” for eligible individuals unable to leave United States during “COVID-19 Emergency Period”. The term COVID-19 Emergency Period is a single period of up to 60 consecutive calendar days selected by an individual starting on or after February 1, 2020 and on or before April 1, 2020 during which the individual is physically present in the United States on each day. An Eligible Individual may claim the COVID-19 Medical Condition Travel Exception in addition to, or instead of, claiming other exceptions from the substantial presence test for which the individual is eligible.

Substantial Presence Test: “Closer Connection” Exception

In addition to exceptions and exemptions listed above, there is one more highly important exception to the Substantial Presence Test called the “Closer Connection” Exception. Under 26 USC §§7701(b)(3)(C), a person is exempt from the application of the Substantial Presence Test if the following four conditions are met:

1) the person is present less than 183 days in the United States during the current year;

2) the person can establish that, during the current year, he had a tax home in a foreign country (obviously, “tax home” is a term of art that has its special significance for the purposes of the “closer connection” exception;

3) the person has a “closer connection” to that foreign country than to the United States; and

4) the person has not applied for a lawful permanent residency status in the United States.

I have addressed the Closer Connection Exception in detail here.

Substantial Presence Test:  Tax Treaty Exception

Tax treaties provide another exception. IRC §7701(b)(6) and Treas. Reg. §301.7701(b)-7 provide that an individual who meets the substantial presence test but is a resident of a treaty country under a tie-breaker provision of an income tax treaty may elect to be treated as a nonresident alien for US tax purposes. This election is made on Form 8833, Treaty-Based Return Position Disclosure.

It’s important to note that while this treaty election can significantly affect an individual’s US tax obligations, it does not negate the fact that the individual met the substantial presence test. This distinction is crucial for certain reporting requirements, such as FBAR and Form 8938.

Substantial Presence Test: Closer Connection Exception and Treaty Election vs. FBAR

One of the most common pitfalls of US international tax compliance relates to a situation where the substantial presence test is met but either a closer connection exception is claimed or an election is made to be taxed as a resident of another country.  In such a situation, even many practitioners incorrectly conclude that the taxpayer is not required to file FBAR.  This is not the case; even where a tax treaty foreign tax residency election or a closer connection exception claim is made, the taxpayer may still need to file an FBAR. 76 Fed. Reg. 10,234, 10,238; IRM 4.26.16.2.1.2(6) (11-06-15).

I will discuss this FBAR exception to the closer connection and tax treaty exceptions in another article.

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

Understanding the nuances of the US international tax law, including the Substantial Presence Test with its numerous exceptions and its implications for both tax residency and FBAR reporting, is essential for individuals who spend significant time in the United States. Given the complexity of these rules and their potential US tax impact, you need qualified professional help to properly navigate these complex rules.

This is why you need to contact Sherayzen Law Office.  Our international tax team is highly knowledgeable and experienced in this area of law. We have helped hundreds of US taxpayers to determine their US tax residency status, and we can help you!  

Contact us today to schedule your confidential consultation!

§318 Re-attribution: General Rule | International Tax Lawyers Miami

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This article continues a series of articles on the Internal Revenue Code (“IRC”) §318 constructive ownership rules. Today, I would like to focus on the §318 re-attribution rule. In this article, I will explain the general §318 re-attribution rule and mention the exceptions. I will discuss the exceptions in more detail in future articles.

§318 Re-attribution: General Rule

Generally, under the IRC §318(a)(5)(A), stock constructively owned by a shareholder under any of the §318 attribution rule is deemed to be actually owned for the purposes of re-attribution to others. In other words, except for limitations mentioned below, the constructive ownership of stock can be further attributed to other persons.

For example, if a husband owns stocks in Corporation Y and his wife is deemed to owned these stocks under the family attribution rules of §318(a)(1)(A)(i), then these constructively-owned stocks can be further attributed from the wife to Corporation X under the shareholder-to-corporation rules of §318(a)(3)(C) if the wife owns 50% or more of the value of stocks issued by Corporation X.

§318 Re-attribution: Great Burden on Taxpayers

The breadth of the §318 re-attribution rule can present a huge challenge to taxpayers. Both individuals and entities must maintain correct ownership records to allow their tax attorneys to properly determine their ownership of stock under §318 and their consequent tax obligations.

The dangerous reach of the §318 re-attribution rule can be demonstrated by the following example. Let’s suppose that corporation X has 200 shares outstanding and all of the shares are owned as follows: H owns 100 shares, his wife W owns 60 shares and his son S owns 40 shares. Additionally, H owns 25% in partnership P.

Under the §318 family attribution rules, H actually owns 100 shares and constructively owns another 100 shares (i.e. his wife’s and his son’s shares) of X. Under §318(a)(5)(A), H’s constructive ownership of 100 shares is deemed to be actual ownership for the purposes of re-attribution of stock. Consequently, under the partner-to-partnership rules of §318(a)(3)(A), 100% ownership of X is now attributed to P.

This can get even worse. Assuming the same facts, what if P also actually owns 50% of the value of the stock of corporation Y? Then, under §318(a)(3)(C), Y would be a constructive owner of 100% of X, because these shares were attributed first to H and, then, from H to P.

§318 Re-attribution: Restrictions

It is obvious that, without any limitations, such an extensive re-attribution of stock can easily get out of hand and spread to cover persons who have no relationship to the original owners. For this purpose, the US Congress imposed certain restrictions on the re-attribution of stock under §318(a)(5)(A). Each provision §318(a)(5)(B)–§318(a)(5)(D) imposes limitations on re-attribution of stock where the relationship between the original owner and the person subject to stock re-attribution no longer justifies the assertion of constructive ownership. I will detail these restrictions in future articles.

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

If you own foreign assets, including foreign business entities, you have the daunting obligation to meet all of your complex US international tax compliance requirements; otherwise, you may have to face the wrath of the IRS in the form of high noncompliance penalties. In order to successfully meet your US international tax compliance obligations, you need the professional help of Sherayzen Law Office.

We are an international tax law firm that specializes in US international tax compliance and offshore voluntary disclosures. We have successfully helped hundreds of US taxpayers worldwide with their US international tax compliance, and we can help you!

Contact Us Today to Schedule Your Confidential Consultation!

New Form 1040-SR for Seniors | US Tax Lawyers & Attorneys

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For the very first time, the IRS has created a new tax form called Form “1040-SR”. “SR” here standards for “seniors”. The idea is that the new form will be used by senior taxpayers. Let’s discuss Form 1040-SR in more detail.

Form 1040-SR: Reasons for Its Creation

The reason for the creation of Form 1040-SR was the Bipartisan Budget Act of 2018. The Act obligated the IRS to create a new form for seniors.

Form 1040-SR: Eligibility

Taxpayers born before Jan. 2, 1955 (i.e. those who are 65 years old or older), have the option to file Form 1040-SR whether they are working, not working or retired. Married couples filing a joint return can use the new form regardless of whether one or both spouses are age 65 or older or retired.

Form 1040-SR: Differences from Regular Form 1040

The principal difference between the regular Form 1040 and Form 1040-SR is a larger font and better readability.

Otherwise, all lines and checkboxes on the new form mirror the Form 1040, and both forms use all the same attached schedules and forms. The new form allows income reporting from other sources common to seniors such as investment income, Social Security and distributions from qualified retirement plans, annuities or similar deferred-payment arrangements. Both forms use the same “building block” approach introduced last year that can be supplemented with additional Schedules 1, 2 and 3 as needed.

Many taxpayers with basic tax situations can file Form 1040 or 1040-SR with no additional schedules. However, taxpayers with international tax exposure will most likely need additional schedules.

Seniors can use Form 1040-SR to file their 2019 federal income tax return, which is normally due on April 15, 2020 but has been extended to July 15, 2020 because of the Coronavirus. The revised 2019 Form 1040 Instructions cover both versions of Form 1040.

Seniors With Foreign Assets and Foreign Income Still Need to Comply With US International Tax Requirements

Sherayzen Law Office wishes to warn seniors that using Form 1040-SR does not relieve seniors of their obligation to comply with US international tax reporting requirements concerning their foreign assets and foreign income.

US tax residents must disclose their worldwide income on their US tax returns even if they are filing Form a 1040-SR this year. Similarly, all US international information returns must be filed with the senior version of Form 1040. Finally, foreign accounts must be disclosed not only on FBAR, but also on Schedule B of Form 1040-SR and possibly Form 8938.

If you have undisclosed foreign assets and foreign income for prior years, should contact Sherayzen Law Office for professional help with the offshore voluntary disclosure of your past noncompliance with US international tax reporting requirements. We have successfully helped hundreds of US taxpayers resolve their prior US tax noncompliance issues, and we can help you!

Contact Us Today to Schedule Your Confidential Consultation!

§267 Family Attribution | International Tax Lawyer & Attorney

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In a previous article, I introduced the constructive ownership rules of the Internal Revenue Code (“IRC”) §267. Today, I would like to discuss one of them in more detail – §267 family attribution.

§267 Family Attribution: General Rule

The §267 family attribution rule is described in §267(c)(2). It states that, for the purposes of determining whether an individual is a related party under §267, this individual is considered as a constructive owner of stocks owned, directly or indirectly, by or for his family.

§267 Family Attribution: Who is a Family Member

The critical question for §267(c)(2) is the definition of family. §267(c)(4) provides the answer to this question: “the family of an individual shall include only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants.”

Under Treas. Reg. §1.267(c)-1(a)(4), if any such family relationship was formed through legal adoption, such adoption is given full legal force for the purposes of §267(c)(2). “Ancestors” here include parents and grandparents; it appears that great-grandparents should also be family members for the purposes of §267 family member attribution. Id. The term “lineal descendants” includes children and grandchildren. Id.

Neither §267 and relevant Treasury regulations contain any reference to aunts and uncles. There is, however, a reason to believe that aunts and uncles are not family members for the purpose of §267(c)(2). This argument is based on the fact that, prior to its repeal in 2004, the definition of family in §544(a)(2) (which was part of the foreign personal holding company provisions) was identical to that of §267(c)(4). The IRS held in Rev. Rul. 59-43 that aunts and uncles are not family members for the purposes of §544(a)(2); hence, the same logic should apply to §267(c)(2).

Furthermore, neither step-parents nor step-children are family members for the purposes of §267(c)(2) (see Rev. Rul. 71-50 and DeBoer v. Commissioner, 16 T.C. 662 (1951), aff’d per curiam, 194 F.2d 289 (2d Cir. 1952)). Based on Tilles v. Commissioner, 38 B.T.A. 545 (1938), aff’d, 113 F.2d 907 (8th Cir. 1940), nieces or nephews are also not family members. Nor are the in-laws.

§267 Family Attribution: Attribution and Limitations

Under the §267 family attribution rule, any family member will be the constructive owner of any other family member’s stocks. This will be the case even if the person to whom the stock ownership is attributed has no direct or even indirect ownership of stock in the corporation (see Reg. §1.267(c)-1(a)(2)).

On the other hand, §267(c)(5) prevents the double-attribution of stock. In other words, a stock constructively owned under the family attribution rules may not be owned by another person under §267(c)(2). For example, if stock ownership is attributed to an individual’s wife under §267(c)(2), §267(c)(5) prevents further attribution of stock ownership to the wife’s mother.

§267 Family Attribution: Other Doctrines Should Be Considered

It is important to emphasize that a lawyer should always be on the lookout for other doctrines which may intervene with the attribution under §267(c)(2). For example, where a wife transfers property to her husband in anticipation of the sale of that property by the husband to her brother, §267(c)(5) double-attribution limitation may be ignored by the application of the “substance over form” principle by a court. The “step transaction” doctrine should always be a concern in such transactions.

Contact Sherayzen Law Office for Professional Help With US Tax Law

US tax law is extremely complex. An ordinary person will simply get lost in this labyrinth of tax rules, exceptions and requirements. Once you get into trouble with US tax law, it is much more difficult and expensive to extricate yourself from it due to high IRS penalties.

This is why it is important to contact Sherayzen Law Office for professional help with US tax law as soon as possible. We have helped hundreds of US taxpayers around the world to successfully resolve their US tax compliance and US tax planning issues. We can help you!

Contact Us Today to Schedule Your Confidential Consultation!