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International Tax Lawyer Lectures on US Tax Reporting of Italian Assets and Income

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On February 2, 2017, Mr. Eugene Sherayzen, the founder and owner of Sherayzen Law Office (an international tax law firm headquartered in Minneapolis, Minnesota) gave a lecture at the Italian Cultural Center in downtown Minneapolis. The topic of the lecture was an introduction to US tax reporting of Italian assets and income for individual taxpayers. The lecture was well-attended by mostly native Italians (the room was filled to capacity) and caused a great amount of interest in the audience.

US Tax Reporting of Italian Assets

US Tax Reporting of Italian Assets Introduction

US Tax Reporting of Italian Assets and Income: Worldwide Income Reporting Requirement

The lecture commenced with the discussion of the worldwide income reporting requirement. After explaining the US tax residency requirement, Mr. Sherayzen focused on the importance of reporting Italian-source income in the United States for those Italians who are considered to be US tax residents (i.e. US citizens, US permanent residents, persons who satisfied the Substantial Presence Test and the US tax residents by choice). The lawyer explained that the Italian-source income must be disclosed by these Italians even if the income is already taxed in Italy and even if it is never brought into the United States.

US Tax Reporting of Italian Assets and Income: Foreign Rental Income Must Be Reported but Real Estate itself Is Reportable Only In Certain Cases

Then, Mr. Sherayzen discussed the subject of reporting by Italians of their foreign real estate and income derived from foreign real estate. The international tax lawyer emphasized that foreign rental income and foreign capital gains must be disclosed on the taxpayers’ US tax returns.

Then, Mr. Sherayzen clarified that, in situations where real estate is owned outright by individuals (i.e. not through any entity or any other complex arrangement), the ownership of the real estate itself is not generally reportable. However, if the Italian real estate is owned through an entity, then it will need to be disclosed as part of the entity’s financial statements prepared as part of Form 5471, 8865 or 8858. The lawyer again emphasized that, even in these circumstances, the income derived from Italian real estate is still reportable on the taxpayers’ US tax returns.

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US Tax Reporting of Italian Assets and Income: FBAR and FATCA Form 8938

After discussing real estate as an exception from the general rule that foreign assets are likely to be reportable on the information returns in the United States, Mr. Sherayzen turned to the subject of reporting of foreign accounts with particular focus on FBAR and FATCA Form 8938. The discussion focused on the types of accounts that needed to disclosed, the reporting thresholds, and the penalties associated with the failure to file these forms. The international tax lawyer also discussed in more depth the history of FBAR.

This discussion caused a great number of questions related to FBAR, its thresholds and its relationship to income reporting. Fewer questions were asked with respect to Form 8938.

US Tax Reporting of Italian Assets and Income: PFICs

Despite the time limitations, Mr. Sherayzen briefly discussed Form 8621 as a hybrid form. The lawyer explained that a “hybrid form” meant that Form 8621 was used for both, income tax reporting and asset reporting, with respect to PFICs. Mr. Sherayzen explicated, in a very general manner, what assets qualified for PFIC status and what were the income tax consequences of PFICs. The Minneapolis international tax lawyer warned the audience that their Italian private pension plans and life insurance policies could contain PFICs.

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US Tax Reporting of Italian Assets and Income: Foreign Inheritance and Foreign Gifts

The lecture ended with a brief discussion of US tax reporting requirements concerning inheritance and gifts from Italian nationals and non-resident aliens (for US tax purposes). At that point, Mr. Sherayzen introduced Form 3520 and its threshold reporting requirements for foreign gifts and foreign inheritance. The lawyer also explained how Form 8938 could be applicable to a foreign inheritance.

After the lecture ended, Mr. Sherayzen continued to take questions in private for the next thirty minutes.

Tax Definition of the United States | US Tax Lawyers

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The tax definition of the United States is highly important for US tax purposes; in fact, it plays a key role in identifying many aspects of US-source income, US tax residency, foreign assets, foreign income, application of certain provisions of tax treaties, et cetera. While it is usually not difficult to figure out whether a person is operating in the United States, there are some complications associated with the tax definition of the United States that I wish to discuss in this article.

Tax Definition of the United States is Not Uniform Throughout the Internal Revenue Code; Three-Step Analysis is Necessary

From the outset, it is important to understand that the tax definition of the United States is not uniform. Different sections of the Internal Revenue Code (“IRC”) may have different definitions of what “United States” means.

Therefore, one needs to engage in a three-step process to make sure that the right definition of the United States is used. First, the geographical location of the taxpayer must be identified. Second, one needs to determine the activity in which the taxpayer is engaged. Finally, it is necessary to find the right IRC provision governing the taxation of that taxpayer engaged in the identified specific activity in that specific location; then, look up the tax definition of the United States with respect to this specific IRC provision.

General Tax Definition of the United States

Generally, for tax purposes, the United States is comprised of the 50 states and the District of Columbia plus the territorial waters (along the US coastline). See IRC § 7701(a)(9). The territorial waters up to 12 nautical miles from the US shoreline are also included in the term United States.

General Tax Definition of the United States Can Be Replaced by Alternative Definitions

As it was pointed out above, this general definition is often modified by the specific IRC provisions. The statutory reason why this is the case is the opening clause of IRC § 7701(a) which specifically allows for the general definition to be replaced by alternative definitions of the United States: “when used in this title, where not otherwise distinctly expressed or manifestly incompatible with the intent thereof … .”

Hence, instead of relying on the general tax definition of the United States in IRC § 7701(a), one needs to look for alternative definitions specific to the IRC provision that is being analyzed. Moreover, the fact that there is no express alternative definition is not always sufficient, because one may have to determine the intent (most likely from the legislative history of an IRS provision) behind the analyzed IRC provision to see if an alternative tax definition of the United States should be used.

General Tax Definition and Possessions of the United States

While the object of this small article does not include a detailed discussion of the alternative tax definitions of the United States, it is important to note that the Possessions of the United States (“Possessions”) are not included within the general tax definition of the United States. They are not mentioned in IRC § 7701(a)(9); IRC 1441(e) even states that any noncitizen resident of Puerto Rico is a nonresident alien for tax withholding purposes. Similarly, IRC § 865(i)(3) defines Possessions as foreign countries for the purposes of sourcing income from sale of personal property.

On the other hand, Possessions may be included within some of the alternative tax definitions of the United States. For example, for the purposes of the Foreign Earned Income Exclusion, Possessions are treated as part of the United States.

Thus, it is very important for tax practitioners and their clients who reside in Possessions to look at the specific IRS provisions and determine whether an alternative definition applies to Possessions in their specific situations.

Contact Sherayzen Law Office for Professional Tax Help

If you need professional tax help, contact the international tax law firm of Sherayzen Law Office Ltd. Our legal team is highly experienced in US domestic and international tax law. We have helped hundreds of US taxpayers to resolve their tax issues and We can help You!

Contact Sherayzen Law Office Today to Schedule Your Confidential Consultation!

US International Tax Lawyer Lectures at Alliance Française on Offshore Reporting

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On December 7, 2016, Mr. Eugene Sherayzen, the founder of Sherayzen Law Office and a US international tax lawyer, gave a lecture at the Minneapolis chapter of Alliance Française. The topic of the lecture was an introduction to reporting of foreign income and foreign assets for individual taxpayers in the United States. The lecture was well-attended and raised a lot of interest among the participants.

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US International Tax Lawyer Explained the US Tax Residency Requirements

Mr. Sherayzen first focused on defining the crucial term of “US tax resident”. As he explained during the lecture, the starting point for legal analysis of any US international tax lawyer is often the determination of whether his client is a US person.

During the lecture, Mr. Sherayzen covered three categories of US tax residents – US citizens, US Permanent residents and individuals who met the requirements of the Substantial Presence Test.

He also distinguished the immigration-law concept of US permanent residency (i.e. green-card holders) from the tax concept of US tax residency. The US international tax lawyer also discussed certain exceptions to the Substantial Presence Test, focusing on F-1 and J-1 visas.

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US International Tax Lawyer Emphasized Worldwide Income Reporting Requirement

Then, Mr. Sherayzen explained to the audience that US tax residents are required to disclose and pay US taxes on their worldwide income, even if this income was already disclosed on foreign tax returns.

At that point, the US international tax lawyer observed that the worldwide income reporting requirement is one of the most violated laws. Mr. Sherayzen distinguished three groups of US tax residents who are not in compliance with this law.

The first group consisted of US tax residents who were born overseas and were not aware of the worldwide income compliance requirement due to their prior experiences in their home countries (especially those which adopted the territorial model of taxation).

The second group was described as a small group of persons who were aware of the requirement and willfully violated it.

Finally, Mr. Sherayzen distinguished a third group of individuals who knew about the worldwide income reporting requirement, attempted to comply with it to the best of their ability, but failed to do so due to their lack of sufficient knowledge of US tax laws. The US international tax lawyer specifically referenced the Assurance Vie accounts as a representative case for such violations due to huge differences between the US and the French tax treatment of these accounts.

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US International Tax Lawyer Described Top Three Reporting Requirements with Respect to Foreign Bank and Financial Accounts

The third part of the presentation was devoted to the discussion of the FBAR, Form 8938 and Form 8621 (PFIC) requirements with respect to reporting foreign bank and financial accounts. The discussion concerned the types of accounts that needed to disclosed, the reporting thresholds, the due dates and how the forms needed to be filed. Some history of the forms was provided; due to time limitations, however, only a limited introduction to FATCA was provided to the audience.

This discussion produced a lively Q&A exchange between the US international tax lawyer and the audience.

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US International Tax Lawyer Discussed the Reporting of Foreign Gifts and Inheritance

The fourth part of the discussion concentrated on the Form 3520 reporting of foreign gifts and inheritance, including the filing threshold and the penalties associated with the form. Mr. Sherayzen also explained that, in certain circumstances, Form 8938 may be applicable to foreign gifts and inheritance for the purpose of annual tax compliance.

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US International Tax Lawyer Introduced the Hypothetical to Illustrate How These Forms Might Apply in a Real-Life Situation

The final part of the presentation was devoted to the analysis of a hypothetical to demonstrate how all of these information returns could apply in a real-life situation. The focus of the hypothetical was on the French and French-Canadian issues. Mr. Sherayzen also invited the audience to participate in the legal analysis of the hypothetical which was enthusiastically welcomed by the audience.

The presentation concluded with an additional fifteen-minute Q&A session.

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Totalization Agreement with Romania Progresses | Minnesota Tax Lawyer

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On October 26, 2016, the Totalization Agreement with Romania entered a new stage – the government of Romania approved for signature a draft social security (also known as “Totalization”) agreement with the United States.

The Totalization Agreements are authorized by Section 233 of the Social Security Act. The United States currently has Totalization Agreements with 26 countries – Australia, Austria, Belgium, Canada, Chile, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary (the most recent addition), Ireland, Italy, Japan, Luxembourg, the Netherlands, Norway, Poland, Portugal, the Slovak Republic, South Korea, Spain, Sweden, Switzerland and the United Kingdom

The purpose of a Totalization Agreement is to eliminate the burden of dual social security taxes. Such situation arise usually in the context of workers from one country working in another country while they are covered by the social security systems in both countries. In such cases, the Totalization Agreement protects the workers from paying social security taxes in both countries on the same earnings.

The Totalization Agreement with Romania is intended to benefit the Romanian workers who work in the United States and US workers who work in Romania. This is why any advance in the progress of the Totalization Agreement with Romania is of high interest to workers and businesses who work in both countries, United States and Romania.

Obviously, there is still a very long road to go for the Totalization Agreement with Romania. First, the Totalization Agreement with Romania has to be finalized (and it seems that this stage has been reached), then signed by both countries and, finally, ratified by both countries. This process, especially ratification, can take years especially if the US Congress and the new President do not see “eye to eye” on this issue. However, the obvious benefits of the Totalization Agreement with Romania should eventually pave the way to its ratification in both countries.

US–Hungary Totalization Agreement Enters Into Force

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On September 1, 2016, the US–Hungary Totalization Agreement entered into force. In this article, I will briefly discuss the main benefits of this Agreement to US and Hungarian nations.

US–Hungary Totalization Agreement: What is a Totalization Agreement?

The Totalization Agreements are authorized by Section 233 of the Social Security Act for the purpose of eliminating the burden of dual social security taxes. In essence, these are social security agreements between two countries that protect the benefit rights of workers who have working careers in both countries and prevent such workers and their employers from paying social security taxes on the same earnings in both countries.

Usually, such a situation arises where a worker from country A works in Country B, but he is covered under the social security systems in both countries. In such cases, without a totalization agreement, the worker has to pay social security taxes to both countries A and B on the same earnings.

US–Hungary Totalization Agreement Background

The US–Hungary Totalization Agreement was signed by the United States and Hungary on February 3, 2015 and entered into force on September 1, 2016. This means that Hungary now joined 25 other countries – Australia, Austria, Belgium, Canada, Chile, the Czech Republic, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Luxembourg, the Netherlands, Norway, Poland, Portugal, the Slovak Republic, South Korea, Spain, Sweden, Switzerland and the United Kingdom – that have similar Totalization Agreements with the United States.

US–Hungary Totalization Agreement: Key Provisions

There are three key provisions of the US–Hungary Totalization Agreement which are relevant to Hungarian and US workers. First, protection of workers’ benefits and prevention of dual taxation. US workers who work in Hungary and are already covered under Hungarian social security system should be exempt from US social security payments, including health insurance (under FICA and SECA only), retirement insurance, survivors and disability insurance contributions. However, US–Hungary Totalization Agreement does not apply to the Medicare; US employees must still make sure that they have adequate medical insurance coverage. Similarly, Hungarian workers who work in the United States and are already covered by the US social security system should be exempt from Hungarian social security taxes.

The second key provision of the US–Hungary Totalization Agreement provides for a Certificate of Coverage. The Certificate can be used by an employee to remain covered under his home country’s social security system for up to 60 months. Additional extensions are possible upon approval by the host country.

Finally, under the US–Hungary Totalization Agreement, workers may qualify for partial US benefits or partial Hungarian benefits based on combined (or “totalized”) work credits from both countries. This means that, where there is insufficient number of periods (or credits in the United States) to claim social security benefits, the periods of contributions in one country can be added to the period of contributions in another country to qualify to these benefits.

Contact Sherayzen Law Office for US Tax Issues Concerning Hungarian Assets and Income

If you have foreign accounts and other assets in Hungary and/or income from these Hungarian assets, contact Sherayzen Law Office for professional help. We have helped hundreds of clients throughout the world, including in Hungary, with their US tax issues and we can help you!