Some years ago a Client (he was not a client at that time) inherited a Foreign Corporation. It was a mid-sized Foreign Corporation, and he was not the only owner there, but a partial owner, a minority owner.
In a Foreign country, the classification of ‘Entity’ may not be exactly in line with the US Tax Classification. So to figure out whether this is a Corporation or a Partnership, you really have to look into how this company operates and what the law says (in) how it operates.
He came to a Business Lawyer and actually there was an Accountant involved in this case as well. (We’ll talk about the next trap after that and why the Accountant may not have been the best choice there). An Accountant was involved there but the chief role was played by the Business Lawyer. The Business Lawyer was involved some years before in another Transaction. In that transaction, he was advised by the Accountant that the Form 5471 had to be filed and about the penalties associated with the form.
He told the Client, “We don’t know what kind of Entity this is and I know about this Form 5471 and based on what the Accountant told me, I don’t think your Entity is actually a Corporation; I think it’s a Partnership. You are a minority owner; that means that Form 8865 doesn’t apply and you don’t have the 5471 form requirement. That will be an easier way to get rid of the IRS Penalties associated with Form 5471.”
What he forgot about… well, two things is – one little detail about income. If it’s a Partnership, it’s a Pass Through Entity. That means that this Client was in Income Tax Non-Compliance since the time he inherited the Company. For this Client, that would mean that he was underreporting about 90% of his income in each year.
The second issue, is obviously the one I have already mentioned. You have to look at what the law says, what the Local Law says. How did the Company operate before? You cannot just randomly say: this a Foreign Partnership and this is a Foreign Corporation just because some of the details are here or some of the details are not here.
In the end, we were able to go back. It was a Corporation, not a Partnership so we were able to file a 5471 Voluntary Disclosure and were able to end that issue without any penalties. But if the IRS had audited his tax returns and discovered that he underreported his income by 90%, tremendous penalties would have ensued.
http://sherayzenlaw.com/wp-content/uploads/2018/01/sherlawltd_logo.png00adminhttp://sherayzenlaw.com/wp-content/uploads/2018/01/sherlawltd_logo.pngadmin2020-05-04 21:30:492024-01-04 22:11:40Example of the Tax Dabble Trap | Rochester MN International Tax Lawyer
The Tax Dabble Trap sort of flows into the next trap; the Tax Law Uniformity Trap. In the same way the Business Lawyer believes he may be competent enough to advise on International Tax Law, he might think that there is no difference between US International Tax Law and US Domestic Law. For that person, that Lawyer, there’s only Tax Law and this is not correct.
This is exactly what the Tax Law Uniformity Trap is: the assumption that US Domestic Law and US International Tax Law are the same and this is false.
Let me give you sort of an analogy; think about pies. If you were to look at the US Domestic Tax Law, that’s your baked dough, that bottom part of the pie and International Tax Law is a big level of thick rich cream on top of that pie. There is a deep inter-relationship between the two. International Tax Law is obviously part of the overall US Tax Law but International Tax Law is different, it has a different structure, different texture, different taste if you wanted to continue this analogy.
It’s important to remember that Tax Consequences on the International level may not be the same as Tax Consequences on the US level.
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There’s also a belief that a Foreign Client who owns a US Corporation is in the same position as a US Client who owns a Domestic Corporation, which is also false.
I think everyone probably knows here that an S Corporation cannot be owned by a foreign person.
There’s also such an interesting form called a Form 5472, just to give you an example, which requires the Domestic Corporation to report certain transactions between the corporation and the 25% or more foreign owner(s) of that corporation and there’s a $10,000 penalty associated with the form for not filing it and which can go up to $50,000.
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Example of the Tax Dabble Trap | Rochester MN International Tax Lawyer
/in International tax attorney & lawyer Video /by adminSome years ago a Client (he was not a client at that time) inherited a Foreign Corporation. It was a mid-sized Foreign Corporation, and he was not the only owner there, but a partial owner, a minority owner.
In a Foreign country, the classification of ‘Entity’ may not be exactly in line with the US Tax Classification. So to figure out whether this is a Corporation or a Partnership, you really have to look into how this company operates and what the law says (in) how it operates.
He came to a Business Lawyer and actually there was an Accountant involved in this case as well. (We’ll talk about the next trap after that and why the Accountant may not have been the best choice there). An Accountant was involved there but the chief role was played by the Business Lawyer. The Business Lawyer was involved some years before in another Transaction. In that transaction, he was advised by the Accountant that the Form 5471 had to be filed and about the penalties associated with the form.
He told the Client, “We don’t know what kind of Entity this is and I know about this Form 5471 and based on what the Accountant told me, I don’t think your Entity is actually a Corporation; I think it’s a Partnership. You are a minority owner; that means that Form 8865 doesn’t apply and you don’t have the 5471 form requirement. That will be an easier way to get rid of the IRS Penalties associated with Form 5471.”
What he forgot about… well, two things is – one little detail about income. If it’s a Partnership, it’s a Pass Through Entity. That means that this Client was in Income Tax Non-Compliance since the time he inherited the Company. For this Client, that would mean that he was underreporting about 90% of his income in each year.
The second issue, is obviously the one I have already mentioned. You have to look at what the law says, what the Local Law says. How did the Company operate before? You cannot just randomly say: this a Foreign Partnership and this is a Foreign Corporation just because some of the details are here or some of the details are not here.
In the end, we were able to go back. It was a Corporation, not a Partnership so we were able to file a 5471 Voluntary Disclosure and were able to end that issue without any penalties. But if the IRS had audited his tax returns and discovered that he underreported his income by 90%, tremendous penalties would have ensued.
International Tax Lawyers San Diego | Tax Law Uniformity Trap
/in International tax attorney & lawyer Video /by adminThe Tax Dabble Trap sort of flows into the next trap; the Tax Law Uniformity Trap. In the same way the Business Lawyer believes he may be competent enough to advise on International Tax Law, he might think that there is no difference between US International Tax Law and US Domestic Law. For that person, that Lawyer, there’s only Tax Law and this is not correct.
This is exactly what the Tax Law Uniformity Trap is: the assumption that US Domestic Law and US International Tax Law are the same and this is false.
Let me give you sort of an analogy; think about pies. If you were to look at the US Domestic Tax Law, that’s your baked dough, that bottom part of the pie and International Tax Law is a big level of thick rich cream on top of that pie. There is a deep inter-relationship between the two. International Tax Law is obviously part of the overall US Tax Law but International Tax Law is different, it has a different structure, different texture, different taste if you wanted to continue this analogy.
It’s important to remember that Tax Consequences on the International level may not be the same as Tax Consequences on the US level.
International Tax Lawyers Des Moines | Special Treatment of Foreign Owners of a US Corporation
/in International tax attorney & lawyer Video /by adminThere’s also a belief that a Foreign Client who owns a US Corporation is in the same position as a US Client who owns a Domestic Corporation, which is also false.
I think everyone probably knows here that an S Corporation cannot be owned by a foreign person.
There’s also such an interesting form called a Form 5472, just to give you an example, which requires the Domestic Corporation to report certain transactions between the corporation and the 25% or more foreign owner(s) of that corporation and there’s a $10,000 penalty associated with the form for not filing it and which can go up to $50,000.