Is “Present Tax Year Only Disclosure” your answer to IRS Voluntary Disclosure?

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We handle a lot of inquiries from taxpayers trying to figure out if they really need to enter into the 2012 IRS Offshore Voluntary Disclosure Program. Tax preparers have also questioned us on what to do now that they have learned that a client has never reported their foreign income and foreign accounts.  Some tax advisors are recommending that taxpayers merely get into compliance on a go forward basis and do nothing to address the past non-compliance gambling that the IRS does not have the resources to detect the foreign account. I call this “Present Tax Year Only Disclosure”. This could be the worst advice ever.  In my opinion this option is also not viable because of the ease with which the U.S. government can flag Foreign Bank Account Reports (TDF 90-22.1) commonly known as “FBAR′s” and I have heard rumors that the Criminal Investigation Division (CID) has created a group of special agents to monitor for just this occurrence.

How would Present Tax Year Only Disclosure actually work in the real world? 

So let’s think about this first FBAR that a taxpayer is going to file to get into present and future compliance. This FBAR will list the following information – the bank, the account number and the value of the account.

Seems harmless enough. But the truth is that this information tells the IRS a lot more than that. For instance, let’s suppose that the IRS knew, through intense data collection, that any Credit Suisse bank account that starts with “240″ and was opened between 1997 and 1999.  Now it just so happens that this taxpayer’s 2013 FBAR includes a Credit Suisse bank starting with 240 with a balance of $750,000.

So what is this 2013 FBAR really saying? “Hey IRS, here is a foreign bank account that I opened around 1997-1999. I never had an FBAR filing obligation before because the account must have been under $10,000. But now, out of the blue, this account has blossomed from next nothing to $750,000 overnight.”

So then what would the IRS do with that information?  

Well if I were a CID special agent my thought process would be as follows:

The taxpayer has just reported a $750,000 account balance at Credit Suisse. Let’s take a look at his prior returns. Hmmmm… for the last 3 years he has made $50,000 a year or so… Thus… the deposit could not have come from previously taxed U.S. income. Did the taxpayer inherit this money? If he did he better have filed a form 3520 to report the inheritance or I get to hit him with a 35% penalty on the amount of the inheritance! Hmmmm…. No 3520 was filed. Gee… Since I can determine that the funds did not come from previously taxed earnings or from an inheritance there must be something fishy afoot here… Let’s audit this taxpayer. Matter of fact; let’s have the criminal investigation division take a look as well…

As you can see, this is not a viable option.

The IRS Civil Division has the ability to assess FBAR penalties, and the penalty is 50% of that account’s value for the year. Armed with a John Doe summons, the IRS could assess FBAR penalties for each of the years.

Additionally, because the taxpayer failed to include the interest earnings on his Credit Suisse account and most likely checked the box “no” on schedule B which asks about the existence of foreign accounts, the taxpayer has also filed false and fraudulent income tax returns for which he has exposure to the 75% civil fraud penalty. Unlike the normal six year statute of limitations for tax evasion, there is no statute of limitations for the civil fraud penalty.

So when doing the math from the fallout of a Present Tax Year Only Disclosure, the amount due could exceed the value of the accounts meaning the taxpayer could wind up with nothing, the accounts totally wiped out, or even a tax bill placing all of the taxpayer’s wealth at risk, not just his offshore accounts.  And the taxpayer could still face criminal charges.

If you have never reported your foreign investments on your U.S. Tax Returns, you should seriously consider participating in the IRS’s Offshore Voluntary Disclosure Initiative (OVDI) which allows taxpayers to come forward to avoid criminal prosecution and not have to bear the full amount of penalties normally imposed by IRS.  Taxpayers who hire an experienced tax attorney in Offshore Account Voluntary Disclosures should result in avoiding any pitfalls and gaining the maximum benefits conferred by this program.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems, get you in compliance with your FBAR filing obligations, and minimize the chance of any criminal investigation or imposition of civil penalties.

Final FATCA rules are issued – Deadline Is July 1, 2014 For Foreign Banks To Disclose U.S Account Holders To IRS

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Last week the IRS released a large package of regulations needed to implement the Foreign Account Tax Compliance Act (FATCA). FATCA, enacted as part of the Hiring Incentives to Restore Employment Act of 2010, P.L. 111-147, requires U.S. withholding agents to withhold tax on certain payments to foreign financial institutions (FFIs) that do not agree to report certain information to the IRS regarding their U.S. accounts and on certain payments to certain nonfinancial foreign entities (NFFEs) that do not provide information on their substantial U.S. owners to withholding agents. FATCA withholding goes into effect July 1, 2014.

One significant change is to accommodate direct reporting by certain entities about their substantial U.S. owners to the IRS rather than to withholding agents.  What this means is that your foreign bank can now directly report U.S. account holders directly to IRS without going through any third party or foreign government agency and be in compliance with FATCA.

The IRS has also made it easy for foreign banks to report U.S. account holders through an online FATCA registration system IRS has launched.  FFIs that are required to participate or else face withholding on their U.S. investments include:

  • Depository institutions, such as banks;
  • Custodial institutions, such as mutual funds;
  • Investment entities, such as hedge funds; and
  • Certain insurance companies that have cash-value products or annuities.

If you have never reported your foreign investments on your U.S. Tax Returns, you should seriously consider participating in the IRS’s Offshore Voluntary Disclosure Initiative (OVDI).  Once the IRS contacts you, you cannot get into this program and would be subject to the maximum penalties (civil and criminal) under the tax law.  Taxpayers who hire an experienced tax attorney in Offshore Account Voluntary Disclosures should result in avoiding any pitfalls and gaining the maximum benefits conferred by this program.

Protect yourself from excessive fines and possible jail time. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles and elsewhere in California qualify you for OVDI.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems, get you in compliance with your FBAR filing obligations, and minimize the chance of any criminal investigation or imposition of civil penalties.

IRS Grants Limited Relief For U.S. Persons Owning Mexican Property In A Fideicomiso

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In June 2013, the IRS handed down Rev. Rul. 2013-14 which states that Mexican Land Trusts (MLTs), also known as “fideicomisos”, are not trusts for purposes of IRS tax law.  Prior to the ruling, there was confusion over whether these MLTs were trusts subject to onerous tax reporting requirements involving foreign trusts.  As a result of the ruling, those who hold MLTs, which include many individuals who own vacation or retirement homes in Mexico, are not required to comply with burdensome tax reporting requirements typically applicable to foreign trusts.

Under the Mexican Federal Constitution, non-Mexican persons cannot directly own real property located in “restricted zones” in Mexico.  The restricted zones include real property located within 100 kilometers (63 miles) of Mexico’s inland borders and 50 kilometers (32 miles) of its coastline.

However, non-Mexican persons, with the help of a Mexican bank, can indirectly own real property through MLTs.  Under an MLT, documents are drawn up whereby the MLT entity would be set up, the Mexican bank would nominally hold bare legal title and the beneficial ownership would be retained by the non-Mexican person.

Rev. Rul. 2013-14 essentially disregards the MLT as a true entity and treats the non-Mexican person as the owner of the real property.  The great advantage of this is that the U.S. taxpayer does not need to file forms typically required for foreign trusts.

U.S. persons who receive money from foreign trusts are required to file Form 3520 “Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts” and owners of foreign trusts are required to file Form 3520-A, which is a return for the trust.  In addition, if the aggregate value of taxpayer’s interest in foreign assets exceed $10,000, he or she is required to file an FBAR form and may need to file Form 8938.

One caveat – the ruling is expressly limited to situations in which the Mexican bank holds only bare legal title.  It the non-Mexican person has a bank account out of which the Mexican bank, on its own initiative pays taxes or other expenses related to the property, the IRS could treat the MLT as a trust for U.S. tax purposes.  In addition, U.S persons would still be required to disclose ownership of foreign accounts in Mexico and elsewhere and report foreign interest income and foreign rental income on a U.S income tax return.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems, get you in compliance with your FBAR filing obligations, and minimize the chance of any criminal investigation or imposition of civil penalties.

Go For The Gold And Pay Your Tax – Olympic Medals Taxable

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While millions of Americans were glued to their televisions to watch American athletes compete in this year’s Winter Olympics, the Internal Revenue Service was quietly getting ready to make sure that all our Olympic winners pay taxes on their victories.

It’s true. The Internal Revenue Code mandates that If you win a prize in a lucky number drawing, television or radio quiz program, beauty contest, or other event, you must include it in your income. For example, if you win a $100 prize in a marathon, you must report this income on your Form 1040. If you refuse to accept a prize, do not include its value in your income.  Prizes and awards in goods or services must be included in your income at their fair market value.

That being the case, any athlete who accepts his or her Olympic medal will have to report its value as income and pay taxes on it.  Considering that the value of each medal ranges from $10,000 to $25,000, this can be a hefty tax bill of up to $9,000. That’s true even though the competition took place in Russia and not the United States.

Contrast this to winning Olympic athletes from most other countries don’t have to worry about their medals being taxed.  This unfairness has resulted in considerable debate during each session of Congress when a Summer or Winter Olympics is held but any legislation to change the tax law has never made it out of Congress.

You would think most Americans would be in favor of the legislation but there appears to be some backlash. For example, should an Olympian who comes home with 4 medals conceivably make $100,000 tax free while millions of hard working Americans struggle to support their families on far less income yet have to pay taxes? Also consider the millions dollars from endorsements that medal winners can make as a result of winning a medal.

It’s clearly a decisive issue with arguments on both sides. But what you need to remember that even income earned outside the U.S. may be taxable. Every year, thousands of taxpayers learn that lesson the hard way. If you live, compete or work outside the United States, you must still file tax returns here.  In addition, if you win a prize or award, you must claim the value of that prize or award on your tax return as income.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems and make sure you are fully utilizing all benefits under the tax laws.

IRS Warning: Beware Of Sophisticated Fraudulent Tax Collection Notice Scam Targeting Taxpayers

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From time to time the IRS issues consumer warnings on the fraudulent use of the IRS name or logo by scamsters trying to gain access to consumers’ financial information in order to steal their identity and assets. When identity theft takes place over the Internet, it is called phishing.

Suspicious e-Mail/Phishing

Phishing (as in “fishing for information” and “hooking” victims) is a scam where Internet fraudsters send e-mail messages to trick unsuspecting victims into revealing personal and financial information that can be used to steal the victims’ identity.  Current scams include phony e-mails which claim to come from the IRS and which lure the victims into the scam by telling them that they are due a tax refund.

2013/2014 Tax Season Fraudulent Tax Collection Notice Scam

The most recent scam that the public has told our office involves a sophisticated fraudulent tax collection notice scam targeting taxpayers for which the IRS has filed a Federal Tax Lien.

Here is how it works: The scamsters will search public records for the filing of a Federal Tax Lien by IRS and with the information gathered from that filing will generate a form letter and mail it to the targeted taxpayer.  The letter is designed to mimic an IRS notice but it is really coming from a third party having nothing to do with the IRS.  If the recipient of the notice contacts the number listed, the person answering your call will purport to be working for the IRS.  The intended victim is told he or she owes money to the IRS and it must be paid promptly through a pre-loaded debit card or wire transfer. If the victim refuses to cooperate, he or she is then threatened with arrest, deportation or suspension of a business or driver’s license. In many cases, the person who answered your call becomes hostile and insulting.

The IRS is aware of this scam too and has confirmed that this scam has hit taxpayers in nearly every state in the country.  The IRS does not and will not ask for credit card numbers over the phone, nor request a pre-paid debit card or wire transfer.

If you receive a notice regarding your taxes which do not bear the official seal of the Internal Revenue Service and an official verifiable address of an IRS office or Service Center, that is a sign that it really isn’t the IRS sending you a notice.

Other characteristics of this scam include:

  • Scammers use fake names and IRS badge numbers. They generally use common names and surnames to identify themselves.
  • Scammers may be able to recite the last four digits of a victim’s Social Security Number.
  • Scammers spoof the IRS toll-free number on caller ID to make it appear that it’s the IRS calling you back.
  • Scammers sometimes send bogus IRS emails to some victims to support their bogus calls.
  • Victims hear background noise of other calls being conducted to mimic a call site.
  • After threatening victims with jail time or driver’s license revocation, scammers hang up and others soon call back pretending to be from the local police or DMV, and the caller ID supports their claim.

The IRS does not initiate contact with taxpayers by email to request personal or financial information.  This includes any type of electronic communication, such as text messages and social media channels. The IRS also does not ask for PINs, passwords or similar confidential access information for credit card, bank or other financial accounts.

Employment Verification Contacts

If you receive a telephone call or a fax from someone claiming to be with the IRS and you are not comfortable providing the information, you should get that person’s name, badge number and office location and then contact the IRS customer service line at 1-800-829-4933 to verify the validity of the call or fax. Upon getting verification from this IRS customer service line, you may then contact the IRS employee who requested the information and provide the required information.

To Report Fraud

You may also report the fraudulent misuse of the IRS name, logo, forms or other IRS property by calling the IRS toll-free fraud hotline at 1-800-366-4484.

What You Should Do If You Really Do Have Tax Issues?

The tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles and California know exactly what to say and handle the IRS.  Our experience and expertise not only levels the playing field but also puts you in the driver’s seat as we take full control of resolving your tax problems. 

Description: The Law Offices Of Jeffrey B. Kahn, P.C. has helped many people avoid collection action by the IRS and State tax agencies. Working with one of our tax attorneys in Los Angeles or elsewhere in California is the best bet for reducing or eliminating the amount you owe.

 

Your Foreign Bank Is Disclosing You To The IRS

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The IRS has various ways to find out about international or overseas bank accounts.  The Foreign Account Tax Compliance Act (“FATCA”) which was passed by Congress in March 2010 requires foreign financial institutions to register with and report to the IRS certain information about their U.S. account holders.

The foreign financial institutions include, but are not limited to depositary institutions (e.g., banks), custodial institutions (e.g., mutual funds), investment entities (e.g., hedge funds or private equity funds) and certain types of insurance companies that have cash value products or annuities.

The foreign financial institutions are required to report information such as the identities of their U.S. account holders, the social security numbers of the U.S. account holders, the account numbers, account balances and income, such as interest and dividends earned on the foreign account.  If the foreign financial institutions do not register and agree to report, they face a 30% withholding tax on certain U.S.-source payments made to them.  With July 1, 2014 being the deadline under FATCA for compliance, virtually all foreign financial institutions have now established procedures to identify U.S. account holders and have each U.S. account holder sign a Form W-8 BEN or face closure of their account.

Under these procedures, the foreign bank will send you a letter that you have been identified as a U.S. accountholder to be reported to the IRS.  As such, the bank will ask you to submit proof that you have entered into the IRS’s Offshore Voluntary Disclosure Initiative (OVDI) which allows taxpayers to come forward to avoid criminal prosecution and not have to bear the full amount of penalties normally imposed by IRS.  If you have engaged tax counsel and entered into this program, you need not worry.

In addition, under the Bank Secrecy Act of 1970 financial institutions are required to report any deposit, withdrawal and transfer of $10,000 or more to the IRS.  These reporting requirements include international transactions and have been used as a basis to investigate taxpayers who have assets overseas.  So even if a U.S. taxpayer were to refuse to cooperate with the foreign financial institution and that bank were to close the account, the transfer of the funds out of that institution would be reported to IRS.

If you have never reported your foreign investments on your U.S. Tax Returns, you should seriously consider participating in the IRS’s Offshore Voluntary Disclosure Initiative (OVDI).  Once the IRS contacts you, you cannot get into this program and would be subject to the maximum penalties (civil and criminal) under the tax law.  Taxpayers who hire an experienced tax attorney in Offshore Account Voluntary Disclosures should result in avoiding any pitfalls and gaining the maximum benefits conferred by this program.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems, get you in compliance with your FBAR filing obligations, and minimize the chance of any criminal investigation or imposition of civil penalties.

IRS Warning: Beware Of Sophisticated Telephone Scam Targeting Taxpayers

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From time to time the IRS issues consumer warnings on the fraudulent use of the IRS name or logo by scamsters trying to gain access to consumers’ financial information in order to steal their identity and assets. When identity theft takes place over the Internet, it is called phishing.

Suspicious e-Mail/Phishing

Phishing (as in “fishing for information” and “hooking” victims) is a scam where Internet fraudsters send e-mail messages to trick unsuspecting victims into revealing personal and financial information that can be used to steal the victims’ identity. Current scams include phony e-mails which claim to come from the IRS and which lure the victims into the scam by telling them that they are due a tax refund.

2013/2014 Tax Season Telephone Scam

The most recent scam that the public has told our office involvesa sophisticated phone scam targeting taxpayers, including recent immigrants, throughout the country.

Here is how it works: Victims receive a call from someone purporting to be working for the IRS.  The intended victim is told he or she owes money to the IRS and it must be paid promptly through a pre-loaded debit card or wire transfer. If the victim refuses to cooperate, he or she is then threatened with arrest, deportation or suspension of a business or driver’s license. In many cases, the caller becomes hostile and insulting.

The IRS is aware of this scam too and has confirmed that this scam has hit taxpayers in nearly every state in the country.  The IRS does not and will not ask for credit card numbers over the phone, nor request a pre-paid debit card or wire transfer.

If someone unexpectedly calls claiming to be from the IRS and threatens police arrest, deportation or license revocation if you don’t pay immediately, that is a sign that it really isn’t the IRS calling.  When the IRS is first contacting a taxpayer on a tax issue is likely to occur via mail.

Other characteristics of this scam include:

  • Scammers use fake names and IRS badge numbers. They generally use common names and surnames to identify themselves.
  • Scammers may be able to recite the last four digits of a victim’s Social Security Number.
  • Scammers spoof the IRS toll-free number on caller ID to make it appear that it’s the IRS calling.
  • Scammers sometimes send bogus IRS emails to some victims to support their bogus calls.
  • Victims hear background noise of other calls being conducted to mimic a call site.
  • After threatening victims with jail time or driver’s license revocation, scammers hang up and others soon call back pretending to be from the local police or DMV, and the caller ID supports their claim.

The IRS does not initiate contact with taxpayers by email to request personal or financial information.  This includes any type of electronic communication, such as text messages and social media channels. The IRS also does not ask for PINs, passwords or similar confidential access information for credit card, bank or other financial accounts.

Employment Verification Contacts

If you receive a telephone call or a fax from someone claiming to be with the IRS and you are not comfortable providing the information, you should get that person’s name, badge number and office location and then contact the IRS customer service line at 1-800-829-4933 to verify the validity of the call or fax. Upon getting verification from this IRS customer service line, you may then contact the IRS employee who requested the information and provide the required information.

To Report Fraud

You may also report the fraudulent misuse of the IRS name, logo, forms or other IRS property by calling the IRS toll-free fraud hotline at 1-800-366-4484.

What You Should Do If You Really Do Have Tax Issues?

The tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles and California know exactly what to say and handle the IRS.  Our experience and expertise not only levels the playing field but also puts you in the driver’s seat as we take full control of resolving your tax problems. 

Description: The Law Offices of Jeffrey B. Kahn, P.C. has helped many people avoid collection action by the IRS and State tax agencies. Working with one of our tax attorneys in Los Angeles or elsewhere in California is the best bet for reducing or eliminating the amount you owe.

The Three Most Important Things To Do When You Know You Owe Money To The IRS.

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IRS debts require immediate attention.  So keep these things in mind:

1.     Make sure you really owe the money

If you owe a lot more tax than you expected, find out why. Read your completed return carefully and look for errors. It’s easy to add the same income twice, or to forget an important deduction. Maybe the IRS does not apply all your prior payments. If you expected to qualify for a deduction or credit, and your tax return doesn’t show it, make sure you answered all the questions correctly. One missed question or checkbox can cause you to miss out on tax benefits you may be entitled to.

Another way to determine if something is amiss is to compare this year’s return to your tax return from last year. If your tax situation has not changed drastically, but your tax bill has, find out why.

Just because you received a letter from the IRS that you owe money, don’t automatically assume the IRS is correct. They make mistakes, too. And if you did not file a return, the one that IRS prepares for you will almost always shows a higher liability than if you filed your own return. While you can attempt to contact the IRS for clarification, it is difficult to reach a person who has the knowledge and experience AND THE TIME to understand your problem and work out a solution. Also, when you do finally get to speak with an agent, they are acting in the best interest of the IRS – NOT YOU.

Never should you seek any payment resolution on a liability that is erroneously more than what you really owe.

2.     Minimize penalties and interest

Large tax bills are worse when you pay penalties and interest on top of the original amount owed. You can minimize penalties and interest in three ways:

Exceptions to underpayment of tax penalties

If you underpaid your taxes this year, but you owed considerably less last year, you generally don’t pay a penalty for underpayment of tax if you paid or had withheld at least as much as you owed last year, and you pay by the due date this year. By looking at last year’s tax liability and other tax information, it can be determined if the safe harbor rule reduces your penalties and interest. You may also be able to reduce your penalties and interest using the annualized income method if you received more of your income in the latter part of the year.

Ask for an abatement of penalties

The IRS may reduce or remove penalties and interest on the penalties if a taxpayer writes a letter explaining the situation. But notice that the interest on the tax cannot be abated. In order to succeed, you must show “reasonable cause” which may be met where you had an unusual tax event, you made an honest mistake, or you or your spouse had a serious illness.

Pay as quickly as possible

If you owe tax that may be subject to penalties and interest, don’t wait until April 15th or if on extension October 15th to file your return. Send an estimated tax payment or file early and pay as much tax as you can.

3.     See if you qualify for an Offer In Compromise or alternatively ask for an installment plan

If you can’t pay the tax by the time it is due, don’t avoid the bill. It will only get worse.

The IRS must allow you to make payments on your overdue taxes if you owe $50,000 or less and you can show that you cannot pay the amount you owe now. In that situation you may qualify to pay off the tax in as long as six years. Of course, you must also agree to comply with the tax laws, and you or your spouse must not have had an installment agreement with the IRS in the past five years.

Because an installment plan does not allow for any discount of the amount owed and the balance will continue to accrue penalties and interest, serious consideration should be given to an Offer In Compromise (“OIC”).

You’ve probably heard ads for experts promising to help you settle your IRS bill for less than you owe. It’s true that the IRS will negotiate back taxes through an OIC.

However, you must plan on offering at least as much as your net worth – everything you own, reduced by your debts and valuation discounts. There are also other considerations involved including whether you are a wager earner or you own your own business. You should first seek advice from an expert who is knowledgeable and has the experience in working OIC cases with the IRS. Check their credentials to make sure they are reputable – that is always the best way to insure that you have someone who is established and accountable to their clients. Nowadays, it is so easy and quick to check somebody out on the internet or through any professional licensing boards (i.e. State Bar, CPA, etc.) they are subject to.

A consultation with the Law Offices Of Jeffrey B. Kahn, P.C. can help you determine what the best strategy is for you.

Description: The Law Offices of Jeffrey B. Kahn, P.C. has helped many people avoid collection action by the IRS and State tax agencies. Working with one of our tax attorneys in Los Angeles or elsewhere in California is the best bet for reducing or eliminating the amount you owe.

How Does the IRS Find Out About Foreign Bank Accounts?

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The IRS has various ways to find out about international or overseas bank accounts.  The Foreign Account Tax Compliance Act (“FATCA”) which was passed by Congress in March 2010 requires foreign financial institutions to register with and report to the IRS certain information about their U.S. account holders.

The foreign financial institutions include, but are not limited to depositary institutions (e.g., banks), custodial institutions (e.g., mutual funds), investment entities (e.g., hedge funds or private equity funds) and certain types of insurance companies that have cash value products or annuities.

The foreign financial institutions are required to report information such as the identities of their U.S. account holders, the social security numbers of the U.S. account holders, the account numbers, account balances and income, such as interest and dividends earned on the foreign account.  If the foreign financial institutions do not register and agree to report, they face a 30% withholding tax on certain U.S.-source payments made to them.  With July 1, 2014 being the deadline under FATCA for compliance, virtually all foreign financial institutions have now established procedures to identify U.S. account holders and have each U.S. account holder sign a Form W-8 BEN or face closure of their account.

In addition, under the Bank Secrecy Act of 1970 financial institutions are required to report any deposit, withdrawal and transfer of $10,000 or more to the IRS.  These reporting requirements include international transactions and have been used as a basis to investigate taxpayers who have assets overseas.  So even if a U.S. taxpayer were to refuse to cooperate with the foreign financial institution and that bank were to close the account, the transfer of the funds out of that institution would be reported to IRS.

Another tool used by IRS is to get a Federal Court to issue “John Doe summonses” and have them served on financial institutions to investigate a foreign financial institution’s compliance in reporting U.S. account holders.  Unlike a normal summons which allows the IRS to find out information regarding a specific taxpayer whose identity the IRS knows, a John Doe summons allows the IRS to get the names of all taxpayers in a certain group.  In 2009, this very powerful tool allowed the IRS to get the names of many non-complying taxpayers in its investigation of Swiss banking giant UBS, eventually leading to UBS paying $780 million to settle the investigation.

Finally, the IRS has created a special unit to compare information they have received from the foreign financial institutions with what was reported to the IRS by each taxpayer on his or her present and past income tax returns.  You can bet that if you did not file FBAR’s or report your worldwide income, this group will pick up this discrepancy and have an audit or investigation started on you.

If you have never reported your foreign investments on your U.S. Tax Returns, you should seriously consider participating in the IRS’s Offshore Voluntary Disclosure Initiative (OVDI) which allows taxpayers to come forward to avoid criminal prosecution and not have to bear the full amount of penalties normally imposed by IRS.  Once the IRS contacts you, you cannot get into this program and would be subject to the maximum penalties (civil and criminal) under the tax law.  Taxpayers who hire an experienced tax attorney in Offshore Account Voluntary Disclosures should result in avoiding any pitfalls and gaining the maximum benefits conferred by this program.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems, get you in compliance with your FBAR filing obligations, and minimize the chance of any criminal investigation or imposition of civil penalties.

U.S. Taxpayer Reporting Requirements for Foreign Income Producing Real Estate

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U.S. taxpayers, who include U.S. Citizens or resident aliens, must report worldwide income from whatever source, subject to the same income tax filing requirements that apply to U.S. Citizens or resident aliens living in the U.S.  This worldwide income reporting requirement also applies to rental proceeds generated by real estate the taxpayer owns and rents in a foreign country.  A U.S. Taxpayer also must report on his or her U.S. Federal Income Tax Return the sale of real estate located in a foreign country.

A U.S. taxpayer that collects rental income from foreign real estate must report this income on Schedule E, Supplemental Income and Loss.  Schedule E asks for not only the rents received from the rental property, but also allows for deductions of many expenses for the property, such as repairs and mortgage interest paid.  If the taxpayer claims depreciation expenses of the rental property, the taxpayer may be required to file Form 4562, Depreciation and Amortization.

If the Schedule E shows a loss after deducting the allowable expenses from your rental income, complex passive activity loss limitations come into play in filing Form 8582, Passive Activity Loss Limitations.  Whether you can use the real estate loss to offset your other income depends on whether the real estate rental is considered a “passive activity.”  Generally, rental real estate is a passive activity, unless the taxpayer can meet certain qualifications to consider the rental activity as active.

Ownership of specified foreign assets, such as foreign bank accounts, often triggers certain tax reporting requirements.  For example, a U.S. taxpayer who owns a foreign account must file a FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), if the aggregate value of the foreign accounts exceeds $10,000 at any time during the calendar year.  Many taxpayers will also be required to file a Form 8938, Statement of Specific Foreign Financial Assets with his or her annual tax return depending on some specific threshold values.

Ownership of real estate generally does not trigger these additional reporting requirements.  However, if the real estate is held through a foreign entity, such as a trust or estate, then the foreign rental property must be reported on Form 8938, subject to the threshold values.  Additional reporting requirements come into play as well if the real estate is held through a trust or estate, including completing Part III of Schedule B, Interest and Ordinary Dividends.

Penalties

Failure to report your foreign rental income, to accurately report the income on your tax return, or to complete Form 8938 when necessary could expose the taxpayer to many penalties, including a failure-to-file penalty of $10,000, criminal penalties, and if the failure to file results in underpayment of tax, an accuracy-related penalty equal to 40% of the underpayment of tax and a fraud penalty equal to 75% of the underpayment of tax.

The reporting requirements for foreign rental real estate can become very complex and advanced for most taxpayers.  U.S. taxpayers who own income-generating real estate in a foreign country would benefit from the experienced tax attorneys of the Law Office Of Jeffrey B. Kahn, P.C. representing you to avoid the pitfalls associated with failure to comply with the reporting requirements associated with owing foreign real estate.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems, get you in compliance with your FBAR filing obligations, and minimize the chance of any criminal investigation or imposition of civil penalties.