IRS Says “Foreign” Online Gambling Accounts Must Be Reported On An FBAR

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Given all the press surrounding the “Report of Foreign Bank and Financial Accounts” or so-called FBARs, by now we all know about what should be reported on an FBAR, right? Well, given the Internal Revenue Service’s latest assertion in United States v. John C. Hom (Case No. C 13-03721 in the U.S. District Court for the Northern District of California), maybe we had better start studying once again.

Online Gambling Accounts

Mr. Hom was an avid and professional internet gambler with online gambling accounts maintained with various popular overseas entities such as FirePay.com (based in London), PokerStars.com (based in Isle of Man), and Partypoker.com (based in Gibraltar). The overseas gambling accounts circumvent U.S. laws that prohibit the interstate operation of betting businesses in the United States thus making online gambling technically illegal.

Mr. Hom was randomly selected for an audit when during the course of the audit the IRS agent discovered the online gambling accounts. The IRS then assessed the FBAR negligence $10,000 penalty for each unreported online gambling account for each year at issue. While

While these online accounts may not be a traditional type of financial accounts (such as a bank account), the IRS contends that they functioned in the same way as such traditional accounts. For example, taxpayer opened the accounts in his own name, he had a user name and password, funds were transferred or disbursed from the accounts at taxpayer’s discretion, taxpayer could transfer funds from one account to another, deposit and withdraw funds at will and could carry a balance in the accounts. For these reasons, the IRS maintains that the accounts at FirePay.com, PokerStars.com, and Partypoker.com are “bank, securities, or other financial account[s]” for purposes of FBAR reporting under the Bank Secrecy Act provisions.

This issue is currently being considered by the judge. We will keep you updated on what happens.

Who Must File FBAR?

The Bank Secrecy Act requires that a Report of Foreign Bank and Financial Accounts (FBAR), be filed if the aggregate balances of such foreign accounts exceed $10,000 at any time during the year. This form is used as part of the IRS’s enforcement initiative against abusive offshore transactions and attempts by U.S. persons to avoid taxes by hiding money offshore.

The FBAR covers a calendar year and must be filed no later than June 30th of the following year (regardless of whether you file an extension for you Form 1040) and includes any interest a U.S. person has in:

Offshore bank accounts
Offshore mutual funds
Offshore hedge funds
Offshore variable universal life insurance policies
Offshore variable annuities a/k/a Swiss Annuities
Debit card and prepaid credit card offshore accounts
Effective September 30, 2013, Form TD F 90-22.1 (the old FBAR form used in previous years) has been replace by FinCEN Form 114. Also, unlike the old FBAR form which was filed in paper format only, FinCEN From 114 can only be filed electronically. The deadline to file remains June 30th following the reporting calendar year (i.e., the 2013 FBAR is due June 30, 2014). No extensions are available.

The penalties for FBAR noncompliance are stiffer than the civil tax penalties ordinarily imposed for delinquent taxes. The penalties for noncompliance which the government may impose include a fine of not more than $500,000 and imprisonment of not more than five years, for failure to file a report, supply information, and for filing a false or fraudulent report.

The Solution For Past Noncompliance

The IRS is giving taxpayers one last chance to come forward and voluntarily disclose foreign accounts and unreported foreign income before the IRS starts investigating non-compliant taxpayers.

If you have never reported your foreign investments on your U.S. Tax Returns, you should seriously consider participating in the IRS’s 2012 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: 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, San Francisco and elsewhere in California qualify you for OVDI.

Reminder For Taxpayers with Foreign Assets of 2014 U.S. Tax Filing Obligations

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U.S. citizens and resident aliens, including those with dual citizenship who have lived or worked abroad during all or part of 2013 who will have a U.S. tax liability need to be mindful of their filing requirements in 2014.

The filing deadline is Monday, June 16, 2014, for U.S. citizens and resident aliens living overseas, or serving in the military outside the U.S. on the regular due date of their tax return. Eligible taxpayers get one additional day because the normal June 15 extended due date falls on Sunday this year. To use this automatic two-month extension, taxpayers must attach a statement to their return explaining which of these two situations applies.

Nonresident aliens who received income from U.S. sources in 2013 also must determine whether they have a U.S. tax obligation. The filing deadline for nonresident aliens can be April 15 or June 16 depending on sources of income.

Federal law requires U.S. citizens and resident aliens to report any worldwide income, including income from foreign trusts and foreign bank and securities accounts. In most cases, affected taxpayers need to fill out and attach Schedule B to their tax return. Certain taxpayers may also have to fill out and attach to their return Form 8938, Statement of Foreign Financial Assets.
Part III of Schedule B asks about the existence of foreign accounts, such as bank and securities accounts, and usually requires U.S. citizens to report the country in which each account is located.

Generally, U.S. citizens, resident aliens and certain nonresident aliens must report specified foreign financial assets on Form 8938 if the aggregate value of those assets exceeds certain thresholds.

Separately, taxpayers with foreign accounts whose aggregate value exceeded $10,000 at any time during 2013 must file electronically with the Treasury Department a Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts (FBAR). This form replaces TD F 90-22.1, the FBAR form used in the past. It is due to the Treasury Department by June 30, 2014, must be filed electronically and is only available online through the BSA E-Filing System website.

Federal tax law requires U.S. taxpayers to pay taxes on all income earned worldwide. U.S. taxpayers must also report foreign financial accounts if the total value of the accounts exceeds $10,000 at any time during the calendar year. Willful failure to report a foreign account can result in a fine of up to 50% of the amount in the account at the time of the violation and may even result in the IRS filing criminal charges.

The IRS is giving taxpayers one last chance to come forward and voluntarily disclose foreign accounts and unreported foreign income before the IRS starts investigating non-compliant taxpayers.

If you have never reported your foreign investments on your U.S. Tax Returns, you should seriously consider participating in the IRS’s 2012 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: 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, San Francisco and elsewhere in California qualify you for OVDI.

California Reporting Requirements for Canadian RRSP’s

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Sometimes the tax consequences at a Federal level are different than that at the State level.

Such is the case in California when dealing with a Canadian Registered Retirement Savings Plan (RRSP).

As explained in Revenue Procedure 89-45, a Canadian RRSP is not an Individual Retirement Account (IRA) because “these plans do not meet the requirements for qualification as individual retirement accounts under section 408(a) of the Internal Revenue Code. As a result, the earnings of such a plan are includable currently in the gross income of the beneficiary of the plan for United States income tax purposes.” Rev. Proc. 89-45; superseded by Rev. Proc. 2002-23. 2 Rev. & Tax. Code, § 17501. Because California also conforms to federal law regarding the treatment of IRA’s (Rev. & Tax. Code Sec 17501), an RRSP does not qualify as an IRA for California income tax purposes.

Revenue Procedure 89-45 then explains that for federal income tax purposes, a taxpayer may elect to defer the taxation of earnings on contributions made while the beneficiary is a resident of Canada, until the earnings are distributed from the RRSP. This special treatment is provided in accordance with a treaty between the United States and Canada, and does not apply to California.

The State Board of Equalization has previously held that tax treaties between the United States and other countries which expressly limit their application to federal income taxes do not prevent California from taxing persons otherwise covered by such treaties.” Appeal of M. T. de Mey van Streefkerk, 85-SBE-135, Nov. 6, 1985. The United States Supreme Court noted that “the tax treaties into which the United States has entered do not generally cover the taxing activities of subnational governmental units such as States … and if the treaty does apply to the States it will be specified in the treaty itself. Container Corp. v. Franchise Tax Board (1983) 463 U.S. 159, 196. Accordingly, the federal election to defer taxation on earnings of the RRSP is inapplicable for California income tax purposes.

Basically, the Franchise Tax Board considers a RRSP to be similar to a savings account. The Franchise Tax Board will treat a taxpayer’s original contributions to the RRSP, made while a Canadian resident, as a capital investment in the RRSP. A California resident must include any earnings from their RRSP in their taxable income and pay taxes on this income in the year earned. After a taxpayer pays tax on these earnings, the earnings will also be treated as capital invested in the RRSP. Therefore, when a taxpayer receives a distribution from their RRSP, the amount consisting of the contributions and the previously taxed earnings is considered a nontaxable return of capital.

In summary, under both federal and California law an RRSP does not qualify as an IRA and does not receive IRA treatment. The federal treaty that allows taxpayers to elect to defer taxation on their RRSP earnings until the time of distribution does not apply for California income tax purposes. California residents must include their RRSP earnings in their taxable income in the year earned.

California taxpayers who have an interest in a Canadian RRSP 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 having an interest in an RRSP.

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 Guidance Issued On Bitcoin Tax Reporting Requirements

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Bitcoin has been in the news frequently lately, particularly since the collapse of the Japanese-based Bitcoin exchange, Mt. Gox.  Bitcoin is a digital currency and peer-to-peer payment system created in 2009. Since 2009, the use of bitcoins has expanded significantly.  Bitcoins can be bought and sold for various currencies, generally through a series of online exchanges where participants can bid on bitcoins from individuals or buy them at market price from companies.

The unique characteristics of Bitcoin as a digital currency left many questions about tax reporting requirements, such as whether users of Bitcoin must file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR).  U.S. taxpayers who have an interest in, or signatory or other authority over a foreign financial account, such as a bank account, securities or other similar foreign accounts must file an FBAR if the aggregate value of the foreign accounts exceeds $10,000 at any time during the calendar year. As of October 1, 2013 the FBAR form must be filed through the Financial Crimes Enforcement Network’s (FinCEN’s) Bank Secrecy Act E-Filing System on or before June 30th of the year following the calendar year being reported. For example, to report foreign accounts held open in 2013, the taxpayer must file the FBAR by June 30, 2014.

Prior to the Internal Revenue Service’s release of Notice 2014-21 on March 25, 2014, we did not know whether the IRS would treat a virtual currency as currency or property. The IRS has now said – treat it as property. [IRS Information Release IR-2014-36 and Notice 2014-21].  I think that is a good answer. After all, Bitcoin is not used as the currency of any government and generally, are convertible to a currency of a government. For example, you can buy Bitcoin with U.S. dollars and convert it back to U.S. dollars.

So, what does it mean that Bitcoin is property? Here are a few tax examples.

• If you mine Bitcoin, you generate income equal to the value of the Bitcoin when mined. And if you are doing this as a business, you’ll also owe self-employment tax. [See Q&A 8 and 9 of Notice 2014-21].

• If you buy Bitcoin so you can use it instead of dollars, you’ll have some extra recordkeeping to handle. For example, you bought 1 Bitcoin (BTC) when it was worth $700. You later use half of that BTC to buy goods and at that time, 1 BTC is worth $800. You have a $50 gain. A few months later, you use the remaining .5 BTC to buy goods and at the time, 1 BTC is worth $1,000, you will report a gain of $150. The tax principle here is that if your wealth has increased and you cash out that wealth (realize it), you have income. When you can use something you paid $700 for to buy $900 of goods, you have income of $200. This is the same result you’d have if you had converted the Bitcoin back to dollars right before making the purchase of the goods in dollars. [See Q&A 6 and 7 of Notice 2014-21]

• Your employer pays you in Bitcoin. You’ll have income equal to the value of the Bitcoin on the day you receive it. And, yes, the employer will include this income in your W-2. Same answer if you are instead a contractor; it will be included in the Form 1099 your employer gives you. [See Q&A 10-14 of Notice 2014-21]

Federal tax law requires U.S. taxpayers to pay taxes on all income earned worldwide.  The knowing omission of such income can result in a minimum fine of $10,000 and/or potential incarceration of at least 1 year besides the standard civil penalties associated with the increase in tax and interest thereon.  U.S. taxpayers must also report foreign financial accounts if the total value of the accounts exceeds $10,000 at any time during the calendar year.  Willful failure to report a foreign account can result in a fine of up to 50% of the amount in the account at the time of the violation and may even result in the IRS filing criminal charges.

U.S. taxpayers who have bitcoins 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 bitcoins.

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.

2013 U.S. Expat Tax Updates for Americans Living Abroad

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As expats begin the task of gathering documents for their U.S. tax return preparation, here are some important updates to keep in mind.

Foreign Earned Income Exclusion (“FEIE”)

The Foreign Earned Income Exclusion is a valuable tax benefit that adjusts for inflation each year. For tax year 2013 the FEIE was $95,100 and for tax year 2014 it jumps to $97,600. This means you deduct the first $97,600 you earn. For some expats this exclusion alone could eliminate your entire U.S. tax liability. However, it’s important to remember that you must qualify as an expat to beeligible for this exclusion. You qualify via one of two residency tests: the Physical Presence test (“PPT”) or the Bona Fide Residence test (“BFR”). Many expats qualify by the PPT, which requires you to earn foreign income and be outside the U.S. for 330 of any 365 day period. Note that this is not a calendar year, but a rolling 365-day period. To qualify using the BFR, you must be overseas for at least one year and have no intentions of returning to the U.S.

Foreign Housing Exclusion

This is another exclusion available to expats to reduce U.S. tax liability. With this exclusion, you can deduct a certain amount of your housing expenses. For tax year 2013 the base deduction is $15,616 (it is tied to the FEIE each year). Your exclusion amount is prorated based on the number of days you are abroad. Now, if you happen to live in one of the many cities that the IRS deems to have a ‘higher cost of living,’ your exclusion will be even higher. Here is a sample of the increased allowances for some popular cities:

Sydney, Australia – $32,782
Mexico City, Mexico – $47,900
Seoul, Korea – $56,000
Dubai, United Arab Emirates – $57,164
Montreal, Canada – $60,600
London, United Kingdom – $88,200
Hong Kong, China – $114,300
Tokyo, Japan – $117,100

For a complete list of cities with higher allowances, click here: http://www.irs.gov/pub/irs-pdf/i2555.pdf

Foreign Account Tax Compliance Act (“FATCA”)

If you haven’t heard about FATCA yet, this year you certainly will. FATCA was created to uncover tax cheats hiding U.S. money in offshore accounts. Currently individuals with offshore assets are required to file FATCA Form 8938 if their assets exceed specific thresholds. This form is included with the Form 1040 filing and substantial penalties will be charged by the IRS where the IRS finds you omitted this form. Starting in July 2014, FATCA will require foreign financial institutions to report on the accounts of their American clients. What does this mean? Basically, there is no place for one to hide. If you have offshore assets exceeding the thresholds, you need to report them or your foreign financial institution will! The Form 8938 filing thresholds for expats are as follows:

• Single Filing: $200,000 on the last day of the year or $300,000 at any point during the year
• Married Filing Jointly: $400,000 on the last day of the year or $600,000 at any point during the year

FBAR (Foreign Bank Account Report)
There is a new process for filing your FBAR. The old way of paper filing Form TD 90-22.1 is history. You now need to file FBAR electronically to the US Treasury Department via FinCEN Form 114. The deadline is still the same—June 30th and there are no extensions.

You must file FBAR if you have foreign bank accounts totaling $10,000 or more. Note that this is an aggregate amount over all your accounts and even if you had $10,000 in the accounts on only one day, you will need to file FBAR. Penalties for failing to file can be steep, so if you are required to file, don’t miss the deadline!

The penalties for FBAR noncompliance are stiffer than the civil tax penalties ordinarily imposed for delinquent taxes. The penalties for noncompliance which the government may impose include a fine of not more than $500,000 and imprisonment of not more than five years, for failure to file a report, supply information, and for filing a false or fraudulent report.

Note that the filing threshold is different for the FBAR than for Form 8938 and the FBAR is filed separately from your Form 1040.

Foreign Tax Credit

If you paid or accrued foreign taxes to a foreign government on foreign source income that is still subject to U.S. tax, you may be able to take either a credit or itemized deduction for those taxes. The IRS allows the foreign tax credit so that you are not doubly taxed on the same income.

Taken as a deduction, the foreign income taxes reduce your U.S. taxable income. Taken as a credit, foreign income taxes reduce your tax liability. Most of the time, it is more advantageous to take foreign income taxes as a tax credit.

To claim the foreign tax credit, you need to fill out IRS Form 1116 unless the amount of credit you are claiming is $300 or less ($600 if married filing a joint return).

The laws regarding the foreign tax credit are complex and the application of the foreign tax credit can vary depending on various factors. For example, if you have foreign sourced qualified dividends or capital gains or capital losses that will affect the amount of foreign tax credit you can take.

Also, the U.S. has different tax treaties with other countries that may limit your foreign tax. The tax treaty with each country specifically addresses the type of income for which the tax credit is available and the rate limitation. For example, the tax treaty with the United Kingdom does not allow a tax credit for foreign taxes paid with respect to interest income. Also, the tax treaty with India caps the foreign taxes paid to 15%.

But in all cases, if the foreign income is not recognized on your U.S. tax return, you cannot claim as a foreign tax credit the taxes paid to the foreign county on said income.

Obamacare

In 2014 Obamacare (otherwise known as the Affordable Care Act) came into effect. While this doesn’t impact your 2013 taxes, you need to be aware of the future impact it can have on you.Obamacare requires that every American hold the minimum essential healthcare coverage—those who don’t will pay a penalty on their taxes. If you qualify as an expat (via the PPT or BFR) you are exempt from Obamacare. If you do not qualify (i.e. you are on a shorter-term assignment or haven’t been abroad long enough yet) or you are ineligible for a qualifying U.S. expatriate healthcare policy, you may be subject to the tax. The penalty for 2014 is the greater of $95 per adult and $47.50 per child OR 1% of your family income (defined as income over and above the filing threshold). If you return to the U.S. after being abroad, you will be required to enroll in a qualified policy in order to avoid the tax.

Staying abreast of the latest tax updates is critical for expats, as these updates can certainly save you money and help avoid costly oversights. 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.

FBAR: Goodbye Form TDF 90.22-1 and Hello FinCEN Form 114

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The Financial Crimes Enforcement Network (FinCEN) is a bureau of the United States Department of the Treasury that collects and analyzes information about financial transactions in order to combat domestic and international money laundering, terrorist financing, and other financial crimes. On September 30, 2013, FinCEN posted on their internet site, a notice stating that the FinCEN Form 114, Report of Foreign Bank and Financial Accounts (the current FBAR form) would replace Form TD F 90-22.1 (the old FBAR form used in previous years). If you have a financial interest in, or you are signatory authority over foreign account(s) that total more than $10,000 at any time during the calendar year, you are required to file Form 114 no later than June 30th for the following year. The 2013 Form 144 is due June 30, 2014.

Some of the new features of Form 114 include:

1) The requirement that From 114 must be filed electronically. The old FBAR allowed paper filing but that is no longer the case with Form 114. It must be filed electronically.

2) An option where you can “explain a late filing”. You can also indicate whether the filing is made in conjunction with an IRS compliance program.

The electronic filing system on the FinCEN website is called the BSA E-Filing System (BSA standing for the Bank Secrecy Act) and it allows you to save changes to your form, track progress of the processing of your form and receive electronic notices. Either you or your tax preparer can file this form. By having your foreign account information submitted electronically to the U.S. Treasury, the government will be able to more quickly and effectively match this information to foreign sourced income reported on your current and past Federal income tax returns. Discrepancies would be identified by the government’s computer and those taxpayers would be referred for examination or investigation by the IRS.

The penalties for FBAR noncompliance are stiffer than the civil tax penalties ordinarily imposed for delinquent taxes. The penalties for noncompliance which the government may impose include a fine of not more than $500,000 and imprisonment of not more than five years, for failure to file a report, supply information, and for filing a false or fraudulent report.

With the option for taxpayers to include why this Form for any prior year is being filed late, taxpayers may be tempted to use this process in an attempt to come into compliance for failing to report foreign income on prior year’s income tax returns and/or failing to disclose foreign bank accounts. Beware that such disclosure does not protect you from the heavy fines and possible criminal charges. Instead, 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.

Bitcoin Tax Reporting Requirements

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Bitcoin has been in the news frequently lately, particularly since the collapse of the Japanese-based Bitcoin exchange, Mt. Gox. Bitcoin is a digital currency and peer-to-peer payment system created in 2009. Since 2009, the use of bitcoins has expanded significantly. Bitcoins can be bought and sold for various currencies, generally through a series of online exchanges where participants can bid on bitcoins from individuals or buy them at market price from companies.

The unique characteristics of Bitcoin as a digital currency leaves many questions about tax reporting requirements, such as whether users of Bitcoin must file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR).U.S. taxpayers who have an interest in, or signatory or other authority over a foreign financial account, such as a bank account, securities or other similar foreign accounts must file an FBAR if the aggregate value of the foreign accounts exceeds $10,000 at any time during the calendar year. As of October 1, 2013 the FBAR form must be filed through the Financial Crimes Enforcement Network’s (FinCEN’s) Bank Secrecy Act E-Filing System on or before June 30thof the year following the calendar year being reported. For example, toreport foreign accountsheld open in 2013, the taxpayer must file the FBAR by June 30, 2014.

The first major issue with whether a U.S. taxpayer must file an FBAR on a Bitcoin account is whetherthese accounts qualify as a “financial account” as defined on the FBAR form.  The FBAR instructions define a “financial account” to include “a securities, brokerage, savings, demand, checking, deposit, time deposit, or other account maintained with a financial institution (or other person performing the services of a financial institution).”

FinCEN could deem a Bitcoin account a financial account, particularly since FinCEN has required some exchanges to register as Money Service Businesses.  SeeFIN-2013-G001, “Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies,” March 18, 2013.  Furthermore, bitcoins can be spent like regular currency to purchase items or can be exchanged for various currencies that would be subject to the FBAR requirements if held in a financial account.

On the contrary, significant parallels can be drawn between bitcoins and a safety deposit box holding gold coins.  A user that owns bitcoins can essentially print out the bitcoins on paper and hold them physically, such as holding gold coins in a safety deposit box.  The IRS has stated that a U.S. taxpayer who owns gold coins in a safety deposit box has “direct ownership” of this asset, which means the taxpayer does not need to file an FBAR or a Form 8938, Statement of Specific Foreign Financial Assets (discussed below).  However, if the gold coins are held in an account at a foreign bank, the value of those gold coins, and possibly bitcoins, must be reported on the FBAR and Form 8938.

As discussed above, the U.S. taxpayer who owns bitcoinsmay also be required to file Form 8938, Statement of Specific Foreign Financial Assets with his or her annual tax return, if the Bitcoin accounts are financial accounts.  Whether a taxpayer is required to file this form depends on where the taxpayer lives, the taxpayer’s filing status, and the value in the accounts.  For example, unmarried taxpayers living in the United States must file Form 8938 if the total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.

Failure to comply with the above reporting requirements can result in steep penalties to the unwitting taxpayer.  Failure to file an FBAR may result in civil penalties for negligence, pattern of negligence, non-willful, and willful violations.  These penalties range from a high penalty for willful violations, equal to the greater of $100,000 or 50% of the balance in the account at the time of violation, to a low penalty of $500 for negligent violations.  For failing to file a correct Form 8938, the taxpayer could face 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.

U.S. taxpayers who have bitcoins 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 bitcoins.

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. Taxpayers Owning An Interest In A Foreign Entity

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A U.S. taxpayer who holds an interest in a foreign entity may not realize that he or she must comply with complex tax reporting requirements as a result of holding an interest in the foreign entity.  First, a U.S. taxpayer who is a shareholder of a “controlled foreign corporation” (CFC), as defined in 26 U.S.C. § 957, must pay taxes on certain income of the CFC, such as foreign investment income.

A U.S. taxpayer who has a financial interest in a foreign entity may be required to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), if the foreign entity is the owner of record or holder of legal title of foreign accounts, such as bank accounts or stocks, and the aggregate value of the foreign accounts exceeds $10,000 at any time during the calendar year.  As of October 1, 2013 the FBAR form must be filed through the Financial Crimes Enforcement Network’s (FinCEN’s) Bank Secrecy Act E-Filing System on or before June 30th of the year following the calendar year being reported.  For example, to report foreign accounts held open in 2013, the taxpayer must file the FBAR by June 30, 2014.

Whether the U.S. taxpayer is deemed to have a financial interest in a foreign account and thus may be required to file an FBAR to report the entity’s foreign accounts depends in part on the type of entity involved and the taxpayer’s interest in the entity.  The U.S. taxpayer is deemed to have a financial interest in a foreign financial account if the owner of record of legal title is a corporation for which the U.S. taxpayer owns directly or indirectly (i) more than 50% of the total value of shares of stock, or (ii) more than 50% of the voting power of all shares of stock.  If the U.S. taxpayer has either (i) an interest in more than 50% of a partnership’s profits, or (ii) an interest in more than 50% of the partnership capital, then the U.S. person is deemed to have a financial interest in the foreign accounts held by the partnership.  Finally, a U.S. taxpayer is deemed to have a financial interest in a foreign financial account if the owner of record of legal title is any other entity in which the U.S. taxpayer owns directly or indirectly more than 50% of the voting power, total value of equity interest or assets, or interest in profits.  If the U.S. taxpayer falls into one of the above categories, he or she must report the foreign accounts on an FBAR if the aggregate balance exceeds $10,000 at any time during the year.

Certain U.S. taxpayers who own an interest in a foreign corporation may also be required to file Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations.  Form 5471 gives several categories of persons who must file this form.  For example, a U.S. citizen or resident who acquires stocks in a foreign corporation and the stock interest is either (i) 10% or more of the total value of the foreign corporation’s stock, or (ii) 10% or more of the total combined voting power of all classes of stock with voting rights.  Depending on the category in which the taxpayer falls, he or she may be required to attach additional schedules to the Form 5471.  A taxpayer who may be involved in a foreign partnership must follow similar rules by filing a Form 8865.

In addition to filing the above forms form, the U.S. taxpayer must follow certain reporting requirements on his or her annual tax return.  First, the U.S. taxpayer must include a completed Schedule B, Interest and Ordinary Dividends, with his or her annual tax return.  On Schedule B, the taxpayer will complete Part III, Foreign Accounts and Trusts, which asks whether, at any time in the year, the taxpayer had a financial interest in or signatory authority over a foreign financial account.  Schedule B also asks whether the taxpayer is required to file an FBAR, and if so, in which foreign country the financial account was located.

The U.S. Taxpayer may also be required to file Form 8938, Statement of Specific Foreign Financial Assets with his or her annual tax return.  In the case of holding an interest in a foreign entity, the U.S. taxpayer may list as financial assets, for example, any stocks or securities issued by a foreign corporation and any partnership interest in a foreign partnership.  Whether a taxpayer is required to file this form depends on where the taxpayer lives, the taxpayer’s filing status, and the value in the accounts.  For example, unmarried taxpayers living in the United States must file Form 8938 if the total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.

Failure to comply with the above reporting requirements can result in steep penalties to the unwitting taxpayer.  Failure to file an FBAR may result in civil penalties for negligence, pattern of negligence, non-willful, and willful violations.  These penalties range from a high penalty for willful violations, equal to the greater of $100,000 or 50% of the balance in the account at the time of violation, to a low penalty of $500 for negligent violations.

The penalties for failing to file a Form 5471 or Form 8865 depend in part on the category of taxpayer, but may include a $10,000 penalty for each failure to file, plus an additional $10,000 per month if the Form 5471 is not filed within 90 days of the deadline.  All taxpayers who fail to file a Form 5471 or Form 8865 also may be subject to criminal penalties and penalties for understating the financial assets.

For failing to report income received from a CFC and failing to file a correct Schedule B and Form 8938, the taxpayer could face 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.

U.S. taxpayers who may have a financial interest in a foreign entity 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 an interest in a foreign entity.

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.

Required Disclosures To The IRS Of Indian Accounts – NRE, NRO and PPF

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The U.S. government requires U.S. tax persons to report their “worldwide income” from any source whether it is earned in the U.S. or abroad.  A U.S. tax person includes both U.S. citizens, green card holders and other persons satisfying the substantial presence in the U.S. standard.

Indian nationals residing in the U.S. who hold Indian accounts with an aggregate balance of over $10,000 (U.S.) are required to report those accounts on a Foreign Bank Account Report (“FBAR”).  In addition, any income earned on those accounts need to be included on any U.S. income tax returns.

There are different types of Indian accounts that an Indian national may hold.  A Non-resident Ordinary Account (“NRO”) is an account made for income earned in India.  Income earned on an NRO may be taxed by the Indian government.  There is a limit of $1 million (U.S.) net of taxes that can be repatriated from an NRO in any given year.

A Non-resident External Account (“NRE”) is an account which allows an Indian national to hold income earned outside of India and is not taxed by the Indian government.  There is no limit on the amount that can be repatriated.

Funds held in both NRO’s and NRE’s must be in Indian Rupees.

Taxes paid to the Indian tax authorities for interest income earned from an NRO may be claimed as foreign tax credit on the U.S. tax return to avoid “double taxation”.

Another type of account an Indian national may hold is a Public Provident Fund (“PPF”).  A PPF is savings vehicle that has restrictions on withdrawals and any earnings on a PPF are not taxed by the Indian government.  Only an Indian citizen residing in India may initially open a PPF but if he or she becomes a resident of another country while holding the PPF, he or she may be allowed to hold the PFF under certain circumstances.  While this type of account may be utilized as a retirement fund in India, it is not recognized by the U.S. as a tax-deferred retirement account.  Therefore, the U.S. requires that income on PPF’s be included on an Indian national’s U.S. income tax return.

Recently, the IRS has announced more aggressive efforts in cracking down on Indian account holders, particularly in Northern California.  If you have never reported income from your foreign accounts or 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.

Foreign Gifts and Inheritances – When Do You Need to File Form 3520?

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If you receive a gift or inheritance from a foreign person or other foreign entity, you may need to file Form 3520- Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts.

Is it foreign income or a foreign gift or bequest?

The first step in determining if you need to report your foreign gift or bequest to the IRS is to determine if the cash or property received is income or can be characterized as a gift. Income, of course, would be reported as income on your personal income tax return. If there were payments made to you in previous years that should have been characterized as income and you did not report that income on your U.S. income tax returns, you should seriously consider entering into the Offshore Voluntary Disclosure Initiative (OVDI) to avoid the maximum civil penalties and avoid criminal charges Amounts paid for qualified tuition or medical bills on behalf of a U.S. person are not considered gifts or income.   If the money or property received from the foreign person or entity can be rightfully characterized as a gift or bequest, then you need to consider whether you meet the filing thresholds to report the gifts.
What is the value of the foreign gift or bequest?

If during the course of a calendar year:

(a) The value of the gifts and bequests received from a nonresident alien individual or foreign estate, which must also include gifts or bequests received from foreign persons related to the nonresident alien individual or foreign estate, exceeds $100,000, OR

 

(b) The value of the gifts received from foreign corporations or foreign partnerships, which must also include gifts received from foreign persons related to the foreign corporations or partnerships, exceeds $15,102 in 2013, or $15,358 in 2014 (this value is adjusted annually for inflation),

THEN you must file Form 3520.

Where the donor (the person making the gift) is related to another donor, the IRS requires that you must aggregate these gifts to determine whether the filing threshold is met.  For example, if your uncle in Pakistan gives you $50,000 and your aunt in India gives you $60,000 in the same year, the sum of their gifts would mandate that the $100,000 filing threshold was met.   These gifts would be reported on Part IV of Form 3520.

Where and when to file Form 3520?

Form 3520 is filed separately from your income tax return.  The due date for filing Form 3520 is the same as the dues date for filing your federal individual income tax return, including extensions.  The form should be sent to the Internal Revenue Service Center, P.O. Box 409101, Ogden, UT 84409.

There may be penalties if you do not file your Form 3520 or if it is incomplete or inaccurate.  For foreign gifts, you may be subject to a penalty equal to 5%, but not to exceed 25%, of the amount of the foreign gift or bequest for each month for which failure to report continues. For distributions from foreign entities, the penalty is equal to the greater of $10,000 or 35% of the gross value of the distributions from the foreign entity.

U.S. taxpayers who receive a gift or inheritance from a foreign person or other foreign entity 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 the receipt of foreign gifts.

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.