mutual funds and offshore investing

Beware the Potential Tax Pitfalls of Investing in Offshore Mutual Funds or Owning Foreign Insurance Policies

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Beware the Potential Tax Pitfalls of Investing in Offshore Mutual Funds or Owning Foreign Insurance Policies

If you have never reported your foreign investments on your U.S. Tax Returns, the IRS has established the Offshore Voluntary Disclosure Program (OVDP) which allows taxpayers to come forward to avoid criminal prosecution and not have to bear the full amount of penalties normally imposed by IRS.  When entering into OVDP, a taxpayer must file amended income tax returns reporting worldwide income and file all required informational tax forms.  Many taxpayers who attempt to do this on their own and who have Foreign Mutual Funds or Foreign Insurance Policies are finding that their OVDP submissions are being rejected or examined because of some arcane tax laws and tax procedures associated with these investments that most laypeople are not aware.

Do You Have Foreign Mutual Funds?

U.S. taxpayers ought to be aware of the potential tax heartaches associated with investing in mutual funds held by foreign banks or foreign brokerage firms. When making such investments through U.S. firms, any appreciation or depreciation of value of the funds is not recognized as gain or loss until the fund is sold or liquidated.  This is not the case with the same type of investments in foreign firms.  Each year the U.S. investor must pick up as income or record a loss in the appreciation or depreciation of value of the funds even though there was no sale or liquidation of the funds.  Essentially, such an investor loses the advantage of deferring gains which is enjoyed by those investors dealing with U.S. firms.

To understand how this operates – under the Internal Revenue Code, there is a concept called Passive Foreign Investment Company or “PFIC”.  A foreign corporation is classified as a PFIC if it meets one of the following tests:

  1. Income Test– 75% or more of the corporation’s gross income is passive income (interest, dividends, capital gains, etc.)
  2. Asset Test– 50% or more of the corporation’s total assets are passive assets; passive assets are investments that produce interest, dividends or capital gains.

The IRS has extended the characterization of a PFIC to include most foreign-based mutual funds, hedge funds and other pooled investment vehicles.

A. U.S. taxpayer with these investments is required to fill out Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualifying Electing Fund, and include it with his Form 1040 along with the appropriate PFIC income and tax computations.  The IRS offers various complicated methods of reporting PFIC income.  Under one such method, “Mark-to-Market”, the IRS requires the reporting of the value of a mutual fund from year to year and taxes any appreciation in the mutual fund values from year to year.  The tax rate that applies is 20%. This is in addition to the normal taxation of dividends and capital gains that domestic mutual funds are taxed on.

Reporting the appreciation of a mutual fund from year to year may end up being no small task as oftentimes a typical stock portfolio will contain twenty to thirty funds which may involve lots of trade activity over the course of many years.  The taxpayer needs to keep accurate and comprehensive records of all information on the mutual fund(s) including share basis, yearly balances, and any sales or purchases from year to year. With such level of activity to record each year, no wonder how laypeople and even tax preparers cannot get these computations right leading to higher penalties and perhaps jeopardizing a taxpayer’s Voluntary Disclosure Submission.

Do You Have A Foreign Insurance Policy?

There is an excise tax under Internal Revenue Code Sec. 4371 imposed on insurance policies issued by foreign insurers. Any person who makes, signs, issues, or sells any of the documents and instruments subject to the tax, or for whose use or benefit they are made, signed, issued, or sold, is liable for the tax.

The following tax rates apply to each dollar (or fraction thereof) of the premium paid.

  1. Casualty insurance and indemnity, fidelity, and surety bonds: 4 cents. For example, on a premium payment of $10.10, the tax is 44 cents.
  2. Life, sickness, and accident insurance, and annuity contracts: 1 cent. For example, on a premium payment of $10.10, the tax is 11 cents.
  3. Reinsurance policies covering any of the taxable contracts described in items (1) and (2): 1 cent.

However, the tax doesn’t apply to casualty insurance premiums paid to foreign insurers for coverage of export goods in transit to foreign destinations.  Premium means the agreed price or consideration for assuming and carrying the risk or obligation. It includes any additional charge or assessment payable under the contract, whether in one sum or installments. If premiums are refunded, claim the tax paid on those premiums as an overpayment against tax due on other premiums paid or file a claim for refund.

The liability for this tax attaches when the premium payment is transferred to the foreign insurer or reinsurer (including transfers to any bank, trust fund, or similar recipient designated by the foreign insurer or reinsurer) or to any nonresident agent, solicitor, or broker. A person can pay the tax before the liability attaches if the person keeps records consistent with that practice.

The person who pays the premium to the foreign insurer (or to any nonresident person such as a foreign broker) must pay the tax and file the return (Form 720, Quarterly Federal Excise Tax Return). The Form 720 covers the last calendar quarter and is due no later than the last day of the month succeeding the reporting quarter.  For example, a Form 720 covering the quarter ended September 30, 2016 is due October 31, 2016.  If you are required to file this Form, you will also need to secure a Taxpayer Identification Number (not your social security number) as these excise taxes are tracked separately by IRS just like employment taxes.

The fact that a tax treaty with the foreign county exempts the taxation of these insurance policies does not waive the requirement for you to file the Form 720.  Attach any disclosure statement to the first quarter Form 720 you would need to file. You may be able to use Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b), as a disclosure statement.

Conclusion.

If you are a U.S, taxpayer with foreign mutual funds or foreign insurance policies, make sure your tax filings are compliant and complete by enlisting the assistance of counsel experienced in the reporting of these investments.

IRS SEEKS TO ELIMINATE GIFT AND ESTATE TAX DISCOUNTS ON FAMILY-OWNED BUSINESSES AND ENTITIES

IRS SEEKS TO ELIMINATE GIFT AND ESTATE TAX DISCOUNTS ON FAMILY-OWNED BUSINESSES AND ENTITIES

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IRS SEEKS TO ELIMINATE GIFT AND ESTATE TAX DISCOUNTS ON FAMILY-OWNED BUSINESSES AND ENTITIES

On August 2, 2016, the Treasury Department issued proposed regulations under the authorization contained in Section 2704(b) of the Code, with a hearing scheduled on December 1, 2016. The proposed regulations will essentially take away all valuation discounts for interfamily transfers of entities controlled by the transferor and his or her family.

I remember back during the Clinton (Bill) administration when the government was seeking to eliminate the ability for taxpayers to claim discounts on transfers of interests in family owned businesses and entities. The government was not able to pass this legislation but was successful in establishing a new Chapter in the Internal Revenue Estate Tax Code (Chapter 14, Sections 2701 to 2704) which restricted the ability of certain “estate freeze techniques” when transferring interests in family-owned businesses.

Now two decades later, it looks like the government is finally getting what it always wanted to eliminate or restrict the use of valuation discounts when it comes to transfers of assets to save on estate and gift taxes. The logic behind valuation discounts (minority interest and marketability discounts) is that if you give a 20% interest in your $100 million business to your child, you’re not giving away $20 million but in fact something worth less because the child cannot turn around and sell the interest for $20 million. Now it is likely that the proposed regulations will not take effect until sometime next year but that being the case it is imperative to complete any discount-related planning throughout the next several months.Some of the major changes that will be adopted in the proposed regulations are discussed below.

The proposed regulations give a broad definition of control. Specifically, control is holding 50% of equity in an entity (corporation, partnership or LLC). For a limited partnership, control is equivalent to having an interest in the general partner.

Under Section 2704(a) the lapse of a voting right or liquidation right in a family owned entity is treated as a transfer by the individual holding the right immediately before it lapses. The current regulations exempt such a transfer if the rights with respect to the transferred interest are not restricted or eliminated. The proposed regulations would deny such exemption for transfers occurring within three years of death if the entity is controlled by the transferor and members or his or her family immediately before and after the lapse.

The proposed regulations will significantly change valuations for transfer tax purposes of interests in family owned entities that are subject to restrictions on redemptions or liquidations. Specifically, such restrictions will be disregarded in valuing such an interest for gift/estate tax purposes when the interest in transferred by a family member. The reasoning for this is the fact that after the transfer the restriction will lapse or can be removed by the transferor or a member of his or her family.

The proposed regulations remove nearly all discounts by disregarding the interests held by non-family members as well. Interests held by non-family members that may otherwise give such non-family member the power to prevent the removal of a restriction will be disregarded unless those interests have been held for at least three years; make up at least 10% of the entity; the total combined non-family interests is more than 20% of all interests; or they hold a put interest in the entity to receive a minimum value.

The proposed regulations issued under Section 2704 would, if adopted in final form, have a significant impact on the wealth transfer tax valuation of interests in family controlled entities. Essentially, almost no minority discounts would be allowed. So if you are in a situation of having a large estate (over $5million of net value) with interests in entities, whether operating businesses or investment entities, you should contact counsel to see what planning can still be implemented before these benefitsdisappear.

Tax advice, tax tips

Tips If You Owe Taxes

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Tips If You Owe Taxes

Mailed Tax Bills.If you owe taxes, you will first receive a bill in the U.S. mail from the IRS which tells you your balance owed through a certain date indicated on the bill. Don’t fall for those calls from people claiming to be the IRS threatening criminal action against you if you don’t pay the amount they are demanding. The IRS will never make an initial contact with you by telephone without first having sent you written notice that you owe the IRS or are under examination. Of course if you have the available funds, you should pay the balance no later than the date indicated in the bill to avoid any extra charges. If you can’t pay in full, keep in mind that interest and penalties continue to accrue on the balance so any payment made to IRS will result in lower accruals of interest and penalties for the future.

Full Payment Agreements of up to 120 days. If you owe more tax than you can pay, you may qualify for more time -up to 120 days- to pay in full. You do not have to pay a user fee to set up a short-term full payment agreement. However, the IRS will charge interest and penalties until you pay in full.

Apply for an installment agreement.If you’re financially unable to pay your tax debt immediately, you can make monthly payments through an installment agreement. Before applying for any payment agreement, you must file all required tax returns and if you are required to make estimated tax payments, you must be current in making those payments. The IRS calls this “being in current compliance”. By being in current compliance, the installment agreement can now cover all tax periods with outstanding balances.

“No Verification” Installment Agreements. For individuals who owe $50,000 or less in combined individual income tax, penalties and interest, OR businesses that owe $25,000 or less in payroll taxes, you can have an installment agreement set up with IRS without presenting any financial information.
“Full Verification” Installment Agreements. For individuals and businesses that exceed the thresholds of the No Verification Installment Agreements, the IRS will require that full financial disclosure be made with your payment plan proposal. Be careful though because the IRS does limit certain expenses and depending on the type of installment agreement entered, you may not be able to get full credit for your actual living expenses. So if you are in this situation, it is best to hire tax counsel to compile the proposal and financial disclosures. If you do it on your own first and fail, your representative will not be able to “undo” what was already disclosed by you to IRS and that could then limit the representative in getting the optimum result.

Understand Your Installment Agreement & Avoid Default. Keep in mind that your future refunds will be applied to your tax debt until it is paid in full. Pay at least your minimum monthly payment when it’s due and if paying by check include your name, address, SSN, daytime phone number, tax year and return type on your payment. Make sure the check is mailed to the right address for delivery no later than the payment due date. File all required tax returns on time & pay all taxes in-full and on time as any new liability will default your installment agreement. Make all scheduled payments even if the IRS applies your refund to your account balance.

If you don’t receive your statement from IRS, send your payment to the address listed in your installment agreement.
There may be a reinstatement fee if your agreement goes into default. Penalties and interest continue to accrue until your balance is paid in full. If you are in danger of defaulting on your payment agreement for any reason, it is a good idea to hire tax counsel who can seek reinstatement or even a medication where you can make lower monthly payments.

Check out an offer in compromise. An offer in compromiseor OIC may let you settle your tax debt for less than the full amount you owe. An OIC may also be helpful if full payment may cause you financial hardship. Not everyone qualifiesafter all, when you are looking for a discount on your IRS liability the government wants to make sure that collectability of the full liability plus interest and penalties is highly doubtful before granting a discount.
An offer in compromise allows you to settle your tax debt for less than the full amount you owe. It may be a legitimate option if you can’t pay your full tax liability, or doing so creates a financial hardship.

The IRS will consider your unique set of facts and circumstances with a focus on your income and expenses to determine your ability to pay and your asset equity.
The IRS will generally approve an offer in compromise when the amount offered represents the most the IRS can expect to collect within a reasonable period of time.

Make sure you are eligible
Before the IRS can consider your offer, you must be current with all filing and payment requirements. You are not eligible if you are in an open bankruptcy proceeding and if you file for bankruptcy while your OIC is being evaluated, the IRS will stop evaluation and return the OIC.

Submit your offer
The form to use in filing an OIC is Form 656. You must include payment of an application fee of $186.00 and a deposit towards the amount offered. Additional you must include financial disclosures. The main forms to use are Form 433-A (OIC) (for individuals) or 433-B (OIC) (for businesses) and these forms list all required documentation that must be included. Like installment agreement requests, the IRS limits certain living expenses so it make sense to engage tax counsel to pursue this process.

Select a payment option
Your initial payment will vary based on your offer and the payment option you choose:
Lump Sum Cash: Submit an initial payment of 20% of the total offer amount with your application. Wait for written acceptance, then pay the remaining balance of the offer in five or fewer payments.
Periodic Payment: Submit your initial payment with your application. Continue to pay the remaining balance in monthly installments while the IRS considers your offer. If accepted, continue to pay monthly until it is paid in full.

Understand the process. While your offer is being evaluated:
1. Your non-refundable payments and fees will be applied to the tax liability;
2. A Notice of Federal Tax Lien may be filed;
3. Other collection activities are suspended;
4. The legal assessment and collection period is extended;
5. Make all required payments associated with your offer;
6. You are not required to make payments on an existing installment agreement; and
7. Your offer is automatically accepted if the IRS does not make a determination within two years of the IRS receipt date.

If your offer is accepted you must meet all the Offer Terms listed in Section 8 of Form 656, including filing all required tax returns and making all payments for the next five years; Any refunds due within the calendar year in which your offer is accepted will be applied to your tax debt; and Federal tax liens are not released until your offer terms are satisfied.

If your offer is rejected you may appeal a rejection within 30 days after the determination letter has been issued by IRS. If though your offer is returned, you do not have this right of appeal and must start the OIC process all over again.

IRS getting more muscle in its fight against offshore tax evasion

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IRS getting more muscle in its fight against offshore tax evasion

In a recent legal battle with UBS, the IRS has exerted its dominance once again by demanding transparency and exposure of international tax evasion and avoidance at some of the most powerful foreign financial institutions. The IRS previously reached an unprecedented settlement with UBS, one of the largest Swiss banks lauded for its powerful position in the foreign bank-secrecy landscape. Following that settlement UBS agreed to surrender client records for a U.S. citizen holding substantial assets in an account in Singapore. What happened in that case serves as a foreboding of what may be to come for many individuals with unreported foreign income or other offshore bank accounts.

With Thousands To Go, This Is Just The Tip Of The Iceberg

In the UBS case, authorities claimed rights to access this information as a means of appropriately addressing tax evasion by evaluating all relevant data. The client, Ching-Ye Hsiaw, had recently shifted assets from his UBS account in Switzerland to a new Singapore account in light of the increased focus of the IRS on the Swiss banking front. Indeed, the IRS has recently expanded efforts to detect, deter, and discipline instances of tax evasion in numerous international jurisdictions. In response to the Foreign Account Tax Compliance Act (FATCA), UBS turned over thousands of taxpayers’ records of accounts previously hidden from the IRS. In fact, UBS turned over nearly one-fifth of the American-sourced accounts held at the institution. These accounts represent many taxpayers who not only paid a premium for the secrecy they believed Swiss bank laws could protect, but also hoped that the IRS would not discover their willful efforts at tax evasion in the first place. Some taxpayers, whose accounts have been submitted to the IRS under these efforts to unveil both individual and corporate attempts at tax evasion, feared the discovery of their foreign bank accounts, but did not know how to properly bring these accounts back to the United States without facing steep civil penalties and even criminal persecution. These first few victories by the IRS under FATCA should alert individuals as cautionary tales of the importance of understanding the implications of holding assets in foreign financial institutions (FFIs).

One FAT check for FATCA

Upon the notable shift of American sourced income out of domestic financial institutions, the IRS sought out the money hidden in tax havens, tax shelters, and tax “nothings”. When Swiss bank-secrecy laws forbade FFIs from reporting American client’s account information without the client’s consent, the U.S. government passed the Foreign Account Tax Compliance Act or more commonly known as FATCA in 2010. The law presented a counter to bank-secrecy laws – if Switzerland would refuse to release information about income rightfully (or so the IRS believed) taxed by the U.S. government, the United States would implement a 30% withholding tax on American investments by other nations. The tax was, and still is, steep enough to prompt cooperation by FFIs if they want any access to the United States capital market. Effects on individuals with unreported foreign income represents only one facet of the effort; focus on multinational entities permeates the IRS agenda. FATCA mirrors other international efforts to eliminate international non-taxation of income, such as the Base Erosion And Profit Shifting (BEPS) project of the Organization for Economic Cooperation and Development. The BEPS project, much like FATCA, seeks transparency and full disclosure of the source and storage of monetary assets. With the spotlight on tax evasion constantly broadening and brightening, both American corporate entities with complex ownership structures and individuals with rather simple investments and income abroad must become and remain informed about similar IRS efforts.

Pay Up: Penalties and Fines for Tax Evasion

As the government becomes increasingly strapped for cash, the focus on derailing the effectiveness of foreign bank secrecy elevates. In order to place extreme emphasis on the priority the IRS has given FATCA enforcement, the government has placed steep civil and criminal penalties on those convicted of tax evasion, especially willful evasion. Tax evasion can result in prison sentences up to 5 years in duration as well as monetary fines of $250,000 for individuals and $500,000 for corporations. Failure to indicate on Schedule B of your Form 1040 that you hold assets in a foreign bank account, if discovered, may bear such repercussions.

The United States government acknowledges the difficulty of affording to bring assets back to the U.S. home soil, both from the perspective of facing an increased continuing tax rate on this income as well as facing steep civil and criminal charges. As such, the government has implemented occasional amnesties. An amnesty is somewhat comparable to forgiveness by the U.S. government, whereby a taxpayer can retrieve assets from foreign accounts and remit them to domestic banks while paying only a portion of usually assigned penalties or no penalties at all. However, these “Welcome Home!” gestures are not often as warm as they seem and often, not as frequent as tax evaders would hope. As referenced by many politicians and persecutors in Washington, there are many completely legal ways to participate in activities that avoid taxation either completely or to some smaller degree. However, as Mr. Hsiaw and UBS would likely agree, knowledge of the nature, legal landscape, and potential punishment for unreported foreign earnings and similar offshore bank accounts and investments are a necessity in the increasingly omniscient reach of the IRS.

How a Summer Wedding Can Affect Your Taxes

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How a Summer Wedding Can Affect Your Taxes

With all the planning and preparation that goes into a wedding, taxes may not be high on your summer wedding checklist. However, you should be aware of the tax issues that come along with marriage.

Here are some basic tips that taxpayers should be aware of:

• Name change. The names and Social Security numbers on your tax return must match your Social Security Administration records. If you change your name, report it to the SSA. To do that, file Form SS-5, Application for a Social Security Card. You can get the form on SSA.gov, by calling 800-772-1213 or from your local SSA office.

• Change tax withholding. A change in your marital status means you must give your employer a new Form W-4, Employee’s Withholding Allowance Certificate. If you and your spouse both work, your combined incomes may move you into a higher tax bracket or you may be affected by the Additional Medicare Tax. Use the IRS Withholding Calculator tool at IRS.gov to help you complete a new Form W-4.

• Changes in circumstances. If you or your spouse purchased a Health Insurance Marketplace plan and receive advance payments of the premium tax credit in 2016, it is important that you report changes in circumstances, such as changes in your income or family size, to your Health Insurance Marketplace when they happen. You should also notify the Marketplace when you move out of the area covered by your current Marketplace plan. Advance credit payments are paid directly to your insurance company on your behalf to lower the out-of-pocket cost you pay for your health insurance premiums. Reporting changes now will help you get the proper type and amount of financial assistance so you can avoid getting too much or too little in advance, which may affect your refund or balance due when you file your tax return.

• Address change. Let the IRS know if your address changes. To do that, send the IRS Form 8822, Change of Address. You should also notify the U.S. Postal Service. You can ask them online at USPS.com to forward your mail. You may also report the change at your local post office. You should also notify your Health Insurance Marketplace when you move out of the area covered by your current health care plan.

• Tax filing status. If you’re married as of December 31, that’s your marital status for the whole year for tax purposes. You and your spouse can choose to file your federal income tax return either jointly or separately each year. You may want to figure the tax both ways to find out which status results in the lowest tax.

Can you get a Tax Write-Off for your wedding?

Generally you cannot write-off a wedding but there are ways that newlyweds can spend for their weeding that can actually save money when it’s time to pay taxes at the end of the year.

While tax write-offs are usually the last thing a bride and groom think about when planning a wedding, when it comes to saving taxes you may want to consider these tips:

The Attire. Brides often wear their wedding dress only once. And while some opt to keep them for whatever reason, others have no idea how to discard them. For a tax write-off, consider donating the wedding gown to a nonprofit organization like Goodwill, MakingMemories.org or CinderellaProject.net. These organizations will take your dress and issue you a donation receipt for your good efforts. While you’re at it, consider donating the bridesmaids dresses, flower girl dress, ring bearer’s outfit and any nonperishable decorations.

The Venue. Believe it or not, some wedding venues are tax deductible. Choose a ceremony or reception venue located at a museum, public-owned park or even a historic house or building of some sort. These places are usually owned by nonprofit organizations who use the money they receive for upkeep purposes only. Speak with the head of the venue sight to make sure that it is a nonprofit organization and what portion of the cost you pay is in excess of the deemed value of the rental of the space (only the excess amount could be deductible as a charitable contribution).

Wedding Favors and Gifts. Charity donations can make thoughtful wedding gifts and favors. They also save you money during tax season. So instead of purchasing a trinket that your guests or attendants may discard later, opt for a donation to your favorite charity on behalf of all those who are a part of your wedding.

Flowers and Foods. You can also get a tax write-off for items that have a short life, such as leftover food and all those floral centerpieces. After the wedding is over, ask a friend or family member to bring the items to a local nursing home, homeless shelter or somewhere similar. You will get a tax deduction for the cost of the remaining food and flowers and you’ll put a few smiles on faces.

Documenting. Whether you have your taxes done by a professional accountant or take care of them yourself, it’s important to document each of these wedding tax write-offs. Keep all your receipts for any purchases you make and request a donation sheet (signed by the organization) that states how much you donated, what you donated and when. Save all your contracts for any wedding venues and, if possible, request that the venue organizer provide you with receipts for each of your payments.

Reporting Charitable Contributions. To claim charitable deductions, you must itemize them on Schedule A of Form 1040. The IRS will need any and all receipts and statements that support the fees, expenses and donations that you claim. If your total noncash contributions exceed $500, you must also fill out Form 8283, Noncash Charitable Contributions, and attach it to your tax return. If you donate a single item worth more than $5,000, you must add Form 8283, Section B, and obtain an appraisal.

It’s risky business to take a tax write-off for your wedding but if it is done right it should be respected by the IRS.

business record keeping. How long do you need to keep your records for?

How Long Do Tax Records Need To Be Kept?

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How Long Do Tax Records Need To Be Kept?

The length of time you should keep a document depends on the action, expense, or event which the document records. Generally, you must keep your records that support an item of income, deduction or credit shown on your tax return until the period of limitations for that tax return runs out.

The period of limitations (which we call the Statute Of Limitations or “SOL”) is the period of time in which you can amend your tax return to claim a credit or refund, or the IRS can assess additional tax. The information below reflects the SOL that apply to income tax returns. Unless otherwise stated, the years refer to the period after the return was filed. Returns filed before the due date are treated as filed on the due date.

SOL’s that apply to income tax returns:

1. Keep records for 3 years if situations (4), (5), and (6) below do not apply to you.
2. Keep records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later, if you file a claim for credit or refund after you file your return.
3. Keep records for 7 years if you file a claim for a loss from worthless securities or bad debt deduction.
4. Keep records for 6 years if you do not report income that you should report, and it is more than 25% of the gross income shown on your return.
5. Keep records indefinitely if you do not file a return.
6. Keep records indefinitely if you file a fraudulent return.

For employment tax returns, you should keep employment tax records for at least 4 years after the date that the tax becomes due or is paid, whichever is later.

The following questions should be applied to each record as you decide whether to keep a document or throw it away.

Are the records connected to property?

Generally, keep records relating to property until the period of limitations expires for the year in which you dispose of the property. You must keep these records to figure any depreciation, amortization, or depletion deduction and to figure the gain or loss when you sell or otherwise dispose of the property.

If you received property in a nontaxable exchange, your basis in that property is the same as the basis of the property you gave up, increased by any money you paid. You must keep the records on the old property, as well as on the new property, until the period of limitations expires for the year in which you dispose of the new property.

What should you do with your records for nontax purposes?

When your records are no longer needed for tax purposes, do not discard them until you check to see if you have to keep them longer for other purposes. For example, your insurance company or creditors may require you to keep them longer than the IRS does.

How Taxes And Business Entities Work

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How Taxes And Business Entities Work

Is there any difference in an LLC or S-Corp when forming an entity and looking at potential tax liability?

When clients inquire on what type of entity should be formed for the operation of a business venture, we refer to that type of discuss ion as “Choice Of Entity”.

Both LLC’s and S-Corp’s have some similarities.

They both offer the following advantages over not incorporating:
• Limited liability: Directors, officers, shareholders/members, and employees enjoy limited liability protection.
• Pass-through taxation: Owners report their share of profit and loss on their individual tax returns.
• Double taxation elimination: Income is not taxed twice (unlike corporate income which is taxed at the corporation level and again then at the individual level as dividend income when distributions are made).
• Investment opportunities: The company can attract investors through the sale of shares of stock or membership interests.
• Perpetual existence: The business continues to exist even if the owner leaves or dies.

The big difference though is how these entities are taxed which people are not aware knowing that for both types of entities, the income or loss flows through to the individual income tax returns of the owners. An S-Corp will follow the corporation tax code. An LLC can follow either the partnership tax code or the corporation tax code or even be taxed as an entity disregarded as separate from its owner.

To answer which tax code is most beneficial, we consider several factors including the type of business being conducted. Real estate ventures are usually better off being subject to the partnership tax code while other types of businesses are usually better off being subject to the corporation tax code.

How the owners are to be compensated or paid back their investment also impact what entity to use. It is common that owners who fund a business over owners who provide sweat equity will demand a priority when any distributions are made. It is also advisable that for owners who render services to the business pick up ordinary income as compensation for the service provided. The choice of entity becomes key to minimize the adverse tax consequences that could otherwise arise if proper planning is not made.

We also consider the ultimate exit strategy of the business in determining what entity to use. Depending on how the business is first going to be capitalized or financed, the exit strategy for the business will have different tax consequences if the entity follows the corporation tax code or the partnership code.

Since the initial choice of entity in most cases cannot subsequently be changed without incurring additional tax liability, you should seek tax counsel BEFORE forming the entity and not waiting until afterwards when it is too late.

IRS Generates $8 Billion from Voluntary Disclosure. Expect More FATCA Reporting in 2016

IRS Generates $8 Billion from Voluntary Disclosure. Expect More FATCA Reporting in 2016 and Beyond

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IRS Generates $8 Billion from Voluntary Disclosure. Expect More FATCA Reporting in 2016 and Beyond

The Internal Revenue Service faces many challenges when it comes to enforcing compliance with U.S. tax laws for individuals with offshore assets and income sources. To strengthen these efforts, the IRS has implemented offshore voluntary disclosure programs (known as OVDP’s) as a way to encourage U.S. taxpayers to come forward to meet their tax obligations related to earning income abroad or having undisclosed offshore assets. The OVDP’s support comprehensive efforts to address tax evasion issues through targeted enforcement, prosecution and implementation of the Foreign Account Tax Compliance Act (“FATCA”). Results of voluntary disclosure programs and FATCA implementation have been encouraging to the extent that the IRS has vowed to expand FATCA and strengthen enforcement strategies. The programs have proven effective in helping taxpayers become current with their tax liabilities, raising IRS collections and discouraging offshore tax evasion for taxpayers with assets and income abroad.
Understanding FATCA

FATCA was introduced in March 2010 as part of a strategy to crack down on U.S. taxpayers who use foreign financial institutions (FFI’s) to conceal their assets to avoid paying U.S. taxes. This piece of legislation effectively gives the Department of Justice (“DOJ”) and the IRS blanket authority to investigate suspect accounts held by individuals and businesses in offshore institutions. FATCA forces FFI’s to comply with stringent reporting requirements for any accounts that may be held by U.S. taxpayers in countries that have signed inter-governmental agreements(IGA’s) or, to disclose specific account holder information to the DOJ and the IRS. Serious sanctions and penalties may be imposed for non-compliance.

The intent of FATCA was to go after high net worth individuals who were taking advantage of offshore tax havens to shield assets from U.S. tax obligations. However, FATCA provisions include disclosing information on all accounts held in the name of U.S. citizens. This had unintended consequences, including closure of accounts when businesses and individuals failed to meet stringent documentation requirements and denial of new account applications that affected even those who had limited income and assets. Countries that have signed IGA’s include Spain, France, Germany, United Kingdom, Singapore, Switzerland and Japan.

The IRS has indicated that FATCA Offshore compliance and FATCA provisions will top 2016 priorities. These efforts will include facilitating exchange of FATCA information worldwide to root out unreported and under-reported income and untaxed assets. Aside from reporting requirements, FATCA also obligates FFI’s to withhold taxes and to report account activities that may indicate fraud and tax evasion.
Compliance with FATCA Provisions

U.S. citizens who have assets held in FFI’s should use Form 8938 to report those assets as part of their annual tax returns. The reporting thresholds vary depending on certain factors.

• If you live in the U.S. and you are single, you may have to comply with FATCA requirements when your offshore financial assets are valued at $50,000 at year-end or $75,000 anytime during the year.
• If you are U.S.-based, married but filing separately, the same thresholds as outlined above applies.
• If you are married and living in the U.S., the value of your specified foreign assets must be reported starting at a year-end valuation of $100, 000 or if the value met or exceeded the $150,000 level during the tax year.
• If you live abroad, married and filing jointly, the threshold is $400,000 at year-end or $600,000 at any time during the year.
• If you live abroad and you are single, the foreign asset filing threshold is $200,000 at year-end or $300,000 during the year.

Filing Form 8938 does not take the place of other reporting requirements such as the FBAR, the Report of Foreign Bank and Financial Accounts, and FinCen Form 114. Failure to file Form 8938 and the FBAR may lead to hefty penalties, starting with $10,000 for failure to file. When the IRS sends a notification and you fail to file your Form 8938, another $50,000 is added to your accrued penalties. You could also be liable for an additional 40% penalty based on underpayment of taxes due to non-disclosure of offshore assets. Also, being compliant with these filing requirements now does not cure past non-compliance.
Impact of FATCA Reporting Requirements

Under FATCA provisions, banks, investment houses, brokers, specified insurance companies and some non-financial entities are required to report account information to the IRS and DOJ if the account holders are U.S. citizens. This means that when you set up new accounts with offshore entities, you will be asked to provide information about your citizenship. FATCA reporting requirements apply even when only one spouse is a U.S. citizen or only one spouse lives abroad.

To clarify, the OVDP’s implemented in 2009, 2011 and 2012 were intended to encourage taxpayers with offshore assets to comply with their tax obligations and become current on tax liabilities accruing to ownership of assets in FFI’s and any income earned abroad. The 2009 OVDP resulted in 18,000 disclosures and a $3.4 billion collection that covered back taxes, penalties and interest payments. In 2011, the OVDP generated 15,000 disclosures and revenue collections of $1.6 billion for 75 percent of the accounts that were finalized in that year. In 2012, a third program generated 12,000 disclosures, bringing total collections for all OVDP opportunities to $8 billion as of October 2015 according to Douglas W. O’Donnell, commissioner for the Large Business and International Division, which is part of the IRS.

A separate report prepared by the Treasury Inspector General for Tax Administration pointed out that the IRS stood to generate about $21.6 million more in penalties alone with more efficient enforcement action on taxpayers who were disqualified or who withdrew from the OVDPs. Taxpayers who participate in voluntary disclosure programs qualify for reduced penalties. When FATCA reports reveal the existence of unacknowledged accounts before the taxpayer applies for OVDP participation, the IRS may deny access to reduced penalties and other benefits of voluntary disclosure.

The Future of FATCA

Since FATCA was implemented in 2010, it has proven effective as an offshore asset tracking strategy and in raising tax compliance for taxpayers with offshore accounts. IRS collection figures demonstrate the value of voluntary reporting as a key component of compliance efforts. As such, the IRS is expected to put more muscle into FATCA and offshore compliance strategies in 2016 and beyond. These efforts may include automatic information exchange for FATCA-related issues, greater cooperation with FFIs, foreign governments and the IRS to pinpoint potential target accounts and improved tax withholding compliance by offshore financial institutions.

References:
https://www.irs.gov/pub/irs-utl/d11809–2016-01-00.pdf
https://www.irs.gov/businesses/corporations/summary-of-fatca-reporting-for-u-s-taxpayers
https://www.irs.gov/uac/newsroom/irs-offshore-voluntary-disclosure-efforts-produce-6-5-billion-45-000-taxpayers-participate
http://www.accountingtoday.com/news/tax-practice/irs-overlooks-noncompliance-in-offshore-voluntary-disclosure-program-78456-1.html

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Income Tax Evaders May Still Face Big Fines And Up To Five Years In Jail After Coming Forward

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Tax cheats cost the government real money from the lost revenue and the costs associated with enforcement and collection of unpaid tax liabilities. On the Federal and State levels, enforcement of the tax laws is a priority task to ensure that everyone is paying their fair share. Recently, the South Carolina Department Of Revenue (“SCDOR”) charged 30 employees of the Boeing Company with tax evasion over several years going back to 2011. The employees voluntarily turned themselves in to SCDOR investigators but are still faced with the prospect of hefty penalties and a five-year jail sentence for each charge.

The SCDOR Investigation
According to the news release from the SCDOR, the Boeing employees filed W-4 forms claiming exemption from South Carolina’s state income taxes. Apparently, during tax years 2011 to 2014, the workers claimed state tax exemptions although they did not qualify under South Carolina’s individual income tax guidelines. During the years in question, these Boeing workers also failed to file their state tax returns.

It is important to note that the workers received notices from SCDOR encouraging them to comply with the tax laws prior to issuance of arrest warrants. These Boeing employees were given several opportunities to rectify their tax problems but failed to do so. The tax liabilities ranged from $4,000 to about $20,000 based on collective incomes exceeding $4 million. Boeing issued a statement saying that the company was aware of the employees’ tax issues and were proceeding with their own investigation. Aside from their tax troubles, these employees may face disciplinary action from their employer.

Understanding State Income Tax Regulations
The State of South Carolina collects income taxes from residents earning an income in the state. Residents who earn incomes outside South Carolina would pay state taxes to the second state. If that state does not collect income taxes, the taxpayer must pay state taxes to South Carolina as their residential state. Nonresidents who earn income from South Carolina employers must pay taxes to this state. The state does not use a separate withholding exemption certificate from the Federal Form W-4. Exemptions and deductions that are allowed on the federal form are accepted for the state tax returns. In general, employees who received a full refund of taxes withheld in the previous year and who anticipate no tax liabilities in the current year may claim exemption from state taxes.

Enforcement of state taxes varies depending on the prevailing tax code although the state Department of Revenue is charged with enforcement. The process and penalties may vary, so it is important to consult a tax professional when you are faced with any State as well as Federal tax liabilities.

What Constitutes Tax Fraud?
Tax fraud is the deliberate intent to avoid paying taxes through whatever means despite the taxpayer being fully aware that taxes are lawfully due.Tax fraud may trigger penalties under the definitions of Title 26 in the Internal Revenue Code.
Specifically, Title 26 U.S.C. Section 7201 states that tax evasion is a felony that carries a penalty of imprisonment for at most five years or a $250,000 fine for each charge for every individual or a combination of fine and imprisonment along with reimbursement of court costs.

Tax evasion is an example of tax fraud. Tax evasion refers to all deliberate acts where taxpayers misrepresent their taxable income on their tax returns. This would include actions such as inflating expenses for larger deductions, strategically under-reporting taxable income or failing to file tax returns in a mistaken attempt to avoid paying taxes.

The Truth about Dealing with the IRS and State Tax Agencies
There could be any number of reasons why individuals choose to forego filing their tax returns. In the case of the Boeing employees, it is difficult to say what, if anything, made them believe that they could get away with non-filing and non-payment of state taxes for an extended period. It is safe to say that their end-game was not prison, but it appears to be heading in that direction. Looking at the amount of tax liabilities that each individual owed the SCDOR, it would have been much more sensible to comply with state tax laws. The tax dues were miniscule compared to the criminal penalties should they be prosecuted for tax evasion.

The existing tax code is based on the premise that taxpayers are willing and able to honor their tax obligations as upstanding citizens. As such, the IRS and the State revenue offices have programs in place to encourage taxpayers to voluntarily come forward to resolve their non-compliant status instead of waiting for tax agency notices or letters. Voluntary disclosure by taxpayers may count in their favor when the revenue investigator decides if the case merits criminal prosecution. The IRS also allows payment plans and in some cases, reduction of tax liabilities for low-income taxpayers.

Redemption for Non-filers
Tax laws may be rigid, but the IRS and State Tax Agencies do not exist to go after taxpayers who make simple and unintentional mistakes on their tax returns. However, blatant fraud that includes non-compliance with tax filing regulations over several years and ignoring tax agency notices will trigger an investigation and prosecution if for fraud charges. The tax agencies do not need to prove how much you actually owe in taxes to charge you with tax fraud and possibly secure a felony conviction.

If for any reason you failed to file tax returns or you need to amend any of your returns from the last six years, it is best to consult a tax professional to make sure that you are making the right steps. When you work with a tax attorney or a tax expert, you may not have to deal directly with the IRS or State Tax Agency. Your tax representative takes charge of requesting tax transcripts from previous years if you don’t have them anymore. If you owe taxes and are unable to make full payment at the time your returns are filed, your tax representative can negotiate a viable payment plan.

Don’t wait for the IRS or State Tax Agency to contact you if you have not been filing your tax returns or need to amend information submitted in previous returns. For your peace of mind, consult a tax professional who can guide you through the process to ensure a positive outcome and avoid prosecution.

Where’s My Refund? Filed your tax return and still have not received your refund check from the IRS?

Where’s My Refund?

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So you filed your income tax return which showed an overpayment and you requested a refund. Most people knowing that they have money coming back to them have probably figured how they are going to spend that money.

The IRS issues more than 9 out of 10 refunds in less than 21 days. However, it’s possible your tax return may require additional review and take longer. The IRS has a tool on its website called Where’s My Refund? This link has the most up to date information available about your refund. The tool is updated no more than once a day so you don’t need to check more often.

You can use Where’s My Refund? to start checking on the status of your return within 24 hours after the IRS has received your e-filed return or 4 weeks after you mail a paper return. Where’s My Refund? has a tracker that displays progress through 3 stages: (1) Return Received, (2) Refund Approved and (3) Refund Sent. You will get personalized refund information based on the processing of your tax return. The tool will provide an actual refund date as soon as the IRS processes your tax return and approves your refund.

Calling the IRS will not speed up your refund. The IRS phone and walk-in representatives can only research the status of your refund if it has been 21 days or more since you filed electronically, more than 6 weeks since you mailed your paper return, or Where’s My Refund?directs you to contact the IRS. If the IRS needs more information to process your tax return, the IRS will contact you by mail.

Ordering a transcript will not help you determine when you will get your refund. This is among the common myths and misconceptions that are often repeated in social media. The codes listed on tax transcripts do not provide any early insight into when a refund will be issued. The best way to check on your refund is by visiting Where’s My Refund?While transcripts include a lot of detailed information regarding actions taken on your account, the codes do not mean the same thing for everyone and they do not necessarily reflect how any of these actions do or do not impact the amount or timing of your refund. IRS transcripts are best and most often used to validate past income and tax filing status for mortgage, student and small business loan applications and to help with tax preparation.

If you owe past-due federal tax, state income tax, state unemployment compensation debts, child support, spousal support, or certain federal nontax debts, such as student loans, all or part of your refund may be used (offset) to pay the past-due amount. Offsets for federal taxes are made by the IRS. All other offsets are made by the Treasury Department’s Bureau of Fiscal Services (BFS). For federal tax offsets, you will receive a notice from the IRS. For all other offsets, you will receive a notice from BFS. To find out if you may have an offset or if you have any questions about it, contact the agency to which you owe the debt.

Another reason your refund amount may be different is if the IRS made changes to your tax return that changed your refund amount. In this case you will get a notice in the mail from the IRS explaining the changes.

If you filed a joint return and you are not responsible for your spouse’s debt, you are entitled to request a portion of the refund back from the IRS. You may file a claim for this amount by filing Form 8379 (PDF), Injured Spouse Allocation. The IRS can process your Form 8379 before an offset occurs. If you file Form 8379 with your original return, it may take 11 weeks to process an electronically-filed return or 14 weeks if you filed a paper return. If you file the Form 8379 by itself after a joint return has been processed, then processing will take about 8 weeks.

When filing Form 8379 by itself, you must show both spouses’ social security numbers in the same order as they appeared on your joint income tax return. You, the injured spouse, must sign the form. Follow the instructions on Form 8379 carefully and be sure to attach the required Forms W-2 and 1099 showing federal income tax withholding to avoid delays. Do not attach the previously filed joint tax return to the Form 8379 when filing it by itself. Send Form 8379 to the Service Center where you filed your original return and allow at least 8 weeks for the IRS to process your request. The IRS will compute the injured spouse’s share of the joint refund. If you lived in a community property state during the tax year, the IRS will divide the joint refund based upon state community property law. Not all debts are subject to a tax refund offset. So to determine whether an offset will occur on a debt owed you should check with a tax professional.

Be careful not to count on getting your refund by a certain date to make major purchases or pay other financial obligations. Many different factors can affect the timing of your refund after the IRS receives it for processing. Even though the IRS issues most refunds in less than 21 days, it’s possible your tax return may require additional review and take longer. Also, if you are anticipating a refund, take into consideration the time it takes for your financial institution to post the refund to your account, or for mail delivery.

You should choose to have a direct deposit of your refund. Eight in 10 taxpayers get their refunds faster by using e-file and direct deposit. The IRS claims it is the safest, fastest way to receive your refund and is also easy to use. Just select it as your refund method through your tax software and type in the account number and routing number. Or, tell your tax preparer you want direct deposit. You can even use direct deposit if you are one of the few people still filing by paper. Be sure to double check your entry to avoid errors.

Your refund should only be deposited directly into accounts that are in your own name; your spouse’s name or both if it’s a joint account. No more than three electronic refunds can be deposited into a single financial account or pre-paid debit card. Taxpayers who exceed the limit will receive an IRS notice and a paper refund. Whether you file electronically or on paper, direct deposit gives you access to your refund faster than a paper check.