Jeffrey B. Kahn, Esq. and Windus A. Fernandez Brinkkord Discusses Finance and the Federal Reserve, IRS Administration Of The Streamlined Procedures for Undisclosed Foreign Bank Accounts and Taxes On ESPN Radio – September 18, 2015 Show

Topics Covered:

1. So the Federal Reserve made its decision yesterday to hold rates steady
2. Have ETFs Reached A Breaking Point?
3. How the new Streamlined Procedures for taxpayers reporting undisclosed foreign bank accounts are being administered by the IRS.
4. Questions from our listeners:

• I am a U.S. citizen living and working outside of the United States for many years. Do I still need to file a U.S. tax return?
• I pay income tax in a foreign country. Do I still have to file a U.S. income tax return even though I do not live in the United States?
• I am a U.S. citizen married to a nonresident alien. What is my filing status and can I claim an exemption for my foreign spouse?

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Jeff states: Yes sometimes we just have to take the money and run!

Good afternoon! Welcome to Inside Advantage – Your Financial And Tax Radio Show.

This is Board Certified Tax Attorney, Jeffrey B. Kahn, the principal attorney of the Law Offices Of Jeffrey B. Kahn, P.C. and head of the KahnTaxLaw team.

Windus states: And this is Licensed Financial Planner, Windus A. Fernandez Brinkkord, Senior Vice President Of Investments at Trilogy Financial Services. You are listening to our weekly radio show where we talk everything about finances and taxes from the ESPN 1700 AM Studio in San Diego, California.

Jeff states: When it comes to knowing tax laws and paying taxes, let’s face it — everyone in the U.S. is either in tax trouble, on their way to tax trouble, or trying to avoid tax trouble!

Windus states: And whether you are on the rebound or flying high, we have the information you need to make sound financial decisions and map out your strategy for success.

Jeff states: Our show is broadcasted each Friday at 2:00PM Pacific Time and replays are available on demand by logging into the KahnTaxLaw website at www.kahntaxlaw.com.

Jeff states: For today’s show we have coming up:

Segment 2 material: Have ETFs Reached A Breaking Point?

Windus states: Also coming up is:

Segment 3 material: How the new Streamlined Procedures for taxpayers reporting undisclosed foreign bank accounts are being administered by the IRS.

And of course towards the end of our show, we will be answering some of your questions.

Jeff starts chit chat with Windus.

Jeff states: So for today’s top story:

So the Fed made its decision yesterday to hold rates steady

This was breaking news reported on September 17^th and of course all the news media picked to up. We looked at an article posted in Yahoo Finance on September 17th http://finance.yahoo.com/news/looming-fed-rate-decision-test-050656810.html

Jeff continues: So in case you have not heard this yet, the U.S. Federal Reserve in its September meeting voted to keep interest rates unchanged given their concerns about the global economy, financial market volatility and sluggish inflation at home, but left open the possibility of a modest policy tightening later this year.

Windus states: Fed Chair Janet Yellen said in a press conference that developments in a tightly linked global economy had in effect forced the U.S. central bank’s hand.

Windus states: The U.S. economy has been performing well enough to perhaps justify a rate hike “and we expect it to continue to do so,” Yellen said shortly after the Fed’s policy-setting committee released its latest statement following a two-day meeting.

Windus states: But Yellen added that “the outlook abroad appears to have become less certain,” driving down U.S. equity prices, pushing up the dollar, and tightening financial conditions in a way that may slow U.S. growth regardless of what the Fed does.

Windus states: “In light of the heightened uncertainty abroad … the committee judged it appropriate to wait,” Yellen said. “Given the significant economic and financial interconnections between the U.S. and the rest of the world, the situation abroad bears close watching.”

Jeff states: Now we have been hearing for a long time from Ms. Yellen that the decisions of the Fed are still be “data-dependent”. Windus, in making this decision to hold rates steady, is the Fed marching to a different beat?

Windus replies: I do not think so but it should be clear that international events and how they impact global markets are a variable for the Feds to consider.

Jeff asks: What about the concept that the U.S. economy is so large that even with a slow-down abroad, the U.S. economy could still be strong and weather through such a storm?

Windus replies.

Jeff asks: So getting back to the Fed’s decision, is there any future guidance we can pull from this?

Windus replies: The Fed still maintains its bias towards a rate hike sometime this year, while lowering its long-term outlook for the economy. The Fed still has two more meetings this year – one in October and one in December. Fresh economic projections showed 13 of 17 Fed policymakers foresee raising rates at least once in 2015, down from 15 at the last meeting in June. Four policymakers now say rates should not be raised until at least 2016, compared to two who felt that way in June.

Jeff asks: I always hear terms describing Fed officials as being doves or hawks. Can you explain the difference to our listeners?

Windus replies:

Jeff states: Now the Fed does make projections of GDP growth, unemployment and inflation and considers the projected movements in making rate change decisions. Windus, what are some of the projections that the Fed has communicated to the public that this article mentions?

Windus replies: Taken as a whole, the latest Fed projections of slower GDP growth, low unemployment and continuing low inflation suggest that concerns of a so-called secular stagnation may be taking root among policymakers. One policymaker even suggested a negative federal funds rate.

Windus states: The median projection of the 17 policymakers showed the Fed expects the economy to grow 2.1% this year, slightly faster than previously thought. However, its forecasts for GDP growth in 2016 and 2017 were downgraded.

Windus states: The Fed also forecasted that inflation would creep only slowly toward its 2% target even as unemployment dips lower than previously expected. It sees the unemployment rate hitting 4.8% next year and remaining at that level for as long as three years.

Windus states: Considering the foregoing, the Fed’s projected interest rate path shifted downward, with the long-run federal funds rate now seen at 3.5%, compared to 3.75% at the last policy meeting.

Jeff asks: So do you think that the Fed is being more dovish or hawkish now that growth projections revised down?

Windus replies: Despite the possibility that we could enter into some period of stagnation, I agree with the consensus that in the absence of any serious derailing of the economy, there will be some increase in rates before the year is out. Remember that we still have two Fed meetings to go before year’s end.

Jeff states: So it looks like the saga will continue into the 4^th quarter of 2015 and for now the status quo continues.

Well it’s time for a break but stay tuned because we are going to tell you about the new concerns over ETF’s.

You are listening to Board Certified Tax Attorney, Jeffrey B. Kahn, and Licensed Financial Planner, Windus A. Fernandez Brinkkord on Inside Advantage on ESPN.

BREAK

Welcome back. This is Inside Advantage – Your Financial And Tax Radio Show on ESPN and you are listening to Board Certified Tax Attorney, Jeffrey B. Kahn, and Licensed Financial Planner, Windus A. Fernandez Brinkkord.

Jeff states: Windus is calling into the studio as she is out on assignment and so in this next segment we want to talk about ETF’s.

Have ETFs Reached A Breaking Point?

Jeff states: A September 13, 2015 article in the Wall Street Journal caught your attention Windus. http://on.wsj.com/1QyPjgM

Jeff states: And in this article it reports how fund managers such as Black Rock, Inc. are trying to figure out what went wrong as the extreme stock-market gyrations in August exposed cracks in the business of exchange-traded funds.

Windus states: Which is one of the reasons why I thought we could talk a bit about the difference between a mutual fund and an ETF and when or why you’d chose to use one over the other.

Jeff asks: So first describe what is a mutual fund?

Windus replies: A mutual fund is a pooling of investors dollars towards a common objective.  Like growth, or income, etc. 
Windus states: This investment instrument can be either all stocks, all bonds, or a blend.  It can even have currencies in them and what have you.
Windus states: Mutual funds were originally created as a means to allow investors to invest with less risk because they were able to diversify with the purchase of one share, but also with a lower minimum.  With a mutual fund, you can typical start investing for as little as $50 a month.  Instead of trying to figure out how to buy one stock at a time, you have access to many with a small amount monthly.  Another great aspect of a mutual fund is the ability to always sell.  With a stock you technically have to reach out to the open market to find a buyer, with a mutual fund, you simply hit the redeem button.  Only in rare occasions will redemptions be stopped, or paused for a period of time.  Mutual funds are actively managed by a portfolio manager and typically a team of analysts.  Some have multiple portfolio managers.

Windus states: Another aspect of a mutual fund is that they settle in what we call “end of day” meaning that no matter when you sell during the day, the sale price will be reflective of the end of the market day not the time in which you imputed your sell order.  Now we are starting to talk about the differences of a mutual fund and an ETF.  Mutual funds sometimes get bad raps in markets where an index would have outperformed it.  What we need to realize is there are going to be rolling periods in the market when an index would have outpaced the mutual fund, and vice versa, and that you are ultimately buying the mutual fund instead because you believe in the manager’s ability to navigate the markets over time better than a straight index would. 

Jeff asks: so what is an EFT?

Windus replies: ETF’s are Exchange Traded Funds.  Like mutual funds, they can be a blend of both stocks bonds, or one or the other or even currencies, etc.  BUT unlike a mutual fund, and ETF is not necessarily actively managed.  ETF’s are commonly passively managed, meaning that they are periodically reset or reviewed by a manager but not daily reviewed or managed like a mutual fund.  Actively managed ETF’s have some about in current time and may gain traction but the benefit of the ETF is the lower fees, which wouldn’t be the case if they were to become managed the same way a mutual ultimately is.  Another interesting aspect of an ETF, which is the cause of some recent issues, is that you can redeem it the same way you redeem a stock.  If it is 9:02am and I enter the order to sell, the price I am given at that time is my settlement price, not the end of day price like it is with a mutual fund. 

Jeff states, before we go on Windus has a special offer for our listeners.

Windus states PLUG: Trilogy Financial Services will provide you with a retirement cash flow analysis which is a $600.00 value for free as long as you mention the Inside Advantage Radio Show when you call to make an appointment. Call my office to make an appointment to meet with me, Windus A. Fernandez Brinkkord. The number to call is 858.314.5169. That is 858.314.5169.

Windus states: You should also know that the securities and advisory services are offered through National Planning Corporation (NPC) Member FINRA, SIPC, and a Registered Investment Advisor.  Trilogy Financial Services and NPC are separate and unrelated Entities.
Jeff states: Windus now that you have done a brilliant job in explaining mutual funds and ETF’s, tell us about what the Wall Street Journal article reported that really put ETF’s to the test. 

Windus states: As the Wall Street Journal article on September 14th highlighted, at 9:42am on August 24th one specific ETF tumbled 35% to its lowest level of the day, this is right when the markets were about to open with a 1000 point drop in the DOW.  At that time the combined weighted values of the stocks the ETF held was $72.42, just down 2.7% for the day.  How can the ETF sale price be $48.00 when the real value would be $72.42?  Assets in the ETF market have grown to roughly $2 trillion up from $305 billion a decade ago.  The volume of ETF’s being trades are up 14.9% compared to a decade ago.  Real time valuing an asset that holds multiple positions is a real challenge and apparently discrepancies can be found when trading volatility picks up. 

Windus continues: This isn’t the first time we’ve seen this, another instance was reported in 2012 as well.  As more and more investors connect to the markets on a daily basis more readily, this instant “valuation” of products that have so many positions may come under further pressure.  It has also yet to be seen how a bond ETF can actually handle money rapidly flowing out of it, and that time will come one day as well.  Mutual funds experience similar pressure but because they are not as instantly traded and because you often pay to be there, people are more cautious on getting out as they are when you can click a button and get out that second. 

Jeff asks: It seems that if people and get in and out of investments quickly by going online, I would think that more of these transactions are being made without much thought people are making bad decisions. Windus what do you think?

Windus responds.

Windus PLUG: Trilogy Financial Services will provide you with a retirement cash flow analysis which is a $600.00 value for free as long as you mention the Inside Advantage Radio Show when you call to make an appointment. Call my office to make an appointment to meet with me, Windus A. Fernandez Brinkkord. The number to call is 858.314.5169. That is 858.314.5169.

Well Windus I know that you have to head off but I am glad that you were able to stay on for the first half of the show.

Windus signs off.

Jeff states: Stay tuned because after the break we are going to tell you how the new Streamlined Procedures for taxpayers reporting undisclosed foreign bank accounts are being administered by the IRS.

You are listening to Board Certified Tax Attorney, Jeffrey B. Kahn, and Licensed Financial Planner, Windus A. Fernandez Brinkkord on Inside Advantage on ESPN.

BREAK

Jeff states: Welcome back. This is Inside Advantage – Your Financial And Tax Radio Show on ESPN and you are listening to Board Certified Tax Attorney, Jeffrey B. Kahn, and Licensed Financial Planner, Windus A. Fernandez Brinkkord.

Windus is on assignment today so calling into the studio from my Walnut Creek Office is my associate attorney, Amy Spivey.

Chit chat with Amy

Streamlined Filing Compliance Procedures

PLUG: The Law Offices Of Jeffrey B. Kahn, P.C. will provide you with a Tax Resolution Plan which is a $500.00 value for free as long as you mention the Inside Advantage Radio Show when you call to make an appointment. Call my office to make an appointment to meet with me, Jeffrey Kahn, right here in downtown San Diego or at one of my other offices close to you. The number to call is 866.494.6829. That is 866.494.6829.

Jeff states: For someone with undisclosed foreign bank accounts and unreported foreign income who does not come forward and the IRS instead finds them, they are be looking a huge penalties. The penalties for noncompliance are stiffer than the civil tax penalties ordinarily imposed for delinquent taxes. The criminal 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. As for the civil penalties they include a penalty equal to 50% of the principal in the undisclosed foreign bank accounts.

Jeff continues: We have been putting the word out for quite some time that if you have unreported foreign income and undisclosed foreign bank accounts, there are special programs in place with the IRS that you can avoid criminal prosecution and get a reduction in penalties that would otherwise be charged by the IRS. One of those programs are the “streamlined procedures” offered under the Offshore Voluntary Disclosure Program (OVDP).

Amy states. That’s right. The streamlined filing compliance procedures are available to taxpayers certifying that their failure to report foreign financial assets and pay all tax due in respect of those assets did not result from willful conduct on their part.

Jeff asks: So let’s discuss the eligibility criteria for the streamlined procedures. [Jeff to read off each item and Amy to explain].

Jeff states: Taxpayers must certify that their conduct was not willful.

Amy replies: Taxpayers using either the Streamlined Foreign Offshore Procedures or the Streamlined Domestic Offshore Procedures will be required to certify, in accordance with the specific instructions, that the failure to report all income, pay all tax and submit all required information returns, including FBARs (FinCEN Form 114, previously Form TD F 90-22.1) was due to non-willful conduct.  

Jeff states: We will talk more about what constitutes non-willful conduct but for now you need to recognize that you cannot just make general statements that you did not know about this. The IRS is looking for details of your circumstances and your background to show that you had no reason to know or to make further inquiry on what were your reporting obligations.

Amy states: And when you make the statements to justify that your conduct was non-willful in the streamlined procedures, you are making them under penalties of perjury. Making false statements in an attempt to get this treatment will put you in more trouble.

Jeff states: The standard of what you need to show that you are non-willful is complicated as many factors need to be considered. When conducting the analysis for our clients and compiling these statements, we consider over 50 factors to justify that a taxpayer is non-willful. These are then incorporated and addressed in our non-willful statements to provide the most persuasive argument that a taxpayer should be deemed non-willful and therefore benefit under the streamlined procedures.

Jeff states: IRS has initiated a civil examination of taxpayer’s returns for any taxable year.

Amy replies: If the IRS has initiated a civil examination of taxpayer’s returns for any taxable year, regardless of whether the examination relates to undisclosed foreign financial assets, the taxpayer will not be eligible to use the streamlined procedures. Taxpayers under examination may consult with their agent. Similarly, a taxpayer under criminal investigation by IRS Criminal Investigation is also ineligible to use the streamlined procedures.

Jeff states: So even if the IRS were to randomly select you for an audit not knowing that you have unreported foreign income, you are locked out from this program. That is why one should not delay in coming forward – you want to beat the IRS at the pass.

Jeff states: Taxpayers eligible to use streamlined procedures who have previously filed delinquent or amended returns must pay previous penalty assessments.

Amy replies: Taxpayers eligible to use the streamlined procedures who have previously filed delinquent or amended returns in an attempt to address U.S. tax and information reporting obligations with respect to foreign financial assets (so-called “quiet disclosures” made outside of the Offshore Voluntary Disclosure Program (OVDP) or its predecessor programs) may still use the streamlined procedures. However, any penalty assessments previously made with respect to those filings will not be abated. 

Jeff states: So just because you may have been hit with a penalty by the IRS for a late-filed foreign information return like an FBAR or you filed amended income tax returns disclosing the foreign income, you can still get into this program.

Jeff asks what is the general treatment by the IRS under the streamlined procedures?

Amy replies: Tax returns submitted under either the Streamlined Foreign Offshore Procedures or the Streamlined Domestic Offshore Procedures will be processed like any other return submitted to the IRS. Consequently, receipt of the returns will not be acknowledged by the IRS and the streamlined filing process will not culminate in the signing of a closing agreement with the IRS. 

Jeff states: So these submissions are treated no differently than when you file your annual income tax return. Just because you include a check for the balance due and the IRS cashes does not mean you can’t be selected for audit sometime in the next three years.

Amy replies: Returns submitted under either the Streamlined Procedures will not be subject to IRS audit automatically, but they may be selected for audit under the existing audit selection processes applicable to any U. S. tax return and may also be subject to verification procedures in that the accuracy and completeness of submissions may be checked against information received from banks, financial advisors, and other sources.

Jeff states: The penalty under the streamlined is equal to 5% of the highest annual aggregate foreign account balance over the last 6 years and if you can show that you were a foreign person in any of the last three years, this penalty is completely waived. Additionally, as long as you are in the program, the IRS states it would not be pursuing criminal charges.

PLUG: The Law Offices Of Jeffrey B. Kahn, P.C. will provide you with a Tax Resolution Plan which is a $500.00 value for free as long as you mention the Inside Advantage Radio Show when you call to make an appointment. Call my office to make an appointment to meet with me, Jeffrey Kahn, right here in downtown San Diego or at one of my other offices close to you. The number to call is 866.494.6829. That is 866.494.6829.

Stay tuned as we will be taking some of your questions. You are listening to Board Certified Tax Attorney, Jeffrey B. Kahn, and Licensed Financial Planner, Windus A. Fernandez Brinkkord on Inside Advantage on ESPN.

BREAK

Jeff states: Welcome back. This is Inside Advantage – Your Financial And Tax Radio Show on ESPN and you are listening to Board Certified Tax Attorney, Jeffrey B. Kahn, and Licensed Financial Planner, Windus A. Fernandez Brinkkord.

Windus is on assignment so I have my associate attorney, Amy Spivey, helping me out.

Jeff continues:

Windus PLUG: Trilogy Financial Services will provide you with a retirement cash flow analysis which is a $600.00 value for free as long as you mention the Inside Advantage Radio Show when you call to make an appointment. Call Windus A. Fernandez Brinkkord at her office to make an appointment. The number to call is 858.314.5169. That is 858.314.5169.

Jeff states: If you would like to post a question for us to answer, you can go to my website at www.kahntaxlaw.com and click on “Radio Show”. You can then enter your question and maybe it will be selected for our show.

OK Amy, what questions have you pulled for us to answer?

Question: I am a U.S. citizen living and working outside of the United States for many years. Do I still need to file a U.S. tax return?

Yes, if you are a U.S. citizen or a resident alien living outside the United States, your worldwide income is subject to U.S. income tax, regardless of where you live. However, you may qualify for certain foreign earned income exclusions and/or foreign income tax credits. 

Question:  I pay income tax in a foreign country. Do I still have to file a U.S. income tax return even though I do not live in the United States?

You have to file a U.S. income tax return while working and living abroad unless you abandon your green card holder status by filing Form I-407, with the U.S. Citizen & Immigration Service, or you renounce your U.S. citizenship under certain circumstances

Question:  I am a U.S. citizen married to a nonresident alien. What is my filing status and can I claim an exemption for my foreign spouse?

In general, if you are a U.S. citizen or resident alien married to a nonresident alien, you are considered “Married Filing Separately” unless you qualify for a different filing status. If you pay more than half the cost of keeping up a home for yourself and a qualifying child or other relative, you may qualify for the head of household filing status.

If you are a U.S. citizen or resident alien married to a nonresident alien, you and your spouse can choose to have your spouse treated as a U.S. resident for all U.S. federal income tax purposes. This allows you and your spouse to file a joint return, but also subjects your nonresident alien spouse’s worldwide income to U.S. income tax.

If you file a joint return, you can claim an exemption for your nonresident alien spouse. If you do not file a joint return, you can claim an exemption for your nonresident alien spouse only if your spouse has no income from sources within the United States and is not the dependent of another U.S. taxpayer.

Jeff PLUG: The Law Offices Of Jeffrey B. Kahn, P.C. will provide you with a Tax Resolution Plan which is a $500.00 value for free as long as you mention the Inside Advantage Radio Show when you call to make an appointment. Call my office to make an appointment to meet with me, Jeffrey Kahn, right here in downtown San Diego or at one of my other offices close to you. The number to call is 866.494.6829. That is 866.494.6829.

Jeff states: Amy thanks for joining us on today’s show.

Amy replies: Thanks for having me.

Jeff states: Well we are reaching the end of our show.

Remember you can send us your questions by visiting the kahntaxlaw website at www.kahntaxlaw.com.

Jeff states: Have a great day everyone and a great weekend!