United States and Switzerland Sign IGA & US and Poland Sign New Tax Treaty | Bellevue Tax Lawyer

On February 14, 2013, the US and Switzerland signed an intergovernmental agreement (IGA) implementing FATCA.  FATCA is a US law that was enacted to improve tax compliance and combat international tax evasion.  The agreement permits Swiss banks to share information with the IRS about US account holders.  The agreement can be found here, and the Swiss announcement can be found here.

On February 14, 2013 the Treasury Department announced that the US and Poland signed a new tax treaty that, once it is ratified, replaces the current tax treaty signed in 1974.  The Treasury release states that the new treaty includes a comprehensive limitation of benefits provision, and also includes provisions for exchange of information between competent authorities of each country.  The new US, Poland tax treaty can be found, here, and the Treasury release can be found, here.

If you are unsure about how these agreements my affect you, please contact a tax professional.  

IRS First Time Penalty Abatement Program | Bellevue Tax Lawyer

With the advent of the 2013 tax season, it is expected that most taxpayers will exercise ordinary care and prudence in filing their returns and thereafter paying all taxes due.  Assessed penalties for failure to file (FTF) or failure to pay (FTP) can be steep, with fines in both cases able to reach 25 percent of the unpaid taxes if these issues are not resolved in a timely manner.  As explained in a recent report from the Treasury Inspector General for Tax Administration, however, these penalties are not intended to increase overall revenue collection but rather to encourage voluntary compliance with IRS filing and payment deadlines.

As such, there are many avenues available for relief to otherwise well-meaning taxpayers who have, for one reason or another, failed to meet these deadlines.  For example, taxpayers who have "reasonable cause" for missing such deadlines owing to a sudden and disabling illness or a natural disaster may have their penalties abated.  Penalty assessments, furthermore, are prohibited on taxpayers residing in combat zones, while taxpayers who are newly retired, disabled, or had a tax penalty of less than $1,000 in the prior year are eligible for an exception to estimated tax penalties.  Penalties may also be waived in advance of litigation or because of a policy statement explicitly affording such relief, such as the "Expanded Fresh Start" initiative of 2012.  

Finally, and most notably, the IRS waives FTF and FTP penalties for taxpayers demonstrating full compliance over the prior three years.  This "First-Time Abate" (FTA) is intended to "reward tax compliance while promoting tax compliance," yet the Treasury Inspector General's report found that "approximately 250,000 taxpayers with FTF penalties and 1.2 million taxpayers with FTP penalties did not receive penalty relief "despite qualifying for such, with "more than $181 million" in penalties going unabated.  Furthermore, some taxpayers who qualified for relief under "reasonable cause" standards instead received FTA waivers, a decision which can negatively impact their future tax status.  

Dealing with penalties of this sort can be a complicated matter, and, as the Treasury Inspector General noted, an improper understanding of one's situation as regards the appropriate method of relief could have significant long-term repercussions.  For a free consultation on these and other tax-related matters, please contact The Law Offices of Aaron P. Richter, a Bellevue-based firm with expertise in Tax Controversy, Business Formation, Estate Planning, and Tax Preparation.

The Tax Implications of the American Taxpayer Relief Act of 2012 | Bellevue Tax Lawyer

In a compromise deal passed a day after the nation began sliding down the so-called “fiscal cliff,” Congress approved tax increases that would affect 77 percent of American households.  The increase that will be most obvious to average Americans will come in the form of the expiration of a 2 percent payroll tax cut that had been enacted during the peak of the recession, thereby restoring the payroll tax to 6.2 percent.  This is expected to limit the short-term spending power of consumers, possibly leading to a slight decline in GDP, while bolstering the long-term health of the national retirement program. 

However, the most long-lasting implications of the ATRA concern significant changes to income and capital gains tax rates.  Individuals with incomes over $400,000 and couples with incomes over $450,000 will see their rates rise from 35 percent to 39.6 percent, thereby fulfilling one of President Obama’s 2012 campaign promises.  However, the bill will keep Bush-era tax rates for incomes below these levels precisely where they were in 2012, providing a significant victory for Republican legislators seeking to preserve the reforms of the preceding administration.  Tax deductions and credits will be phased out for incomes over $250,000 for individuals and $300,000 for couples.  Expansions of the child tax credit, the earned income tax credit, and a $2,500 credit for college tuition—all of which had been sought by the Obama administration—are included in the ATRA.

Capital gains and dividend income over $400,000 for individuals and $450,000 for couples will now be taxed at 20 percent, up from 15 percent.  This is in line with Obama’s 2012 campaign demands, but nevertheless ensures that Bush’s policy of taxing dividends and capital gains equally and gently will be continued. 

The estate tax rate increases from 35 percent to 40 percent on estates valued above the exemption of $5,120,000, with indexing for inflation.  The alternative minimum tax has also been permanently indexed for inflation, thus avoiding the imposition of a tax intended to target only the extremely wealthy on some middle-income earners.  The long-term unemployed will receive relief under the ATRA, which extends unemployment benefits without offsetting cuts in spending to other portions of the federal budget.  Finally—and perhaps quite helpfully for many employees—the congressional deal allows money in pre-tax 401(k) accounts to be converted into Roth 401(k) accounts, an extension of Roth conversions heretofore only available for 401(k) money that was “distributable” (i.e., your vested balance upon retirement age) but that now allows the conversion of everything in traditional 401(k) accounts.

The ATRA is hardly a panacea for the country’s continuing economic woes, and it will have to be reevaluated in two months when $110 billion in delayed spending cuts take effect.  It also contains an “active financing” exemption for manufacturers and financial service providers who avoid double taxation when competing with foreign firms by using foreign subsidiaries to finance the sale of machines and products to overseas customers, a $9 billion tax break that will benefit multinational companies such as J.P. Morgan Chase and General Electric but has raised the ire of labor unions and various corporate watchdog groups. However, the ATRA will require many Americans to reevaluate their tax positions.  Although most taxpayers will wind up paying more taxes in the coming year than in previous ones, it is possible that there are also many additional opportunities now available to them.  For a free consultation on these and other tax-related matters, please contact The Law Offices of Aaron P. Richter, a Bellevue-based firm with expertise in Tax Controversy, Business Formation, Estate Planning, and Tax Preparation.

U.S. Non-Resident, Non-Filer, Streamlined Compliance Initiative | Bellevue Tax Lawyer

As I mentioned in my FBAR Updates post from 6/27, on September 1, the IRS announced the instructions for the new non-resident, non-filing US taxpayer compliance initiative.  The instructions can be found, here.  

The initiative is available to non-resident U.S. taxpayers that have lived abroad since 2009, owe less than $1500 in taxes and have not filed taxes since 2009; and taxpayers that failed to properly request deferral using Treaty Form 8891.  Form 8891 is used for Canadian RRSPs and RRIFs.  The treaty relief is also permitted in the OVDP, and OVDI if your case is still open.

Eligibility for this initiative is based on four questions listed in the questionnaire:

(1) Have you lived in the U.S. for any period since January 1, 2009?

(2) Have you filed a U.S. tax return for 2009 or later?

(3) Do you owe more than $1500 in U.S. taxes for each year individually?

(4) If you are submitting returns solely for the purpose of requesting retroactive

deferral of income on Form 8891, are there any adjustments reported on the amended return to income, deductions, credits, or taxes? 

Unless you are requesting Form 8891 relief, you must answer no to all four of the questions.  If you are requesting 8891 relief, you can answer yes to question (2) if you are only filing amended returns to make the 8891 election.  If you do not meet these requirements you are not eligible for the initiative.  The questionnaire can be found, here. 

Unlike the OVDP, the initiative does not provide protection against criminal prosecution.  Also, once a taxpayer makes a submission under this initiative, the taxpayer is not longer eligible to participate in the OVDP.

The program does not protect the taxpayer against the risk of audit.  The IRS does not go into detail about how it will decide if a return is high risk and possibly subject to an audit.  Based on the information provided, it appears that the more complicated the tax return and the closer the taxpayer is to the $1500 a year threshold, the higher the risk, and more likely to be examined.  Otherwise, it does not provide much detail about how to determine compliance risk.  

As with everything related to the IRS, it is difficult to provide comprehensive information related to taxes on the web.  Please do not rely on this article without consulting your tax professional.  If you are unsure about whether you should enter this program contact a tax professional.

Presidential Candidate Tax Proposals | Bellevue Tax Lawyer

Ever since the election of Ronald Reagan in 1980, it has become commonplace for presidential candidates to promise to implement various “tax cuts” if elected. Although neither incumbent Barack Obama nor former Massachusetts governor Mitt Romney have bucked this trend, there are important differences in the tax proposals that they have made during the current election cycle.

Romney has presented the outlines of a tax program that would appear to offer considerable benefit to high-income earners.  As part of a pledge to slash all tax rates by 20 percent, Romney would see the current top tax rate of 35 percent (assessed on income over $388,351 for individuals and married couples filing jointly, and $194,176 for married individuals filing separately) reduced to 28 percent.  He intends to completely eliminate the tax on capital gains and dividends for individuals earning less than $200,000, while also repealing the Alternative Minimum Tax (AMT) and the estate tax and lowering the corporate tax rate from 35 percent to 25 percent.  Romney's most radical position is his stated desire to see the 3.8 percent investment income surtax—which provides a partial means of funding Obamacare—repealed, along with Obamacare itself.

Romney’s position on other tax issues is not entirely clear, however.  While he has stated that he favors reducing “tax breaks” for high-income earners, he has not yet specified which tax breaks will be cut.  Moreover, the selection of influential Congressman Paul Ryan as his running mate is an indication that his tax positions may become yet more favorable to high-income earners.  In Ryan’s proposed federal budget for FY 2013, the top tax rate is slashed to 25 percent, three percentage points lower than in Romney’s proposal.  Ryan’s budget would also significantly limit the ability of the IRS to tax US corporate profits that are earned abroad. 

President Barack Obama’s suggested changes to tax policy are less advantageous for high-income earners.  He intends to raise the top two tax rates from 33 and 35 percent to 36 and 39.6--a move that would cost taxpayers in these brackets thousands of dollars--while keeping all other rates at current levels.  He also hopes to raise the alternative minimum tax, assessing a rate of at least 30 percent on all households earning over $1 million dollars, and raising the estate tax to 45 percent for each dollar above a $3.5 million exemption (up from a 35-percent rate applied to each dollar above a $5 million exemption).  Obama favors an increase in taxes on capital gains from 15 to 20 percent, as well as the taxation of “carried interest” by private financiers (currently taxed at 15 percent) taxed as ordinary income.  He does, however, favor lowering the corporate income tax rate to 28 percent, while also offering a tax credit for companies relocating their operations to the U.S.   Many of Obama’s programs that would benefit low-income earners are already in place, including a Special Direct Consolidation Program established for Federal Student Loans, a series of tax cuts for middle-income earners, the continuation of the Bush-era and the extremely complicated Public Service Loan Forgiveness Program (an initiative that, barring Congressional repeal, will vest no earlier than 2017), and the expansive, tax code-linked Obamacare medical reforms. 

Regardless of the outcome of the election or your current earnings level, it appears that the tax picture for 2013 and beyond will be quite different than it is today.  For a free consultation regarding the tax opportunities that may be available to you, please contact The Law Offices of Aaron P. Richter,  a Seattle-based firm with expertise in Tax Controversy, Business Formation, Estate Planning, and Tax Preparation. 

The New Truth about an Offer in Compromise | Bellevue Tax Lawyer

In my previous post about submitting an offer-in-compromise, I stated that it was difficult, at best, for a taxpayer to satisfy the terms required to make an offer-in-compromise.  However, the recently updated IRS offer-in-compromise guidelines substantially improves the likelihood that a middle class tax payer will qualify for an offer and that the offer will be accepted.  As discussed in detail below, the biggest changes are related to the reduction in the number of years used to determine available future income, and the ability to include student loan payments.  

Perhaps in recognition of the slow-to-recover economy, the IRS has announced more flexible offer-in-compromise terms for taxpayers who are struggling with other expenses, such as student loan payments and state and local tax delinquencies.  These changes constitute another component of Fresh Start, an IRS initiative that also includes an expansion of the payment window for installment arrangements and penalty relief for unemployed earners and self-employed earners who saw a substantial reduction in earnings.  According to IRS Commissioner Doug Shulman, the changes to this program were intended to “help the middle class more than ever before.”

For taxpayers who have remained current with all tax filings and payments and have yet to initiate bankruptcy proceedings, the revised OIC terms constitute a useful option for achieving long-term financial stability.  The previous program, gave false hope to many taxpayers but offered little relief.  Now, however, settlements for substantially less than what is owed, and settlement acceptance rates—previously in the range of 30% of all submitted offers--are likely to reach 40% or higher. 

The prior OIC requirements were unduly difficult for many taxpayers to meet.  Under the old OIC terms, the IRS looked at five years of future income when assessing offers to pay over the course of six to 24 months, and four years of future income for offers to pay in five or fewer months; the revised OIC terms limit this to two and one, respectively.  Other payments to government entities, such as student loan payments and payments to state and local tax collectors, will be considered when weighing the merits of OIC acceptance.  Equity in income-producing assets will generally not be included in the calculation of collection potential for ongoing businesses.

With OIC revisions in place for the upcoming tax season, individuals who are seeking to settle their outstanding liabilities to the IRS may wish to consult with tax professionals about this program.  The Law Office of Aaron P. Richter, a Washington law firm that specializes in tax controversy and preparation, offers a free phone consultation (425-298-3207) to taxpayers who are interested in learning about how the changes to the OIC program will affect their ability to restructure or discharge their debts.   

As with everything related to the IRS, it is difficult to provide comprehensive information related to taxes on the web.  Please do not rely on this article without consulting your tax professional. 

Bellevue Tax Lawyer | 2012 OVDP FBAR Updates

The IRS published a new webpage today detailing the requirements for the 2012 OVDP, including a new FAQ.

The rules are basically the same as the 2011 OVDI.  One item to note is that the FAQs continue to state that if you have properly reported all of your foreign income, have not been audited in a previous year, but failed to file the FBAR (Form TD F 90-22.1) do not enter the program.  Instead, the FAQs (FAQ #17) state that the taxpayer should prepare the missing FBARs and submit them with a statement explaining why they were late.

A big change for the Canadians is that the new FAQ includes an option to make a late election using Form 8891 for Canadian RRSP, RRIF, and similar accounts.  If the late filing is accepted, the amounts in these Canadian accounts is excluded from the penalty calculation.  For taxpayers in the 2009 OVDP and 2011 OVDI that haven't closed their cases, the FAQ permits them to make this election and, if the election is approved, exclude the funds in the Canadian accounts from the penalty calculation.  See the FAQs, here, and the new OVDP page, here.

Yesterday, the IRS announced a new program for US residents living abroad with minor tax issues that have also failed to file the FBAR.  The new program allows US residents living abroad with less than $1500, per year, of underreported tax liabilities to file 3 years of amended tax returns and 6 years of corrected FBARs, without FBAR penalties.  The new procedure also allows for the late filing of IRS Form 8891for Canadian RRSP, and RRIF accounts for some people.  Unfortunately, the details of the new program will not be released until September 1.  The text of the release is below:

The Internal Revenue Service today announced a plan to help U.S. citizens residing overseas, including dual citizens, catch up with tax filing obligations and provide assistance for people with foreign retirement plan issues.
"Today we are announcing a series of common-sense steps to help U.S. citizens abroad get current with their tax obligations and resolve pension issues," said IRS Commissioner Doug Shulman.

Shulman announced the IRS will provide a new option to help some U.S. citizens and others residing abroad who haven’t been filing tax returns and provide them a chance to catch up with their tax filing obligations if they owe little or no back taxes. The new procedure will go into effect on Sept. 1, 2012.

The IRS is aware that some U.S. taxpayers living abroad have failed to timely file U.S. federal income tax returns or Reports of Foreign Bank and Financial Accounts (FBARs). Some of these taxpayers have recently become aware of their filing requirements and want to comply with the law.

To help these taxpayers, the IRS offered the new procedures that will allow taxpayers who are low compliance risks to get current with their tax requirements without facing penalties or additional enforcement action. These people generally will have simple tax returns and owe $1,500 or less in tax for any of the covered years.

The IRS also announced that the new procedures will allow resolution of certain issues related to certain foreign retirement plans (such as Canadian Registered Retirement Savings Plans). In some circumstances, tax treaties allow for income deferral under U.S. tax law, but only if an election is made on a timely basis.  The streamlined procedures will be made available to resolve low compliance risk situations even though this election was not made on a timely basis.

Taxpayers using the new procedures announced today will be required to file delinquent tax returns along with appropriate related information returns for the past three years, and to file delinquent FBARs for the past six years. Submissions from taxpayers that present higher compliance risk will be subject to a more thorough review and potentially subject to an audit, which could cover more than three tax years.

The IRS also announced its offshore voluntary disclosure programs have exceeded the $5 billion mark, released new details regarding the voluntary disclosure program announced in January and closed a loophole used by some U.S. citizens. See IR-2012-64 for more.

Update September 5: The IRS has posted the new details for the new program.  You can find the link for the program, here.  The questionnaire for the program is, here.  There seem to be some potential issues involved with entering this program and I will make a post about it in the next couple of days.
 
As with everything related to the IRS, it is difficult to provide comprehensive information related to taxes on the web.  Please do not rely on this article without consulting your tax professional.  If you are unsure about whether you have a requirement to file this form contact a tax professional.