Friday, February 5, 2016

Disclosing Foreign Accounts -- Delinquent International Information Return Submission Procedures | Bethesda Tax Lawyer


As I discussed in my previous post, if you have a foreign account and have reported the income and paid taxes on it, but you have not filed FBARs, you can file the late forms without fear of late filing penalties. Unfortunately, the IRS is not as generous if you have reported the income from foreign entities (i.e. foreign partnerships, corporations, or trusts), but not filed the required information returns. The service does offer the Delinquent Information Return Submission Procedures for filing the missing documents, with a major drawback being that it requires a reasonable cause statement.  


The requirements, per the IRS's web page, to enter the procedures are that a taxpayer: 
  • "has not filed one or more required international information returns,
  • has reasonable cause for not timely filing the information returns,
  • is not under a civil examination or a criminal investigation by the IRS, and
  • has not already been contacted by the IRS about the delinquent information returns."

The major drawback to this program is that most people will not qualify because they have not properly reported all income because the reporting requirements for a foreign business are very complex. For example, if you (a US citizen or tax resident) and a friend rent property in a foreign country and formed a foreign LLC equivalent, you have just formed a foreign corporation. Your new business means that you now have to file IRS Form 1120-F, possibly, Form 5471 and Form 926, among others.  To further complicate the situation, did you know that foreign property is subject to different depreciation rules, or that there are rules about which exchange rate you use when converting foreign currency? 

Another problem with the procedures is that reasonable cause is not an easy standard to satisfy. The situations which the IRS provided standards of reasonable cause are:

  • Written advice from the IRS; 
  • Reliance on advice from your tax preparer; and
  • death, disability, sickness, natural disaster, etc.
As you can see, the IRS does limit what it will accept as an explanation for filing these forms late. While these examples are limited, the IRS might allow the excuse of I did not know about these requirements if you entered this program. However, this analysis would be a very fact based argument and is beyond the scope of this brief blog post. If you meet the above requirements including a reasonable explanation, the IRS will not assess penalties for the late filing of the information returns. 

Dealing with offshore accounts is a complicated matter, and not selecting the correct disclosure method could have significant long-term repercussions on penalties.  For a free consultation on these and other tax-related matters, please contact The Law Offices of Aaron P. Richter, a Bethesda-based firm with expertise in Tax Controversy, Business Formation, Estate Planning, and Tax Preparation.

Thursday, January 21, 2016

Disclosing Foreign Accounts -- Delinquent FBAR Submission Procedures | Bethesda Tax Lawyer

In my previous posts about disclosing foreign accounts, I discussed the OVDP and the Streamlined Filing procedures.  The focus of these programs are taxpayers who have foreign financial accounts and/or business entities and have not reported the income from these foreign assets. If a taxpayer has reported the income from her foreign financial accounts and paid taxes on it, the Delinquent FBAR Submission Procedures permit a taxpayer to file the missing FBARs (FinCen Form 114) without a late filing penalty. 

A taxpayer qualifies for this Delinquent FBAR Submission Procedures if she: 

  1. She has not filed an FBAR;
  2. She is or was not under a civil examination/audit or a criminal investigation by the IRS; and
  3. She has not been contacted by the IRS about the delinquent FBARs.
To enter the program, the taxpayer must file the missing FBARs through the FinCen website. When filing the late forms, select "other" as the reason for why you are filing late and include a statement explaining the circumstances for the late filing. The most likely explanation will be "I did not know I had to file an FBAR." The instructions for the program do not provide the number of years to file. However, the statute of limitations for FBARs is six years from the date the form is due (the due date was June 30th in 2015).  Thus, if a taxpayer entered the program today, the maximum number of FBARs required would be six for the 2009 through 2014 tax years. 

Dealing with offshore accounts can be a complicated matter, and not selecting the correct disclosure method could have significant long-term repercussions on penalties.  For a free consultation on these and other tax-related matters, please contact 
The Law Offices of Aaron P. Richter, a Bethesda-based firm with expertise in Tax Controversy, Business Formation, Estate Planning, and Tax Preparation.

Tuesday, January 5, 2016

Interesting NY Times Article About Why People Cheat on Taxes | Bethesda Tax Lawyer

The New York Times published an interesting article, yesterday If The I.R.S. Is Watching You, You'll Pay Up, about the psychology behind cheating on one's taxes.  While the article does not get into specifics about how the IRS identifies tax cheats, it does provide some interesting pieces of information.  Specifically, first, it mentions the fact that small business owners are the people most likely to report income and deductions incorrectly, second, the lack of funding has reduced the IRS's enforcement ability, and finally, the service is regularly trying new ways to encourage compliance.  The article also has a few quotes from law professors and the IRS commissioner; it is worth a quick read. 

As with everything related to the IRS, it is hard to provide comprehensive information related to taxes on the web.  This post is for general information and is not legal or tax advice.  Please do not rely on this article without consulting a tax professional.

Monday, December 28, 2015

Disclosing Foreign Accounts -- Streamlined Foreign Offshore Procedures (SFOP) | Bethesda Tax Lawyer

As I previously discussed, in addition to the OVDP, the IRS offers the Streamlined Filing Compliance Procedures. These procedures consist of two programs, one for US tax residents/citizens living in the United States (Streamlined Domestic Offshore Procedures), and a separate program for US tax residents living abroad (the Streamlined Foreign Offshore Procedures, SFOP).  This post will discuss the foreign procedures. 

The requirements for the SFOP are very similar to those for the SDOP. The two primary differences are, first the offshore penalty is zero, and second the IRS has a non-residency requirement. 

Eligibility for SFOP

To enter the SFOP, the IRS requires that a taxpayer: 
  1. Non-residency --during the previous three tax years the individual has lived outside the United States for 330 or more days and did not maintain an abode in the USA
  2. Has filed tax returns for the previous three years; 
  3. Has not reported income from foreign accounts, assets, entities, etc.;
  4. Has not reported the said foreign assets on the FBAR and other required informational federal tax returns; and
  5. She must certify that the failure to report these assets was due to non-willful conduct. 
The general concern with entering the SFOP is that the taxpayer must certify under the penalties of perjury that her non-reporting of foreign assets was non-willful. Additionally, entrance into the SFOP does not provide immunity from criminal prosecution. 

Willfulness

Entry into the SFOP requires taxpayer certification, under the penalties of perjury, that the failure to report foreign accounts/assets was due to non-willful behavior. The IRS defines non-willful conduct as "conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law." While this definition seems pretty straight forward, it is very nuanced. Moreover, the IRS has intentionally not provided additional guidance on how to interpret the definition, nor has it provided examples of this behavior.  

Another complication to this definition is that it does not address willful blindness.  Willful blindness in the simplest of terms means that a taxpayer should have known to research the filing requirements, but failed to make this inquiry. The test for willfulness is a very fact and circumstances based analysis requiring careful judgment. I will write a separate post about willfulness in a few weeks.      


Required Documents for Entry into the SFOP

  1. Amended tax returns for the three most recent tax years that includes any unreported foreign income and unfiled informational returns; 
  2. The six previous years of FBARs; 
  3. Form 14654; Certification by U.S. Person Residing in the United States for Streamlined Domestic Offshore Procedures; and
  4. A check for any unpaid taxes and interest from the amended returns and a separate check for the offshore penalty. 

Penalties

  1. 0% penalty based upon the year-end balances of the foreign accounts and assets. 
  2. Unlike the OVDP, the SFOP does not assess penalties on the unpaid taxes.

Dealing with offshore accounts can be a complicated matter, and not selecting the correct disclosure method could have significant long-term repercussions on penalties.  For a free consultation on these and other tax-related matters, please contact The Law Offices of Aaron P. Richter, a Bethesda-based firm with expertise in Tax Controversy, Business Formation, Estate Planning, and Tax Preparation.

Tuesday, December 15, 2015

The FAST Act May Slow Your Travel Plans if You Have Tax Debt | Bethesda Tax Lawyer

The recently enacted Fixing America's Surface Transportation Act (FAST) was signed into law on December 4, 2015.  The FAST Act includes a few provisions that are relevant to taxpayers if they owe back taxes.  The two provisions that will affect the most people are, first, that the IRS can request that the Secretary of State revoke or deny a passport for individuals with a "seriously delinquent tax debt."  Second, the bill requires the IRS to hire private debt collections for certain types of debt. 

Under the section, a seriously delinquent tax debt is defined as $50,000 in assessed taxes, interest, and penalties for which a lien has been filed.  The bill does provide for exceptions to the international travel ban if the debts are being paid in a timely manner (e.g. the taxpayer has requested an installment agreement, offer-in-compromise, or innocent spouse relief).  Further, the taxpayer may file suit in the tax court or district court to determine whether the certification of the seriously delinquent was erroneous.  

If you have questions about the FAST act you should contact a tax professional.  For a free consultation on these and other tax-related matters, please contact The Law Offices of Aaron P. Richter, a Bethesda-based firm with expertise in Tax Controversy, Business Formation, Estate Planning, and Tax Preparation.

Friday, November 27, 2015

Disclosing Foreign Accounts -- Streamlined Domestic Offshore Procedures (SDOP) | Bethesda Tax Lawyer

In addition to the OVDP, the IRS offers the Streamlined Filing Compliance Procedures. These procedures consist of two programs, one for US tax residents/citizens living in the United States (Streamlined Domestic Offshore Procedures), and a separate program for US tax residents living abroad (the Streamlined Foreign Offshore Procedures).  This post will discuss the domestic procedures.  

Eligibility for SDOP

To enter the SDOP, the IRS requires that a taxpayer: 
  1. Is a US tax resident or citizen who resides in the United States; 
  2. Has filed tax returns for the previous three years; 
  3. Has not reported income from foreign accounts, assets, entities, etc.;
  4. Has not reported the said foreign assets on the FBAR and other required informational federal tax returns; and
  5. She must certify that the failure to report these assets was due to non-willful conduct. 
The general concern with entering the SDOP is that the taxpayer must certify under the penalties of perjury that her non-reporting of foreign assets was non-willful. Additionally, entrance into the SDOP does not provide immunity from criminal prosecution. 

Willfulness

Entry into the SDOP requires taxpayer certification, under the penalties of perjury, that the failure to report foreign accounts/assets was due to non-willful behavior. The IRS defines non-willful conduct as "conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law." While this definition seems pretty straight forward, it is very nuanced. Moreover, the IRS has intentionally not provided additional guidance on how to interpret the definition, nor has it provided examples of this behavior.  

Another complication to this definition is that it does not address willful blindness.  Willful blindness in the simplest of terms means that a taxpayer should have known to research the filing requirements, but failed to make this inquiry. The test for willfulness is a very fact and circumstances based analysis requiring careful judgment. I will write a separate post about willfulness in a few weeks.      


Required Documents for Entry into the SDOP

  1. Amended tax returns for the three most recent tax years that includes any unreported foreign income and unfiled informational returns; 
  2. The six previous years of FBARs; 
  3. Form 14654; Certification by U.S. Person Residing in the United States for Streamlined Domestic Offshore Procedures; and
  4. A check for any unpaid taxes and interest from the amended returns and a separate check for the offshore penalty. 

Penalties

  1. 5% penalty based upon the year-end balances of the foreign accounts and assets. 
  2. Unlike the OVDP, the SDOP does not assess penalties on the unpaid taxes.

Dealing with offshore accounts can be a complicated matter, and not selecting the correct disclosure method could have significant long-term repercussions on penalties.  For a free consultation on these and other tax-related matters, please contact 
The Law Offices of Aaron P. Richter, a Bethesda-based firm with expertise in Tax Controversy, Business Formation, Estate Planning, and Tax Preparation.

Monday, November 9, 2015

Disclosing Foreign Accounts -- Disclosing Foreign Accounts -The OVDP | Bethesda Tax Lawyer

The IRS created four programs to resolve your undisclosed foreign accounts and entities for individuals.  These programs are the Offshore Voluntary Disclosure (OVDP); Streamlined Filing Compliance Offshore Procedures for foreign or domestic US Tax residents (SFOP and SDOP, respectively); Delinquent FBAR Submission Procedures; and the Delinquent Internation Informational Return Submission Procedures.  This post will focus on the requirements for the OVDP.  My posts in the upcoming weeks will discuss the other programs.

OVDP

Eligibility for OVDP

The IRS has the following requirements to enter the OVDP:

1) The funds of the undisclosed foreign accounts and entities must be from legal sources.   

2) The OVDP is available only to address a taxpayer’s personal liability. 

3) Individuals who facilitated the tax noncompliance of others are not eligible to participate in OVDP.

4) A taxpayer must cooperate with the IRS in determining his/her correct tax liability;


5) The taxpayer needs to make good faith arrangements with the IRS to pay in full, the tax, interest, and any penalties determined by the IRS to be applicable. (An IRS payment plan is permitted if you are unable to pay the balance due at the time the OVDP submission.); and


6) The taxpayer is not under an IRS civil audit/examination or criminal investigation. (The IRS permits a taxpayer to submit a preclearance request to determine whether he is under investigation by the IRS and eligible for the OVDP.)

Willfulness

The OVDP does not require a taxpayer to certify that he was non-willful in his tax non-compliance, failure to file FBARs and information returns.  The other programs all require a certification that the failure to file said forms was non-willful. 

Submission Requirements

To satisfy the requirements of the OVDP, the taxpayer will have to submit an OVDP letter and attachments; eight years of corrected income tax returns, FBARs, and any unfiled informational returns; a check to pay the taxes, penalties and interest; and a separate check to pay the offshore penalty.  There may be additional documents depending on the size of the accounts/assets. 

OVDP Penalties 

There are two penalty regimes under the OVDP: 

1) 50% - A 50% offshore penalty applies if either the taxpayer's foreign financial institution or a facilitator who helped the taxpayer establish or maintain an offshore arrangement has been publicly identified as being under investigation or as cooperating with a government investigation.  The 50% penalty applies to all assets including those that are at different institutions, and the 50% penalty applies even if the asset has been moved to a different bank or brokerage.

The list of foreign banks and facilitators subject to the 50% penalty can be found here


2) 27.5% - The 27.5% penalty applies to all other taxpayers.  

The 27.5% and 50% penalties applies to the year with the highest aggregate balance off all accounts during the eight year OVDP period.  

3) In addition to the OVDP penalty, there is a 20% penalty and interest on past due balances. 

Dealing with offshore accounts can be a complicated matter, and not selecting the correct disclosure method could have significant long-term repercussions on penalties.  For a free consultation on these and other tax-related matters, please contact The Law Offices of Aaron P. Richter, a Bethesda-based firm with expertise in Tax Controversy, Business Formation, Estate Planning, and Tax Preparation.