Offshore Tax Reporting Requirements and the 2016 FBAR due April 18, 2017

Annual tax season is upon us, and we remind readers of important tax reporting requirements that must be met with respect to foreign assets.

  1. “Check the Box” on IRS Form 1040, Schedule B

If you had signature authority or a financial interest (e.g., ownership) in a foreign financial account (including a bank account, securities account, brokerage account, etc.) at any time during 2016, you must “check the box” on your IRS Form 1040, Schedule B, Part III, Line 7.  If your foreign account(s) were valued at more than $10,000 in the aggregate, you must also “check the box” on line 7 regarding the FBAR form, FinCEN 114 (see item 5, below).  This requirement is applicable to taxpayers who had beneficial ownership of, or signature authority or other authority over, such financial accounts in a foreign country.  Even if you closed the accounts during 2016, you must still “check the box” if you maintained the accounts during any part of 2016.  If you received a distribution from, or were the grantor of, or a transferor to, a foreign trust or foreign foundation, you must “check the box” on Line 8 and also file IRS Form 3520.

  1. Report Foreign Income

In addition to “checking the box” on IRS Form 1040, Schedule B, U.S. taxpayers must report all income (including interest, capital gains, dividends and pension distributions) realized during 2016, on IRS Form 1040.  If you held investments in foreign mutual funds or hedge funds, you may be required to file additional tax forms applicable to “PFICs” (Passive Foreign Investment Companies) for tax year 2016 (e.g., IRS Form 8621).  If you received rental income from foreign real estate or realized gains from the sale of foreign real estate, you must declare it.  You may be eligible to deduct real estate expenses and real estate taxes paid to a foreign tax authority.  In many cases, if foreign income was taxed in a foreign country, you may be able to get a credit for foreign taxes paid.  Even so, all foreign income should still be declared.

  1. IRS Form 8938

IRS Form 8938, Statement of Specified Foreign Financial Assets, first introduced in 2012, is yet another IRS form to report foreign bank, brokerage accounts and other foreign financial assets (including interests in offshore trusts and corporations, bonds, foreign mutual funds, foreign annuity and insurance policies).  IRS Form 8938 is due with your annual tax return (April 18, 2017, unless you obtain an extension).

  1. Additional Forms for Entities (Foreign Trusts, Foreign Corporations, etc.)

If you had an interest in a foreign entity such as a foreign trust or foreign foundation, and/or during 2016 you received assets from the a foreign entity, then you may also be required to file IRS Forms 3520 and 3520A.  Please contact us for a copy of our memorandum about this issue.  If you had an interest in a foreign corporation, and the foreign corporation is deemed to be a “Controlled Foreign Corporation” (CFC), then IRS Form 5471 is also due.  These forms are usually due with your income tax return (IRS Form 1040, due April 18, 2017).

  1. The FBAR – due April 18, 2017

This year, 2017, is the first year that the deadline for the FBAR, Report of Foreign Bank and Financial Accounts (FinCEN Form 114), is the same as the deadline for submission of income tax returns (1040s), for calendar year 2016.  The FBAR must be filed by taxpayers who had beneficial ownership of, or signature or other authority over, foreign financial accounts, including bank and securities accounts, if the aggregate value of such accounts exceeded $10,000 at any time during 2016.  The FBAR also applies to foreign insurance policies, annuity policies, retirement plans and other financial products.  Recent authority also extends the FBAR to on-line gambling/gaming accounts.  If you participated in the IRS Offshore Voluntary Disclosure Program (OVDP), Streamlined procedures or submitted retroactive FBARs, you should ensure ongoing compliance by timely submitting the 2016 FBAR.  If the accounts existed at any point during 2016, then the FBAR must be submitted by April 18, 2017.  Note that the FBAR is now known as FinCEN Form 114, and must be filed electronically.  This year, also for the first time, a taxpayer may obtain an automatic extension to file the FBAR.  The extended due date is the same as one’s extended income tax deadline (October 15, 2017).

  1. Strategic Concerns

If you have not yet filed an application for the OVDP or submitted a Streamlined application, or if your application is pending at the IRS, or you are undecided as to whether or not to make a disclosure, you may want to consider requesting an extension for your 2016 tax returns and FBAR.

You may request an extension for filing your income tax return by filing IRS Form 4868.  Note that this is an extension to file the tax return, not pay tax due.  You still need to pay your tax liability by April 18, 2017, while you have until October 15, 2017 to file your tax return and FBAR.  This means that your voluntary disclosure strategy needs to be formulated prior to reporting to the Government the existence of foreign accounts via the FBAR, Form 8938, etc.

Conclusion

Please ensure that your offshore assets are tax compliant by adhering to the ongoing reporting and tax requirements.  If you have any questions or would like our assistance in formulating a disclosure strategy or in preparing the 2016 FBAR, please feel free to contact us.

 

 

 

 

The Coming Post-Election Tax Code Changes Mandate Timely Planning

Donald Trump has promised to rewrite the U.S. tax code, much like Ronald Reagan did in 1986.  With a Republican House and Senate, a tax code overhaul is likely.  Trump’s plan is likely to include:

  • Reduction in income tax rates for individuals and corporations. If enacted, the U.S. would shift from one of the highest corporate income tax rates in the world, to one of the lowest (from 35% to 15%).  For individuals, the highest tax bracket is now 39.6%, plus the 3.8% net investment tax, for a total of 43.4%.  Under the Trump plan, the highest rate would be 33%.
  • Elimination or significant reduction of estate and gift taxes.
  • Restructuring of tax on offshore income, including deemed repatriation and 10% tax on deferred offshore profits.
  • Elimination or partial repeal of the Affordable Care Act (Obamacare), including repeal of the 3.8% tax on net investment income.
  • Carried interest may be taxed as ordinary income.
  • Income earned through flow-through entities (LLCs and S-Corps) to be taxed at 15% rather than higher individual rates.

Apart from the Trump tax plan, Republican legislators have also offered their own plan which also calls for reduction of taxes.

The above are proposals, not yet law.  We can assist you in anticipating the coming tax changes, and planning ahead.  Some suggestions include:

  • Take charitable deductions now, rather than in 2017, when tax changes could likely make deductions less valuable. The current income tax rates are known and will probably be higher than in 2017.
  • If we can expect reductions in income tax and capital gains tax rates next year, consider whether to utilize tax deductions and losses in 2016 and postpone or defer gains and income until 2017.
  • Consider an enhanced role for life insurance and an Irrevocable Life Insurance Trust (ILIT). Insurance proceeds are not taxable as income to the beneficiary.  Growth within an insurance policy is not subject to income and capital gains tax.  If the estate tax will be repealed, insurance could be completely tax-free.  (State estate taxes may still apply.)  Insurance could thus play an enhanced roll in family planning, legacy planning, liquidity and tax-minimization.  An ILIT would add further benefits, including asset protection, creditor protection and extended wealth management for child beneficiaries.

Year-End 2016 Tax Planning, Year-End Gifting & 2017 Tax Changes

Year-end gifting may be changing soon. Each year, we begin our end-of-year suggestions with a reminder to clients who own FLPs, LLCs and family business ventures, that they should take advantage of year-end gifting to lower estate taxes.  This year the message is even more crucial, because discounted gifting of family enterprises is about to go away entirely.  The recent election results will not alter (at least for now) this change in tax law.

Take Advantage of Year-End Gifting to Lower Estate Tax – Before the Law Changes: New IRS Regulations Eliminate the Ability to Discount the Value of FLP and LLC Gifts to Family Members

In August 2016, the IRS finally issued proposed regulations that will eliminate (or severely limit) the ability to discount the value of transfers of interests in closely held entities (FLPs, LLCs, family corporations) to family members.  Such “leveraged gifting” has been an extremely important and common method used by estate planners to eliminate estate taxes.

The proposed regulations will undergo a ninety day comment period and a public hearing on December 1, 2016.  Shortly after that, the IRS will publish final regulations which will take effect within thirty days after publication[1].  These proposed regulations were expected and we have previously written about them here.

Readers are strongly urged to contact us to implement gifts of FLP and LLC interests to their heirs before the changes take effect.  Clients with FLPs should consider gifting limited partnership interests in order to decrease the value of their estate.  As long as clients retain their General Partner (GP) interests, clients will continue to control all assets within their partnership.  Yes, you can escape the estate tax and still control the assets.

In summary:

– You can lower the value of your taxable estate, and pass up to $5,450,000 ($10,900,000[2] for a married couple) to your heirs, tax free.

– If you own an FLP, you can gift Limited Partnership (LP) interests to your heirs, and take advantage of discounting, to get even more out of your estate, tax-free (up to $21,800,000 in 2016).

– You can keep your General Partner (GP) interests and still control the FLP and its assets, even if you gift all of the Limited Partnership (LP) interests.

Also, don’t forget about the annual gift exclusion, which allows you to gift up to $14,000 ($28,000 for a married couple) in 2016 to as many people as you choose.

We realize that gifting and discounting are not simple concepts, and we welcome your questions.  We can advise you as to appropriate FLP discounts, prepare memoranda of gift for you[3], as well as the partnership valuation and gift valuation calculation letters (necessary for the IRS).  Please contact us with any questions regarding your year-end tax planning.

[1]This fall, two bills were introduced in the U.S. House of Representatives and Senate to derail the proposed IRS regulations, further illustrating the uncertain nature of our tax law.

[2] Under current law, in 2017, the exclusions go up: $5,490,000 for individuals and $10,980,000 for married couples.

[3]  A recent tax court case has made it imperative that the documents transferring the LP interests be worded very carefully.  These documents be prepared by qualified tax counsel.

New IRS Regulations Eliminate the Ability to Discount the Value of FLP and LLC Gifts to Family Members

This month, the IRS finally issued proposed regulations that will eliminate (or severely limit) the ability to discount the value of transfers of interests in closely held entities (FLPs, LLCs, family corporations) to family members.

Such “leveraged gifting” has been an extremely important and common method used by estate planners to eliminate estate taxes.

The proposed regulations will undergo a ninety day comment period and a public hearing on December 1, 2016. Shortly after that the IRS will publish final regulations which will take effect within thirty days after publication.

These proposed regulations were expected.  We have previously written about them here and here.

While we do not venture into political discussion, we point out that Hillary Clinton has stated that she will reduce the estate tax exclusion from $5,450,000 per person ($10,900,000 for a married couple) currently in effect, to $3,500,000 per person ($7,000,000 for a married couple) and reduce the gift tax exemption from $5,450,000 per person to $1,000,000 per person.  She will also increase the gift/estate tax to 45%.  (Donald Trump has proposed to eliminate the gift/estate tax entirely.)

Readers who have not yet completed their estate planning are strongly urged to contact us to implement gifts of FLP and LLC interests to their heirs before the changes take effect.

Please see our related articles:

Family Limited Partnerships & Discounting

Historic Opportunity to Avoid Tax on Over $10 Million+ of Assets

Year-End 2015 Tax Planning: Take Advantage of Gifting to Lower Estate Tax – Before the Law Changes

LLC/FLP Discounting and Leveraged Gifting to Lower Estate Tax May Soon Be Limited

Please contact us with any questions.

Will Bank Hapoalim be the next foreign bank to fall to DOJ/IRS?

We are seeing signs that the US Department of Justice and the IRS are gearing up their investigation and possible prosecution of Israeli bank HaHapoalim for tax fraud.  The basis of such a tax fraud charge is that Hapoalim offered banking services to US taxpayers designed to hide accounts and income from the IRS.  In December 2014, another Israeli bank, Leumi, paid a fine of $400 million to DOJ and New York State to avoid criminal charges based on the very same conduct.  As part of this settlement, Leumi also gave the names of 1,500 account owners to the US government.  We’ve known for years that Israeli banks such as Hapoalim, Leumi and Mizrachi Tefahot were under examination by US authorities, much the same as Swiss banks, for offering “secret” banking services.  Now it appears that the US government investigation of Hapoalim is entering a more critical phase.

In recent weeks, we have seen the IRS investigators from the Criminal Investigations (CI) Division of the IRS request interviews of clients who had accounts at Hapoalim.  Such interviews are usually used to build a case against a foreign bank.  At the same time, Hapoalim is freezing accounts owned by American clients and is requesting clients sign and return IRS Forms W-9 and waivers of banking secrecy.  When banks do this, they usually do so before handing over files, documents and information about their clients to DOJ and IRS.  If the clients do not comply, their funds are frozen.

US taxpayers with accounts at Hapoalim must take action on two levels.  First, they must address whether their Hapoalim accounts are US-tax compliant.  If not, for instance, if the accounts were not disclosed on the FBAR form and/or IRS Form 8938, and/or if income (interest, dividends, capital gains, etc.) was not properly reported to the IRS, the clients should seek advice from US tax counsel on the various options to come into US tax compliance.  Second, the clients have to deal with the foreign bank and navigate through the forms requested, taking careful note of the risks and liabilities of the bank reporting the accounts and account owners to DOJ and the IRS.  Of course, un-freezing the funds at the bank is a crucial concern as well, but this goal must be addressed in tandem with the bank’s request for signed documents and waivers and the risk of the bank reporting the client to the US government.

We have experience in representing clients with accounts at Hapoalim, other Israeli banks, and banks around the world.  We have been successful in advocating on behalf of these clients, to rectify account freezes, obtain documents and information from banks, and advise clients on their options to come into US tax compliance.

If you have an account at Hapoalim or anywhere else in the world, contact us for a confidential discussion.

Please also see the following articles on this topic:

Did You Receive a Letter from a Foreign Bank, Urging You to Report Your Account?

With Israeli Bank Accounts Under IRS Scrutiny, Israel is Becoming the IRS’ Most Severe Enforcer of FATCA

The Next Wave of IRS Offshore Account Enforcement: Israeli Banks Under Scrutiny

 

 

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