Many people with offshore financial accounts want to become US tax compliant, but they don’t know the best way forward. A quick Internet search reveals information on filing FBAR forms, making a voluntary disclosure of the accounts to the IRS, or a “streamlined disclosure”. There is a lot of information on the Internet and in the media, much of it frightening, including the end of bank secrecy, banks telling the IRS about American clients, and criminal prosecution of American taxpayers with undeclared foreign assets. People want to bring their foreign assets into IRS compliance, but the choices to do so are daunting and unclear. The best path forward to tax compliance will depend on the background facts.
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Want to Learn about the IRS OVDP and Streamlined Disclosure Procedures for Offshore Assets?
On September 15, 2015, Asher Rubinstein will be presenting a Webinar on the IRS Offshore Voluntary Disclosure Program (OVDP) and the Streamlined disclosure procedures.
As the IRS and Department of Justice have stepped up their efforts to investigate and prosecute US taxpayers with unreported foreign assets, so too has the IRS offered opportunities for taxpayers to preemptively come forward and self-disclose such offshore assets in return for lower penalties and avoidance of criminal prosecution. While the IRS OVDP may benefit a taxpayer who clearly committed offshore tax fraud (for example, by setting up a foreign trust and a “secret” bank account in a tax haven or secrecy jurisdiction specifically to hide income from the IRS), many taxpayers with less egregious facts were swept into the OVDP and its penalty structure. The IRS faced criticism that, for example, a recent immigrant with legitimate accounts “back home”, or a taxpayer who inherited a foreign account from a foreign relative, would pay the same penalties as the tax cheat with a Panama corporation and “secret” account in Switzerland.
In response, the IRS introduced “Streamlined” disclosure procedures for taxpayers with more benign facts. The “Streamlined” disclosure procedures (one for foreign residents, one for domestic residents) have a shorter look back period and much lower penalties than the OVDP (including no penalties for foreign residents), and for these reasons the Streamlined procedures are less onerous and would be the preferred choice for coming into tax compliance. However, there are eligibility standards for being accepted into the Streamlined programs. In addition, the taxpayer has to certify that his or her conduct was “non-willful”. If the IRS disagrees, it is too late for the OVDP and there are no protections against criminal prosecution. Thus, whether to proceed with the Streamlined procedures, and how to certify “non-willfulness”, are critically important.
This webinar will discuss both the OVDP and Streamlined procedures, the differences between the two, and the benefits of each. We will discuss the eligibility requirements (including residency) for the Streamlined procedures. We will explore the concept of “willfulness”, and the risks involved in the Streamlined procedures and certification or non-willfulness. We will detail the procedures, and discuss the penalties for making a voluntary disclosure. We will also explore alternatives to making a voluntary disclosure of foreign assets. This will be an informative, detailed seminar on how to bring offshore assets into US tax compliance in the best manner possible from an experience foreign asset attorney.
Please contact us if you are interesting in participating in the Webinar on September 15, 2015.
The FBAR, Report of Foreign Bank and Financial Accounts, is due by June 30, 2015 for Offshore Accounts
It’s FBAR season again. The FBAR, the Report of Foreign Bank and Financial Accounts, previously known as Treasury Department Form TD F 90-22.1 and now known as FinCEN Form 114, is due by June 30, 2015, for foreign financial accounts that existed during 2014, including offshore accounts. Even if you are on extension to file your 2014 U.S. income tax return, there is no extension for the FBAR filing. The FBAR must be filed electronically.
We’ve written extensively about the FBAR and the foreign accounts and assets that are required to be reported. We advise U.S. taxpayers on whether their foreign assets are subject to the FBAR. We also advise on how to correct past FBAR non-filings. In some cases, FBAR non-compliance can be remedied without penalties. In other cases, such as when a taxpayer did not file an FBAR and also did not report foreign income to the IRS, then it may be possible to come into compliance via a Voluntary Disclosure to the IRS. However, if the IRS already has information about the foreign account, or if the taxpayer is already under investigation or audit, then it may be too late for corrective filings. Thus, proper timing is crucial. We can assist you with such issues, and with offshore reporting and IRS compliance for foreign assets.
Asher Rubinstein in live Webinar on IRS Offshore Voluntary Disclosures, the Streamlined Disclosure Programs, FBAR Compliance, Tax Compliance, etc.
Asher Rubinstein will be speaking in an upcoming Strafford live webinar, “Streamlined Offshore Voluntary Disclosure Program: Avoiding Aggressive Enforcement Regime and Significant Penalties” scheduled for Tuesday, June 2, 1:00pm-2:30pm EDT.
On Mar. 6, 2015, an IRS official stated that the IRS is preparing a renewed, more intensive crackdown on offshore tax evasion. Along with this heightened enforcement, the IRS has extended the streamlined filing compliance procedures indefinitely. Taxpayers should act quickly to take advantage of the less-punitive streamlined filing compliance procedures, including the Delinquent FBAR Submission Procedures and the Delinquent International Information Return Submission Procedures (applying to, e.g., IRS Forms 5471 for “Controlled Foreign Corporations” [CFCs] and IRS Forms 3520 and 3520-A for foreign trusts).
Taxpayers, attorneys, CPAs and other advisors must understand the criteria as well as the process for submitting an application under these streamlined programs. The benefit of the streamlined programs is that qualifying taxpayers will incur reduced or no penalties from failure to file FBARs and/or to include offshore income on a U.S. tax return. A taxpayer may only qualify for the streamlined programs if the failure to file was non-willful or if the taxpayer had reasonable cause (in the case of the Delinquent International Information Return Submission Procedures). There are many indicia of willfulness, and the background facts of each case are important. A key element for determining whether a failure to file is willful is when the taxpayer learned of the filing requirements.
The IRS has stated that most of its upfront rejections of applications under the streamlined programs are due to the filing being insufficient or incorrect on its face. Taxpayers and their advisors must know how to properly complete and file for each of these streamlined programs in order to avoid an upfront rejection.
Our panel will provide participants with the tools necessary to navigate the IRS rules governing the extended 2014 Offshore Voluntary Disclosure Program (2014 “OVDP”) to determine whether clients are eligible for the less arduous and punitive streamlined programs.
We will review these and other key issues:
- What are the new 2014 OVDP requirements?
- What are the new requirements for the streamlined programs? How may a taxpayer take advantage of the benefits of a streamlined program?
- What best practices should be used in determining if a taxpayer qualifies for one of the streamlined programs?
- How would a taxpayer demonstrate non-willfulness?
- What conduct constitutes “willful” non-reporting?
- What risks does an applicant in one of the Streamlined Programs face?
- What are some of the other methods used by taxpayers to become tax compliant with respect to undeclared offshore income and undeclared offshore financial accounts and assets, and what is the viability of these methods? Some of the methods that will be discussed include quiet disclosure, prospective compliance and expatriation.
After our presentations, we will engage in a live question and answer session with participants in order to answer your questions about these important issues directly about tax planning and other issues.
For more information or to register >
Or call 1-800-926-7926 ext. 10
Ask for Streamlined Offshore Voluntary Disclosure Program on 6/2/2015
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Ongoing U.S. Tax Compliance for Offshore Accounts
Whether you have been properly reporting your foreign assets to the IRS regularly, or have entered the IRS Offshore Voluntary Disclosure Program (OVDP) and/or submitted FBARs for past years in order to make your foreign assets tax compliant, you must ensure ongoing tax compliance. With the April 15 income tax deadline just around the corner, we offer the following primer on ongoing tax compliance for offshore accounts.
1. “Check the Box” on IRS Form 1040, Schedule B
If you maintained a foreign financial account at any time during 2014, you must “check the box” on your IRS Form 1040, Schedule B, Part III, Line 7. This requirement is applicable to taxpayers who had beneficial ownership of, or signature authority or other authority over, a financial account in a foreign country. Even if you closed the account during 2014, you must still “check the box” if you maintained the account during any part of 2014. If you received a distribution from, or were the grantor of, or a transferror to, a foreign trust or foreign foundation, you must “check the box” on Line 8 and also file IRS Form 3520/3520A.
2. Report Foreign Income
In addition to “checking the box” on IRS Form 1040, beneficial owners of a foreign account must report all income (including interest, capital gains and dividends) realized during 2014 in the foreign account, 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 2014. If you received a rental income from foreign real estate, you must declare it. You may be eligible to deduct real estate expenses and real estate taxes. 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 be declared.
3. 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 assets (including interests in offshore trusts and corporations, bonds, mutual funds, annuity and insurance policies). IRS Form 8938 is due with your annual tax return (usually April 15, unless you obtain an extension). Our prior guidance on Form 8938 may be found here.
4. Additional Forms for Entities (Foreign Trusts, Corporations, etc.)
If you had an interest in a foreign entity such as a foreign trust or foreign foundation, and/or during 2014 you received assets from such a foreign entity, then you may also be required to file IRS Forms 3520 and 3520A. If you had an interest in a foreign corporation that is deemed to be a “Controlled Foreign Corporation” (CFC), then IRS Form 5471 is due. These forms are usually due with your income tax return (IRS Form 1040, due April 15, 2015).
5. The FBAR – due June 30, 2015
The FBAR, Report of Foreign Bank and Financial Accounts (FinCEN Form 114), must be filed by June 30, 2015 for calendar year 2014. The FBAR must be filed by taxpayers who had beneficial ownership of, or signature or other authority over, any foreign financial account, including bank and securities accounts, if the aggregate value of such accounts exceeded $10,000 at any time during 2014. If you had a foreign account at any point during 2014, then the FBAR must be submitted by June 30, 2015. Thus, even if you closed the account sometime during 2014, you must still file an FBAR. The FBAR also applies to foreign insurance policies, annuity policies, retirement plans and other financial products. Note that the FBAR is now known as FinCEN Form 114, and must now be filed electronically. There are no extensions for the FBAR, even if you obtain an extension to file your annual income tax returns (e.g. Form 1040). Our prior FBAR guidance may be found here.
Conclusion
Whether your foreign assets have always been in U.S. tax compliance, or whether the OVDP and/or submission of retroactive FBARs allowed you to bring your foreign assets into tax compliance, you must continue to be tax compliant going forward. Please ensure that your offshore assets continue to remain tax compliant by adhering to the ongoing reporting and tax requirements.
If you have any questions or would like our assistance in preparing the 2014 FBAR, please contact us.
April 15, 2015 Income Tax Deadline also Includes Foreign Assets, Offshore Trusts, and Income
As we approach the April 15, 2015 deadline for submission of income tax returns to the IRS, readers should be reminded that the U.S. Internal Revenue Code taxes world-wide income. Thus, if you are a U.S. taxpayer and you have income from foreign sources, for example: interest earned in a foreign bank account, foreign stock dividends, interest on foreign bonds, rents from foreign real estate, even income from foreign retirement plans, offshore trusts, etc., you must declare this income to the IRS.
In addition, if you have “a financial interest in or signature authority over a financial account (such as a bank account, securities account, or brokerage account) located in a foreign country”, then you must answer the questions on IRS Form 1040, Schedule B, Part III. These questions also refer you to the FBAR Form, Report of Foreign Bank and Financial Accounts, FinCEN Form 114. The FBAR for 2014 is due June 30, 2015.
In addition, IRS Form 8938, Statement of Specified Foreign Financial Assets, is due with income tax returns by April 15, 2015. Form 8938 is due even if the same foreign assets are reported on different IRS forms, such as Form 3520 for foreign trusts, Form 5471 for foreign corporations, and the FBAR form.
The following are examples of foreign assets that are subject to reporting on Form 8938:
- foreign bank accounts;
- foreign brokerage and securities accounts;
- stock of foreign corporations and interests in foreign LLCs and partnerships;
- interests in a foreign entity such as a trust or foundation;
- ownership of foreign financial instruments, such as bonds and promissory notes;
- ownership of foreign investment instruments and contracts issued by a foreign entity, including foreign annuity policies and insurance policies;
- interests in a foreign investment fund, hedge fund, mutual fund and private equity fund.
The Foreign Account Tax Compliance Act (FATCA), passed by Congress in 2010, is already in effect between the U.S. and many countries, and will soon come into effect world-wide. Under FATCA, foreign financial institutions (FFIs) will soon begin to report to the IRS regarding US owners of foreign assets. If the IRS has obtained information about foreign assets, and a taxpayer hasn’t filed the 8938 form reporting those assets, this would likely trigger an audit and penalties. It is imperative to file Form 8938 before the IRS first learns of the asset from an FFI.
We can assist in determining whether you are subject to Form 8938, and can answer your questions regarding US tax compliance for foreign assets. Contact us for a confidential consultation.
For our prior guidance on IRS Form 8938, please read our article here.
For a helpful comparison between Form 8938 and the FBAR, please click here.
Learn about Voluntary Disclosures of Foreign Accounts and Assets from an International Tax Lawyer
Asher Rubinstein, an international tax lawyer, will be a featured speaker at a Bloomberg webinar on March 18, 2015 titled, “Offshore Voluntary Disclosure: A Brief Guide to the Various IRS Programs and Other Ways of Becoming (and Remaining) Tax Compliant”.
This webinar will begin with a discussion of the recently revised Offshore Voluntary Disclosure Program (the “2014 OVDP”) as well as the new Streamlined Offshore Procedures Programs, the Delinquent FBAR Submission Procedures and the Delinquent International Information Return Submission Procedures. In addition, the webinar will discuss other methods sometimes used by Taxpayers to become tax compliant (and the viability of these methods), such as Quiet Disclosure, Prospective Compliance and Expatriation. The webinar will also discuss several hypothetical fact patterns dealing with several areas of law that often present practitioners with uncertainty, such as how to report Foreign Retirement Accounts.
If you are interested in tuning in to this webinar, please contact us for a discount code.
Investing in the U.S.: How to Maximize Asset Protection and Minimize U.S. Tax
Kenneth Rubinstein will be a featured speaker at the forum “Russia & CIS Clients: New Risks & Alternative Solutions” on March 11, 2015 in Zurich, Switzerland.
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Tax Planning: Tax-compliant Avoidance of Obama Tax
On January 1, 2013, the self-employment tax (the equivalent of social security tax for taxpayers who receive income from self-employment or investments instead of wages) increased from 4.2% to 6.2% and a 3.8% surtax was imposed on investment income (dividends, capital gains and passive rental income). For many taxpayers, these additional taxes constitute a significant reduction in their net income.
Tax compliant strategies exist which enable taxpayers to actively avoid both the self-employment tax and the investment income surtax. Section 1402 of the Internal Revenue Code and the regulations promulgated thereunder provide an exemption for distributions of partnership income to limited partners, provided such distributions are not guaranteed payments and provided the limited partners meet certain conditions. Through the use of multiple layers of limited partnerships, taxpayers may achieve complete exemption from the self-employment tax and the investment income surtax, thereby increasing their net income by as much as ten percent. In many cases, clients may achieve tax exempt status by simply restructuring their existing family limited partnerships.
If you wish to discuss the applicability of this strategy to your situation in regards to tax planning, please call us to schedule a consultation: 212-888-6600.