A new 3.8% tax, commonly known as the “Medicare tax,” is scheduled to take effect for taxable years following December 31, 2012.

The tax is imposed on the lesser of net investment income (“NII”) or the excess of a taxpayer’s modified adjusted gross income over a threshold amount. For married taxpayers filing jointly, the threshold is $250,000; filing separately, $125,000; and for single taxpayers, $200,000.

NII is defined in IRC §1411(c)(1) as the excess of (A) the sum of (i) gross income from interest, dividends, annuities, royalties, and rents, (ii) other gross income derived from a trade or business which is a passive activity with respect to the taxpayer or which trades in financial instruments or commodities, and (iii) net gain attributable to the disposition of property over (B) properly allocable deductions.

In 2013, A would not include the $10,000 of passive income earned by CFC in NII and would not adjust her basis in CFC. In 2014, A would include $10,000 of previously taxed income in NII and would not decrease her basis by that amount, but only by the remaining $20,000 distribution. Finally, in 2015, A would include $20,000 of gain in NII, representing the amount realized of $500,000 less her IRC §1411 basis of $480,000.

If A instead had made an election under the regulations to treat NII and gross income the same, then A would have included the $10,000 in passive income from CFC in NII in 2013, rather than in 2014 when she received a distribution.

There is no similar addback of possessions-source income that is excluded under §931 for residents of American Samoa or under §933 for Puerto Rican residents. Thus, a resident of those possessions would only be subject to the §1411 tax if he realized substantial income from sources outside the possession where he is resident.

The regulations clarify that, in the case of residents of the other three U.S. possessions, all of which have so-called "mirror" Codes; Guam, the U.S. Virgin Islands, and the Northern Marianas,  the §1411 tax will not apply because it has not been imposed by Congress on those three possessions, and because residents of those possessions pay income tax on their worldwide income to the government of the possession where they are resident.

Section 1411(e)(1) exempts a "nonresident alien" from the §1411 tax. The proposed regulations confirm that the term "nonresident alien" is determined in accordance with the "resident alien" definitional rules of §7701(b). However, the regulations give no guidance on how to apply §1411 when an individual is a U.S. citizen or resident alien for part of the year, and a nonresident alien for the balance of the year.

The regulations do not discuss the status of so-called "treaty tie-breaker aliens" who are classified as resident aliens under §7701(b), but who are also classified as income tax residents of a country having an income tax treaty with the United States under the "tie-breaker" rules of the treaty. Regs. §301.7701(b)-7(a)(1) provides that a tie-breaker alien will be classified as a nonresident "for purposes of computing that individual's United States income tax liability under the provisions of the Internal Revenue Code and the regulations thereunder … ." Thus, whether a treaty tie-breaker alien is exempt from the §1411 tax probably depends on whether the §1411 tax is an "income tax" within the meaning of U.S. income tax treaties.

Source:

Cohn & Reznick

BNA

With mandatory government spending cuts looming, Acting IRS Commissioner Steven Miller sent a Memo to all IRS employees on Thursday (See Below), outlining the agency’s plans in the event sequestration occurs as planned on Friday.

MEMORANDUM FOR ALL IRS EMPLOYEES

Source

Journal of Accountancy

ABC News

The schemes were allegedly created by Goldman Sachs and the law firm of King & Spalding, according to prosecutors, and involved creating a partnership that Dow operated out of its European headquarters in Switzerland. The case dates back to transactions Dow started in 1993 that involved patent transfers to company subsidiaries.

According to Anthony Parent -- The US Department of Justice (DOJ) scored yet another victoryin its crusade against Offshore tax evasion. Christopher B. Berg of Portola Valley, Calif. plead guilty in U.S. District Court in San Jose, California of one count of willful failure to file, in 2005, the required report of foreign bank account (FBAR) for a bank account he opened with UBS in Switzerland.  

 
Beginning in 2001 and continuing through 2005, funds representing $642,069 in compensation earned by Berg from consulting services were deposited by wire transfer to UBS accounts.
 
Berg used the money in these accounts at UBS in Switzerland to purchase a vehicle, to obtain cash while in Europe, and to pay the balance on a Eurocard he used while traveling in Europe.
 
Berg did not disclose the existence of his accounts at UBS in Switzerland to his certified public accountant, and did not disclose the income earned by these accounts or the consulting income deposited to the accounts.
 
If restitution is ordered, and Mr. Berg can’t pay, he will likely have a parallel civil tax assessment and an ugly tax problem. In order to settle the civil tax assessment with an Offer in Compromise, he must first pay the criminal restitution amount.
 
The other hurdle is that the IRS does not like to settle back taxes if they feel someone is dishonest or not worthy of consideration. It is very difficult to settle back taxes due to tax evasion.
 
Lastly, even discharging tax debts in bankruptcy (after waiting the appropriate time) is difficult as well, as the Chapter 7 bankruptcy code states that any tax arises from a willful attempt to evade or defeat tax is non-dischargeable. So the best hope in cases where a defendant is given an order of restitution and civil assessment that he can’t afford to to pay is, on the civil side, to get into a Partial Payment Installment Agreement, or Currently Non-Collectable status, wait out the IRS civil statute of limitations and then seek to modify the criminal restitution (which has no statute of limitations) in criminal court.
 

To those considering using the IRS Offshore Voluntary Disclosure Program - criminal cases are very difficult to recover from financially.
 
It is nothing like settling back taxes from such calamities as divorce, unemployment, or health problems. Criminal tax problems are usually fairly catastrophic — even without jail time.