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Monthly Archives: June 2017

Lessons For US Taxpayers Hiding Assets Offshore

On  July 6, 2016 we posted Argentina and Barcelona Soccer Player Leo Messi Handed Jail Term in Spain for Tax Fraud  where we discussed that a Spanish court on July 6, 2016 sentenced the Argentine soccer superstar Lionel Messi to 21 months in jail after he was found guilty of tax fraud for using offshore companies to avoid paying Spanish taxes on advertising contracts.

Under Spanish law, a tax prison sentence under two years can be served under probation, meaning Messi and his father are very unlikely to go to jailMr. Messi was also fined about 2.1 million euros, or $2.3 million, by the court.

Messi had hoped that his appeal to Spain's Supreme Court would clear his name. But the convictions of both Messi and his father were upheld. So were their prison sentences.

Barcelona on Wednesday issued a statement in support of their star forward, saying that they feel Messi is not criminally responsible for the tax fraud.

Some of the lessons for US Taxpayers from this Spanish case are obvious:

  1. Be accountable and be transparent.
  2. One of the biggest themes is accountability.
    • Even people with complex affairs who rely on professionals and trusted advisers to handle their affairs may not be able to entirely avoid responsibility.
  3. Signing a tax return, for example, requires some accountability.

One of Messi's primary defenses in the trial was that he simply did not understand. He said that he signed many documents without reading their contents. Such a defense may not work in the U.S. either.

According to the IRS, the test is whether there was a voluntary, intentional violation of a known legal duty. Willfulness is shown by your knowledge of reporting requirements and your conscious choice not to comply.

  1. Willfulness means you acted with knowledge that your conduct was unlawful, a voluntary, intentional, violation of a known legal duty.
  2. You may not have meant any harm or to cheat anyone, but that may not be enough.
  3. The failure to learn of filing requirements, coupled with efforts to conceal, may mean a violation was willful.
  4. Even willful blindness may be enough, a kind of conscious effort to avoid learning about reporting requirements. Prosecutors had suggested this in Messi's case.
A related lesson is about transparency:
    • Hiding things always looks bad.
    • Spanish prosecutors wisely focused on the Messis' secrecy.
    • The names of the beneficial owners of companies were hidden.
    • The Messi's had companies registered in the UK, Switzerland, Uruguay and Belize.  

Some of the primary charges against Messi and his father involved their use of these shell companies. They were designed to avoid taxes on 4.16 million euros of Messi’s income from image rights. It did not help that Messi's name came up in the Panama Papers.

Accountability and Transparency are likely to be universal lessons to be gleamed from this case and remember:

  • If you don't understand, ask.
  • If something is being covered up, ask why.
  • If there is a good reason to hide ownership from the public, at least make very sure that the ownership is not hidden from the government.

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Read more at: Tax Times blog

Due to Court Ruling IRS PTIN System Down

On June 1, 2017, the United States District Court for the District of Columbia upheld the Internal Revenue Service’s authority to require the use of a Preparer Tax Identification Number (PTIN), but enjoined the IRS from charging a user fee for the issuance and renewal of PTINs.

As a result of this order, PTIN registration and renewal is currently suspended and tax preparers should be getting a refund check for their previous payments as the court ordered "a full refund of all PTIN fees paid."

The Court did not find that the PTIN requirement for tax preparers was unlawful. It found quite the opposite, saying there is a "rational connection" between the regulations and the stated reasons for the regulations ("effective administration and oversight"). The Court agreed that the IRS could continue to require the use of PTINs for tax preparers.

However, the Court did bar IRS from charging PTIN fees to tax preparers, with Judge Royce C. Lamberth, writing in Adam Steele, et al. v. United States of America, that "all fees that the defendant has charged to class members to issue and renew a PTIN ... are hereby declared unlawful." The Court also ordered that the IRS has to provide "a full refund of all PTIN fees paid."

The Total PTIN Fees to Be Refunded
Could Be More Than $175 Million.

While the IRS may still issue PTINs, the IRS has, for now, shut down the issuance of all PTINs, including renewals. The IRS, working with the Department of Justice, is considering how to proceed.

The case is Adam Steele v. U.S. (USDC for DC Circuit - Case No. 14-cv-1523-RCL).

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Rubin on Tax

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New Int'l Tax Rules May Affect US Company's Foreign Subsidiary's Treaty Benefits

On June 6, 2017 we posted More than 100 countries conclude the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS where we discussed that more than 100 jurisdictions have concluded negotiations on a multilateral instrument that will swiftly implement a series of  tax treaty measures to update international tax rules and lessen the opportunity for tax avoidance by multinational enterprises. 

The new instrument will transpose results from the OECD/G20 Base Erosion and Profit Shifting Project (BEPS) into more than 2,000 Tax Treaties Worldwide.  A signing ceremony will be held in June 2017 in Paris. 

Now according to Law360, during an annual OECD forum in Paris, 68 countries officially signed the multilateral instrument, or MLI, which will allow them to close gaps in existing international tax rules that can give rise to treaty abuse and tax avoidance strategies. Another 8 countries also formally acknowledged on Wednesday that they will adopt the MLI.
The MLI does not replace the vast network of hundreds of existing bilateral tax treaties, but once ratified by individual countries' lawmaking bodies, it will enable a swift and efficient way for countries to amend the interpretation of these treaties, a negotiation process that could otherwise take a decade or more, so as to make clear that strategies to avoid paying taxes in multiple jurisdictions are not an intended use of these treaties.
Even though the U.S. participated in the negotiations over the MLI, it ultimately chose not to adopt the convention, which means that treaties the U.S. has with other countries won't be modified by the MLI.
However, the tax situations of multinational U.S. corporations could still be affected because anti-abuse rules are likely to automatically kick in in jurisdictions where these companies' foreign subsidiaries are making cross-border transactions outside the U.S., experts said.
Willem Bongaerts, a tax attorney and partner at Bird & Bird LLP in the Netherlands, said that these corporations should still review and possibly reform their current organizational structures if they want to continue receiving treaty protections they currently enjoy in the foreign countries.
"It could lead to an increase in overall effective tax rate, but very likely, what will happen is that multinationals will anticipate this and will do a reorganization and try to find the most tax optimal structure again," Bongaerts said.
"The Bottom Line Is Basically That with This Entire BEPS Project and with MLI More Specifically, We Can Come to the Conclusion That Tax Structuring without a Nexus

to a Certain Country Will Basically Disappear."

Now, U.S. companies will have to ensure their offshore operations have a valid business purpose beyond a tax benefit or risk being denied treaty benefits under the MLI's Principal Purpose Test, Bongaerts said.
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Read more at: Tax Times blog

US Taxpayers Abroad Must File by June 15, 2017 & New Filing Deadline Now Applies to Foreign Account Reports

On June 12, 2017 the IRS released IR-2017-105 reminding taxpayers living and working abroad that they must file their 2016 federal income tax return by Thursday, June 15. 

  • The special June 15 deadline is available to both U.S. citizens and resident aliens abroad, including those with dual citizenship.
  • For those who can’t meet the June 15 deadline, tax-filing extensions are available and they can even be requested electronically.  
  • In addition, a new filing deadline now applies to anyone with a foreign bank or financial account required to file an annual report for these accounts, often referred to as an FBAR.  
Most People Abroad Need to File
An income tax filing requirement generally applies even if a taxpayer qualifies for tax benefits, such as the Foreign Earned Income exclusion or the Foreign Tax credit, which substantially reduce or eliminate U.S. tax liability. These tax benefits are only available if an eligible taxpayer files a U.S. income tax return.
A taxpayer qualifies for the special June 15 filing deadline:
  1. if both their tax home and abode are outside the United States and Puerto Rico.
  2. Those serving in the military outside the U.S. and Puerto Rico also qualify for the extension to June 15.

Be sure to attach a statement indicating which of these two situations applies.

Interest, currently at the rate of four percent per year, compounded daily, still applies to any tax payment received after the original April 18 deadline.

Federal law requires U.S. citizens and resident aliens to report any worldwide income, including income from foreign trusts and foreign bank and securities accounts on:
  • Form1040, Schedule B of their tax return, Part III of Schedule B requires U.S. citizens to report the country in which each account is located.
  • Form 8938, Statement of Foreign Financial Assets and
  • Report of Foreign Bank and Financial Accounts (FBAR), Form 114.

Automatic Extensions Available Taxpayers abroad who can’t meet the June 15 deadline can request  an extension request which must be filed by June 15. Automatic extensions give people until Oct. 16, 2017, to file; however, this does not extend the time to pay tax.

  • Anyone can request an extension on Form 4868.
  • To get the extension, taxpayers must estimate their tax liability on this form and pay any amount due. 
    • Another option for taxpayers is to pay electronically and get an extension of time to file. IRS will automatically process an extension when taxpayers select Form 4868 and they are making a full or partial federal tax payment using Direct Pay, the Electronic Federal Tax Payment System (EFTPS) or a debit or credit card.
    • There is no need to file a separate Form 4868 when making an electronic payment and indicating it is for an extension.

New Deadline for Reporting Foreign Accounts

Starting this year, the deadline for filing the annual Report of Foreign Bank and Financial Accounts (FBAR) is now the same as for a federal income tax return.  
This means that the 2016 FBAR, Form 114, was normally required to be filed electronically with the Financial Crimes Enforcement Network (FinCEN) by April 18, 2017. But FinCEN is granting filers missing the original deadline an automatic extension until Oct. 16, 2017 to file the FBAR.
  • Specific extension requests are not required.
  • In the past, the FBAR deadline was June 30 and no extensions were available.
  • In general, the FBAR filing requirement applies to anyone who had an interest in, or signature or other authority, over foreign financial accounts whose aggregate value exceeded $10,000 at any time during 2016.
  • Because of this threshold, the IRS encourages taxpayers with foreign assets, even relatively small ones, to check if this filing requirement applies to them.
  • The form is only available through the BSA E-filing Systemwebsite. Report in U.S. Dollars
  • Any income received or deductible expenses paid in foreign currency must be reported on a U.S. tax return in U.S. dollars.
  • Likewise, any tax payments must be made in U.S. dollars.
Both Forms 114 and 8938 require the use of a Dec. 31 exchange rate for all transactions, regardless of the actual exchange rate on the date of the transaction. Generally, the IRS accepts any posted exchange rate that is used consistently.

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Read more at: Tax Times blog