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Monthly Archives: August 2017

Issues Concerning Filing a Form 706NA?

On September 23, 2015, we posted "Some Nonresidents with U.S. Assets Must File Estate Tax Returns" where we discussed that deceased nonresidents who were not American citizens are subject to U.S. estate taxation with respect to their U.S.-situated assets.
 
Many foreigners owning property or assets in the United States are in violation of 706-NA filing requirements because of a number of misunderstandings. The basic rule is pretty clear-if a foreign decedent has assets in the United States with a gross value in excess of $60,000, the estate is supposed to file a tax return with the Internal Revenue Service. 
Many people think of numerous reasons not to file. The main one relates to mortgages or liens against the US property. Assume that a property in Florida is worth $150,000 and there is a $100,000 mortgage held by Bank of X. The owner of the property dies. Is a 706-NA required? Yes-you are not permitted to net the mortgage against the fair market value of the property. The only way you can do this is if the person who owns the property is a German domiciliary in which case the value can be netted on the tax return. This is a peculiarity of the German- United States estate tax convention. Cyst The deceased German domiciliary must still file the tax return because the gross value of the property, the criteria for filing a tax return, is still met. 

 

Other people look to tax treaties to avoid filing the tax returns even when the assets exceed $60,000. What most people do not realize is that in order to take advantage of a tax treaty, one needs to file a federal estate tax return and include a form 8833 with the return explaining the application of the treaty to this particular estate. If you fail to file the 706-NA, you would still technically owe tax on any US situs asset with a gross value in excess of $60,000.

 
Let's make it very simple for everyone- if you represent a foreign client with assets in the United States  with a gross value exceeding $60,000, you are required to file a federal estate tax.

Without the filing of the tax return, you are unable to take advantage of deductions, credits, and treaties benefits which might aid you in reducing the gross federal tax to a point of zero. Additionally, I might add, your client's estate is not in compliance with federal estate tax laws if no 706-NA is filed

 Have a US Estate Tax Problem?
 

Estate Tax Problems Require
an Experienced Estate Tax Attorney
 
 
Contact the Tax Lawyers at
Marini & Associates, P.A.
 
 for a FREE Tax Consultation Contact US at
www.TaxAid.com or www.OVDPLaw.com
or Toll Free at 888-8TaxAid (888 882-9243).

Robert S. Blumenfeld  - 
 Estate Tax Counsel
Mr. Blumenfeld concentrates his practice in the areas of International Tax and Estate Planning, Probate Law, and Representation of Resident and Non-Resident Aliens before the IRS.

Prior to joining Marini & Associates, P.A., he spent 32 years as the Senior Attorney with the Internal Revenue Service (IRS), Office of Deputy Commissioner, International.

While with the IRS, he examined approximately 2,000 Estate Tax Returns and litigated various international and tax issues associated with these returns.As a result of his experience, he has extensive knowledge of the issues associated with and the preparation of U.S. Estate Tax Returns for Resident and Non-Resident Aliens, Gift Tax Returns, Form 706QDT and Qualified Domestic Trusts.

 

Read more at: Tax Times blog

How Does CRS & FATCA Affect US Taxpayers?

On May 26, 2017 we posted Last Chance To Come Clean ... Automatic Exchange of Information Reporting Is Imminent! where we discussed that CRS participating jurisdictions began to exchange information in 2017 and returns where required to be submitted by May 31, 2017, including Crown Dependencies and Overseas Territories.

We also provided a List of countries who have agreed to share information.  Financial institutions, for example, banks, building societies, insurance companies, investment companies, will provide information on non-UK residents with financial accounts and investments in the UK to HM Revenue & Customs (HMRC). HMRC will share this information with the relevant countries. Information for financial institutions.

Hovever, the U.S. has not signed on to CRS, so the US does not receive information pursuant to CRS! 
 

Instead, the U.S. receives information pursuant to the IGAs executed under FATCA, another form of automatic exchange of information.   

Under FATCA, foreign jurisdictions generally report:

  1. Name,
  2. Address,
  3. Taxpayer identification number (TIN),
  4. Account number,
  5. Account balance or value,
  6. Gross amounts paid to the account in the year and
  7. Total gross proceeds paid or credited to the account. 


Under CRS, the signatories receive similar information, as well as, date and place of birth of the individual account holders. 

For entity accounts where one or more controlling persons are reportable persons, CRS require the institution to report the:

    1. Name,
    2. Address,
    3. Country(s) of residence, and
    4. TIN of the entity.

as well as the: 

    1. Name,
    2. Address,
    3. Country(s) of residence,
    4. TIN and
    5. The date and place of birth of each reportable person. 
FATCA is Just One Source of Information for the U.S. !

Other options include:

  1. Specific requests for information (requests pursuant to tax treaties, TIEAs, MLATs, etc.),
  2. Simultaneous exchanges,
  3. Spontaneous exchanges, and
  4. Informal exchanges, etc.

So what is the impact of CRS on US Taxpayer's Foreign Investments?

  1. Unless and until the US signs on to the OCED CRS reporting regime, the is no automatic reporting of information to the IRS from treaty partners who have received information from 3rd countries pursuant to CRS .
  2. The US will get its automatic information solely from FATCA and IGAs with each individual country and
  3. During actual tax audits or criminal prosecutions , the IRS can use specific requests for information (requests pursuant to tax treaties, TIEAs, MLATs, etc.), simultaneous exchanges, spontaneous exchanges, informal exchanges, etc.

Deciding which tool to use often depends on the nature of the IRS investigation and the particular facts and circumstances of the case.  For example, MLATs are generally used to gather and exchange information in Criminal Investigations.

So while things have changed a lot in the past several years (FATCA, CRS, BEPS, etc.), unless and until the US signs on to CRS, which currently appears unlikely, it will have to look exclusively to FATCA and their IGAs with each separate country, which should be more than sufficient, to obtain information regarding foreign holdings of US taxpayers.

Despite the fact that the US does not participate in CRS and that US companies are not in scope of CRS, US companies and their subsidiaries, certainly the ones that are based in or have accounts or investments in countries which participate in CRS, will have to be classified and documented for CRS purpose. So CRS does impact US companies who have subsidiaries or branches in tax favorable countries.

US companies should reevaluate their current structures to determine whether they will be able to defend their royalty stripped out to Luxembourg from others CRS member nations, their interest, strip out to Ireland from other CRS member nations and other tax favorable payments from CRS member nations , which were prior to CRS, unknown by the country where the payments were being made and deducted.

 

Since there is no CRS equivalent of W-9/W-8-Ben-E documentation, US companies will have to deal with a variety of forms in various foreign languages and processes to make their subsidiaries CRS compliant. 

Whether the US will ever join CRS is doubtful but what is certain is that promoting tax transparency and new international standards is a global priority and finding ‘somewhere to hide’ is becoming increasingly difficult for those who continue to try to outwit the authorities! 

Need FATCA or CRS Help?
 

 
  Want to Know if the OVDP Program is Right for You?
 
 
Contact the Tax Lawyers at 
Marini& Associates, P.A.  
 
 
for a FREE Tax Consultation
Toll Free at 888-8TaxAid (888) 882-9243

 

 

 

 
 
 
 

 

 

 

 

 

Read more at: Tax Times blog

Disregarded Entities Are Not Always Disregarded

Under the check the box rules, entities owned by one person can often be disregarded for federal tax purposes. Such entities are referred to as "disregarded entities." 

As time has progressed since the passage of the check the box rules, the IRS has created more and more exceptions to the disregarded treatment. The following is a summary of the principal exceptions, but is not intended to be exhaustive. If any readers think we have missed anything major, please feel free to comment to this posting.

  1. Status is modified if the single owner of the entity is a bank. Treas. Regs. Section 301.7701-2(c)(2) (iii). 

  2. Status is modified for certain tax liabilities. Treas. Regs. Section 301.7701-2(c)(2)(iii). These include: (1) federal tax liabilities of the entity with respect to any taxable period for which the entity was not disregarded; (2) federal tax liabilities of any other entity for which the entity is liable; and (3) refunds or credits of federal tax. 

  3. Disregarded status ignored or modified for taxes imposed under Subtitle - Employment Taxes and Collection of Income Tax (Chapters 21, 22, 23, 23A 24, and 25 of the Code) and taxes imposed under Subtitle A including Chapter 2 - Tax on SelffEmployment Income. Treas. Regs. Section 301.7701-2(c) (2) (iv) (A). 

  4. Status is modified for certain excise taxes, as described in Treas.Regs. Section 301.7701-2(c)(2J(v). Although liability for excise taxes isn't dependent on an entity's classification, an entity's classification is relevant for certain tax administration purposes, such as determining the proper location for filing a notice of federal tax lien and the place for hand-carrying a return under Code Section 6091

  5. Conduit financing proposed regulations will treat a disregarded entity as separate from its single member. Code Section 7701 (I).

  6. Special rules will apply in hybrid situations. Hybrid situations are circumstances where an entity is not disregarded in one jurisdiction but is disregarded in another.
  7.  Final regulations (TD 9796) that treat domestic disregarded entities wholly owned, directly or indirectly, by foreign persons  as domestic corporations solely for purposes of making them subject to the reporting requirements under Internal Revenue Code, Section 6038A that apply to 25% foreign-owned domestic corporations.

 
Have a Tax Problem?  
 




 
Contact the Tax Lawyers at
Marini & Associates, P.A.
 for a FREE Tax Consultation Contact US at
or Toll Free at 888-8TaxAid (888 882-9243).
 
 

 

Read more at: Tax Times blog

CPA Advice May Not Constitute Reasonable Cause to Stop FBAR Penalties

Taxpayers have been able to rely on advice from their accountants and CPAs to meet the complicated tax filing imposed by the U.S. Tax Code. But a case currently pending in the U.S. Court of Federal Claims suggests that CPA advice may not be enough to stop the IRS from assessing FBAR penalties for non-willful reporting violations.

A current case in the United States Court of Federal Claims, Jarnagin v United States, Docket No. 15-1534-T, shows what can happen when an unsuspecting taxpayer fails to file FBAR forms after providing all the requisite information regarding the foreign account to their accountant/CPA.

The Jarnagin were a married couple. Mr. Jarnagin owns and operates a farm and ranch in British Columbia. He became a Canadian Citizen in 1989 and spent a significant portion of each year in the country. Because of his business there, the Jarnagins maintained bank accounts with the Canadian bank CIBC, which had balances of $4 million on December 31, 2006, $3,500,000 in 2007, and $3,860,000 in 2008. Mr. Jarnagin employed a Canadian accounting firm to handle all his Canadian tax preparation.

Mrs. Jarnagin is a real estate broker and property owner in Oklahoma. She relied heavily on her bookkeeper, Misty Fairchild. Every year, Fairchild would turn over the couple’s financial statements, including the CIBC accounts and their balances to Mrs. Jarnagin’s CPA. During the years that Ms. Fairchild represented the Jarnagins, she went back to school to become an accountant, and eventually a CPA. Mrs. Jarnagin eventually transferred her business to Fairchild and her brother Kyle Zybach, who was also a licensed CPA.

However, neither Zybach nor Fairchild were aware of the Jarnagins’ FBAR reporting requirements, until 2010 when Zybach attended continuing education to maintain his CPA license. Even though the Jarnagin’s financial statements had included the foreign bank account, and their tax returns had disclosed the interest, no FBARs were ever filed. In addition, Schedule B, which asks whether the taxpayer has control over foreign accounts was incorrectly marked “No.”

In 2011, the IRS conducted an audit of the Jarnagins’ 2008 & 2009 tax returns. The audit revealed two wire transfers from the CIBC account. While the tax amounts were confirmed by the audit, the transfers triggered an investigation into the couple’s FBAR violations. Because of the audit, the couple were advised not to participate in a voluntary disclosure program or file the missing FBAR forms. The IRS issued non-willful FBAR penalties against both Mr. & Mrs. Jarnagin for four years totaling $80,000.00.

The non-willful FBAR penalties may not be levied if the taxpayer properly reported the “amount of the transaction or the balance of the account” and had “reasonable cause” for failing to file the FBAR on time.

The Jarnagins argued that they did have reasonable cause: the advice (or lack thereof) of their CPA. This argument is based on three tests described in Neonatology Assocs., P.A. v Commissioner, for reasonable cause:

  1. The taxpayer hired a competent professional adviser with sufficient expertise to justify reliance
  2. The taxpayer gave that adviser accurate and complete information, and
  3. The taxpayer relied in good faith on the adviser’s judgment.

The Jarnagins claim that by providing complete financial statements to their licensed CPAs every year, which included the CIBC account, and relying on those professionals to complete their tax returns, they meet the Neonatology requirements.

The IRS however takes the position that a CPA’s advice isn’t automatically enough to raise a reasonable cause defense. The IRS’s lawyers point to several facts to argue the Jarnagins were willfully negligent in their tax reporting duties:

  • Zybach and Fairchild had no experience with foreign accounts
  • The Jarnagins didn’t inquire into their CPAs’ experience before hiring them
  • The Jarnagins didn’t specifically ask about FBAR reporting requirements or how the international accounts would affect their tax returns
  • The Jarnagins did not carefully review the tax returns before signing them.

The IRS argues that other cases provide that a taxpayer is assumed to have read and understood their tax return when they sign it, citing his authority non-FBAR cases, which stand for the proposition that hiring a CPA does not absolve a taxpayer for misstatements or errors in their tax returns.

It remains to be seen if these same arguments hold true for FBAR reporting requirements.Weather the court will distinguish FBAR penalties from the IRS cited case law remains to be seen. If the government wins its claim, it could impose strict liability on taxpayers who don’t even know they have done anything wrong.

Have an FBAR Problem?
 

 
 
 
Want to Know if the OVDP Program
is Right for You?
 
Contact the Tax Lawyers at 
Marini& Associates, P.A.  
 
 
for a FREE Tax Consultation
Toll Free at 888-8TaxAid (888) 882-9243



 
 
 



 

Read more at: Tax Times blog