Yearly Archives: 2021

 As we previously discussed in So Trump Did Not Win the Election - Is It Time to Expatriate? - Part I & Part II, whatever your motives, just because you leave the United States and renounce your citizenship, don't assume you can leave U.S. taxes (or U.S. tax forms and complexity) behind, particularly if you are financially well-off and there are 10 things you need to know about Expatriation:

 8. Some expatriates can escape the exit tax. 

In general the exit tax is unforgiving and has broad application. Yet if you have less than $600,000 of income from the deemed sale of your assets on expatriation, you pay no tax. This exemption amount is adjusted for inflation and is $627,000 for 2010. If your gain exceeds this amount, you must allocate the gain pro rata among all appreciated property. 

However, this exclusion amount must be allocated to each item of property with built-in gain on a proportional basis. This involves a complicated process of multiplying the exclusion amount by the ratio of the built-in gain for each gain asset over the total built-in gain of all gain assets. The exclusion amount allocated to each gain asset may not exceed the amount of that asset's built-in gain. Moreover, if the total allowable gain of all gain assets is less than the exclusion amount, the exclusion amount that can be allocated to the gain assets will be limited to that amount of gain. For example, in 2010, if the total allowable gain in an expatriate's assets was $500,000, then that $500,000 would be the limit instead of $627,000.

Fortunately not all expatriates face the exit tax; only "covered expatriates" do. Under prior law, you generally had to give notice you were expatriating to trigger the rules. Now if you relinquish your passport or green card, it's generally automatic. But some expatriates, even under the new law, can escape the exit tax. The financial thresholds (see point five above) can still exempt you. Some people born with dual citizenship who haven't had a substantial presence in the U.S. and certain minors who expatriated before the age of 18-and-a-half are also exempt. However, those people must still file an IRS Form 8854 Expatriation Information Statement. 

9. You can elect to defer the exit tax. 
If you do face the exit tax, you can make an irrevocable election (on a property-by-property basis) to defer it until you actually sell the property. This election allows people to leave the U.S. and expatriate without triggering immediate tax as long as the IRS is assured it will collect the tax in the future. To qualify, a covered expatriate must provide a bond or other adequate security for the tax liability. There are specific requirements for these security bonds. Plus, there is an updating and monitoring of the bond in case it becomes inadequate to cover the tax. The IRS scrutinizes these elections on a case-by-case basis, so hire an expert. There are detailed requirements for filing the deferral election, including documentation, and copies of various documents. 

One of these requirements is appointing a U.S. agent for the limited purpose of accepting communications with the IRS. Plus, the taxpayer must waive any tax treaty benefits that might otherwise impact the IRS getting its money. It doesn't appear that many of these deferral elections have been made so far. 

There's another reason, other than the bond, not to defer. When you do sell, you'll pay taxes at the rate then in effect, which will likely be higher. If the Obama Administration has its way, when the Bush tax cuts expire at the end of this year, the top rate on long-term capital gains will rise from 15% to 20%. Plus, the just-passed House reconciliation package to the Senate's health care bill (if also approved by the Senate) is supposed to impose an additional 3.8% tax on net investment income for taxpayers with threshold income amounts of $200,000 for individuals and $250,000 for joint filers. This could raise the top capital gains rate to 23.8% for those taxpayers.

10. You'll need professional help. 
As you might expect, there are forms to file and procedures to follow if you expatriate. In fact, if you are wavering, the paperwork alone may keep you stateside! You must file IRS Form 8854 (in some cases for 10 years). Additional special forms (Form W-8CE if you have any deferred compensation items, a specified tax deferred account, certain non-grantor trusts, etc.) are also required. A good source is IRS Notice 2009-85.

Still, get some professional help. As this mere scratching of the surface suggests, the tax rules regarding expatriation for citizens and long-term residents are complex, even dizzying. Gone are the days when one could renounce U.S. citizenship and stand a good chance of avoiding U.S. tax. If you're facing these issues, or even if you are a beneficiary of someone else who is facing them, get some professional help. Bon voyage!

"Should I Stay or Should I Go?"

Need Advise on Expatriation? 

 

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

  

 



Read more at: Tax Times blog

A UK corporation was not entitled to deductions or credits against its U.S. income for 2009 and 2010 because it failed to submit returns for those years before the IRS prepared returns for it. The Tax Court also held that its interpretation of Code Sec. 882(c)(2) did not violate either the business profits article or the nondiscrimination article of the US-U.K. income tax treaty.

Adams Challenge (U.K.) Limited (“Adams”) was a U.K. corporation whose sole income-producing asset for 2009 and 2010 was a multipurpose support vessel. The vessel was chartered by a U.S. firm to assist in decommissioning oil and gas wells and removing debris on portions of the U.S. Outer Continental Shelf in the Gulf of Mexico.

During 2009 and 2010, Adams derived from the charter gross income of about $32 million, which the Tax Court determined was effectively connected with the conduct of a U.S. trade or business. The Court also found that the US-U.K. bilateral income tax treaty did not exempt that income from US taxation because the company had a permanent establishment in the US. However, Adams did not file Federal income tax returns for either 2009 or 2010. 

In April 2014, the IRS prepared substitute returns for 2009 and 2010 for Adams that included the charter income but did not include any deductions or credits to offset that income. The IRS then issued Adams a deficiency notice that determined that Adams was not entitled to deductions or credits for 2009 and 2010 because it failed to file returns for those years.

In 2015, Adams timely filed a petition for redetermination, and in 2017 filed with the IRS its own returns for 2009 and 2010.  

The Tax Court held that Adams was not entitled to deductions or credits to reduce its income tax for 2009 and 2010 because it didn’t submit returns as required under IRC Section 882(c)(2).

The Tax Court rejected Adams arguments that the IRS’s refusal to allow it to claim deductions and credits in these circumstances violated Articles 7(3) and Article 25 of the Treaty. 

The Court also found that Adams failed to show that the requirement to file returns under Code Sec. 882(c)(2) imposed a heavier burden on it than the burden on domestic corporations. 

Although Adams argued that Code Sec. 882(c)(2) subjects it to more burdensome requirements because US companies do not forfeit all their deductions if they neglect to file returns by an “arbitrary deadline," the Court found that foreign corporations have more time to submit returns before the IRS disallows deductions and credits (e.g., foreign corporations have 23½ months after the close of their tax year to file returns before Code Sec. 882(c)(2) applies but domestic corporations must file their returns within 3½ month of the close of their tax year) and may preserve their rights to deductions and credits by filing protective returns reporting zero income and deductions. 

What a foreign taxpayer should do if they believe they are not engaged in a US trade or business, is to file a protective income tax return stating your beliefs as to why you're not engaging a US trade or business in this way where the IRS later disagrees you can file an amended return with all associated deductions and credits.

Remember that where Adams was claiming a tax treaty position for only no US tax, they would still need to file corporate income tax return with a Form 8833 - Treaty – Based Return Position Disclosure.

Have IRS Tax Problems?

 Contact the Tax Lawyers at
Marini & Associates, P.A. 

Read more at: Tax Times blog

On October 7, 2020 we posted IRS Has a Backlog of Unopened Mail and is Experiencing Processing Delays, where we discussed that the IRS was experiencing processing delays as it works through its unopened mail backlog and that at one point, due to the suspension of services, the IRS had a backlog of more than 11 million pieces of unopened mail. 

Now according to Commissioner Charles Rettig, who said on Thursday, that the mail backlog won’t be an issue going forward. 

“We Actually are Current, Believe It or Not,” 

Rettig said during a webcast hosted by the Urban-Brookings Tax Policy Center. “We’re not too far off of where we would be in the ordinary course.” 

The IRS had to sort through a massive backlog of paper-filed returns and other mail.

                                                                Contact the Tax Lawyers at

Marini & Associates, P.A. 

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com
or Toll Free at 888 8TAXAID (888-882-9243) 

Read more at: Tax Times blog

A district court has found that the $10,000 non-willful FBAR penalty (for failure to file the FBAR) applies per FBAR form, not per the number of bank, etc. accounts required to be reported on the form. Two district courts have now come to this conclusion. One district court has found the opposite.

Under 31 USC § 5314(a), every U.S. person that has a financial interest in, or signature or other authority over, a financial account, or accounts, in a foreign country must report the account, or accounts, to IRS annually on a FinCEN Report 114, Report of Foreign Bank and Financial Accounts (commonly referred to as an FBAR or FBAR form) if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year.

One FBAR is used to report multiple foreign financial accounts. (FBAR instructions)

The penalty for violating the FBAR requirement is set forth in 31 USC § 5321(a)(5). The amount of the penalty depends on whether the violation was non-willful or willful.

One district court has held that the penalty for a non-willful FBAR violation relates to each account required to be shown on the FBAR. Thus, IRS could impose the statutory maximum penalty of $10,000 for each of the taxpayer's thirteen accounts that should have been reported on one FBAR. (US v. Boyd, (DC CA 2019) 123 AFTR 2d 2019-1651).

But another district court came to the opposite conclusion. It found that the $10,000 non-willful penalty applies only to the FBAR form itself, not the number of accounts required to be shown on the FBAR. (US v. Bittner  (DC TX 6/29/2020).

In 2010, Mr. Kaufman had 17 foreign accounts, the balance of which, in aggregate, exceeded $10,000. He was required to file an FBAR, but he did not do so.

A court found that his failure was non-willful, and the IRS imposed a penalty of $170,000, i.e., $10,000 for each account.

Mr. Kaufman argued that the penalty should be capped at $10,000, i.e., $10,000 for failure to file one FBAR.

The district court, finding the court's argument in Bittner persuasive, found the non-willful FBAR penalty applies per form, not per account. Thus, the penalty was capped at $10,000.

The district court found the arguments in Boyd unpersuasive. And the court noted that the Boyd decision was not binding on it. Him

 Have an FBAR Penalty Problem?

Read more at: Tax Times blog