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Category Archives: criminal tax law

The Deceptive Simplicity of Form 706 NA


For those of you whose practice involves international tax, I would like to take this opportunity to explain the deceptive simplicity of the form 706 NA.
 

You must have a client who is a nonresident alien who dies. He/she owns US situs assets so you look at section 2014 of the Internal Revenue Code; you correctly determine that since these assets exceed $60,000 in value, the estate is required to file a form 706NA which is the form analogous to a 706 in the hands of a nonresident alien. The form itself is deceptively simple-two pages-what kind of problems can this create? Once you start reading the form, you realize that to complete it properly, you may have to incorporate almost every schedule which appears in a 706. 

The deceptive part of the form occurs when you are trying to determine which of decedent’s US assets (based on section 2014) are taxable by the United States.
 
The United States has more than 20 tax treaties or conventions with foreign countries designed, for the most part, to eliminate double taxation. It is critically important for you, the preparer, to determine which, if any, treaties may exist to reduce the tax liability of your client.
 
The IRS, on its website, has a list of the countries which currently  share estate tax treaties/conventions with the United States. Even this provides only a partial clue.
 
Example- You have a client who was a German who lived in Brazil. Since the decedent was a German citizen,  you make the assumption that treaty benefits will be available to his/her estate. Not always so. Some of the treaties base their benefits on decedents who are domiciliaries of but not necessarily citizens of a particular country. Ergo, you learn that the estate of the German client domiciled in Brazil cannot utilize the benefit of the German treaty.
 
Additionally, since some treaties are predicated on domicile while others are predicated on both domicile and citizenship, you may find yourself in an anomalous situation where you have more than one treaty you can elect to apply. In this particular case, use the treaty which best suits your client.
As a rule, the 20 or so treaties are generally address estates of decedents who were citizens of Europe, England or Canada. There are no treaties with South or Central America or Africa. Remember, however, that some treaties are based on citizenship, not domicile. Therefore the estate of an English citizen domiciled in Sudan could benefit by the UK tax convention.

 

The benefits as well as the applications of the treaties very widely. This is a result of the fact that these treaties were negotiated over various periods of years from the 1950s to the year 2000. The treaties themselves must be read carefully. They are, for the most part, extremely poorly drafted and difficult to fathom. In the case of confusion, look up the meaning of what the treaty means in a publication called the technical explanations of treaties which are a little bit better written but still no works  of Shakespeare. Remember, if you fail to utilize an existing treaty and it costs your client a significant amount of money, you may become involved with your insurance carrier. For those of us who are attorneys, remember the hornbook, Prosser On Torts.  As I recall, and it's been a while, the first topic addressed is “negligence, the basis of liability”. If you fail to find and utilize an existing treaty, you are negligent and potentially headed for big trouble.

 

Some of you feel that the IRS will find incorrect your failure to utilize an estate tax treaty. Not so. First of all, not all estate tax returns are selected for examination, so if the return you filed failing to utilize a treaty is not examined, there is no way that treaty benefits will inure your to your client's estate.  Second, even if the estate is examined, it is not the job of the auditing attorney to tell you that you failed to utilize a treaty. Utilization of a treaty is not mandatory. Therefore, if you file the 706NA utilizing the situs rules of section 2014, the IRS agent will merely agree with your situs depiction and not discuss the availability of the treaty.  

If you feel that you are able to utilize one of the existing treaties, you are required to use a form 8833. In this form you explain which treaty you are using, why you feel it is applicable to your particular situation, and determine the treaty benefits of utilizing the treaty. 
 

Over my 32 years as a senior attorney with the IRS in the international estate tax forum, I audited perhaps 1,800 to 2,000 706 NA's. Utilization of the treaty benefit was not frequent, and I recall situations where some estates could have benefited to the tune of roughly $1 million in tax savings.  

Need Help Preparing Form 706 NA?

 

 

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LB&I Adds Four Compliance Campaigns To 57 Active Campaign List

The IRS Large Business and International (LB&I) division has added four new compliance campaigns to its active campaigns list of 57 campaigns in total.

In 2017, LB&I announced the identification and selection of 13 initial compliance campaigns. With the new compliance campaigns, LB&I essentially shifted to examinations based on compliance issues that LB&I determined presented greater levels of compliance risk, thereby improving return selection. Since the initial 13 campaign announcement, LB&I has added additional campaigns.

The IRS has announced the following new campaigns:

  1. Allocation of success-based fees. Success-based fees paid in transactions under Treas. Reg. § 1.263(a)-5(a) are presumed facilitative and must be capitalized. These fees may instead be allocated to non-facilitative activities, and currently deducted, if the taxpayer meets the documentation requirements under Treas. Reg. § 1.263(a)-5(f). Rev. Proc. 2011-29 allows a safe harbor election for allocating success-based fees paid in covered transactions under Treas. Reg. § 1.263(a)-5(e)(3) without meeting the above documentation requirements so long as 70% of these fees are allocated as non-facilitative and 30% are allocated as facilitative. The goal of this campaign is to ensure taxpayer compliance with current law.
  2. FIRPTA reporting compliance for NRAs. FIRPTA taxes foreign persons on the disposition of their U.S. real property interests.  Generally the buyer/transferee is the withholding agent and is required to withhold 15% of the amount realized on the sale, file the required forms, and remit the tax to IRS. This campaign is intended to increase FIRPTA voluntary compliance through issue based examinations and external education and outreach.
  3. Computation of life insurance reserves under Sec. 807(d)Section 13517 of the Tax Cuts and Jobs Act (TCJA) amended Internal Revenue Code (IRC) section 807(d) to provide a new method for computing life insurance reserves, effective for tax years beginning after December 31, 2017. IRC section 807(d)(1) provides generally that, for purposes of determining life insurance company taxable income, the amount of the life insurance reserves for any contract (other than a contract to which IRC section 807(d)(1)(B) applies (relating to variable contracts)), is the greater of the net surrender value of such contract or 92.81 percent of the reserve determined under IRC section 807(d)(2), subject to the statutory cap as provided in IRC section 807(d)(1)(C).
  4. Re-computation of life insurance reserves. Internal Revenue Code (IRC) section 807(d) sets forth rules for computing the amount of life insurance reserves. Under prior law, the interest rate used in this computation is the greater of: (i) the applicable federal interest rate (AFIR) (as prescribed under IRC section 846(c)(2)); or (ii) the prevailing State assumed interest rate (PSAIR) (as defined in IRC section 807(d)(4)(B)). See former IRC section 807(d)(2)(B). However, a taxpayer could elect to recompute, every five years, the AFIR used in this computation of life insurance reserves. See former IRC section 807(d)(4)(A)(ii).

As an IRS Tax Defense Law Firm, outside of:

  1. Form3520/3520-A Compliance and Penalties,
  2. Micro-Captive Insurance Campaign,
  3. Post OVDP Compliance
  4. Swiss Bank Program Campaign
  5. Syndicated Conservation Easement Transactions
we have not seen nor heard of any action in the remaining 52 listed campaign areas?
Have an IRS Tax Problem?

 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 
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TIGTA Notifies IRS That They Must Improve in the Issuance of Levies and Due Process Notices


The
Treasury Inspector General for Tax Administration (TIGTA) reviewed the levies issued to taxpayers by the different functions within the IRS Collection organization during the period October 1, 2018, through September 30, 2019, found a number of problems associated with IRS levies issued by the Automated Collection System (ACS). 

The TIGTA review found that of the 194,498 taxpayers that received these levies, 145 taxpayers were not timely informed of their Collection Due Process (CDP) rights. The review said, "When an additional amount is assessed to a delinquent account of a taxpayer, an additional CDP notice must be issued to the taxpayer," the audit said. However, out of the 84,513 taxpayers that received additional assessments prior to the ACS levy, four (4) taxpayers did not receive a new CDP notice. IRS also must suspend collection action during the CDP hearing process, TIGTA said.

"However, Of The 194,498 Taxpayers That Received
ACS Levies, TIGTA Identified Three (3) Taxpayers With Levies Issued While A CDP Hearing Was Pending," The Audit Said.

According to the audit, revenue officers issued 58,546 levies utilizing the Integrated Collection System (ICS).

From this population, TIGTA identified: 

  1. 25 taxpayers that were not notified of the CDP rights; 
  2. 24 taxpayers that were not timely notified of their CDP rights; and 
  3. 25 taxpayers that were not notified of their CDP rights when the CDP notice transaction code was incorrectly reversed. 
  4. In addition, out of almost 17,000 taxpayers that received additional tax assessments prior to the levy, audits identified 51 taxpayers that did not receive a new CDP notice subsequent to the time the additional assessment was made.

Finally, "TIGTA also identified 40 taxpayers out of 58,546 that received ICS levies while a CDP hearing was pending in violation of the law," the audit said. Of the seven recommendations made by TIGTA, IRS agreed with six and said it will take alternative corrective action related to the remaining recommendation. 

Have IRS Tax Problem?


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IRS Issues Final Regs Regarding Foreign Persons' Sale, Exchange of Partnership Interest

The IRS has released final regs that provide guidance for certain foreign persons that recognize gain or loss from the sale or exchange of an interest in a partnership that is engaged in a trade or business within the U.S.

The final regs retain the basic approach and structure of the proposed regs with certain revisions described below. 

  1. Determining deemed sale EC gain or deemed sale EC loss. The final regs retain the basic framework of the proposed regs, including the factual determinations regarding assets attributable to an office or fixed place of business in the U.S. maintained by the partnership ("office attribution rule") (Reg §1.864(c)(8)-1(c)(2)(ii)(B) through Reg §1.864(c)(8)-1(c)(2)(ii)(E)) 
  2. Ten-year exception. The final regs retain the ten-year exception as an exception to the determination of deemed sale EC gain and EC loss under Reg §1.864(c)(8)-1(c)(2)(i)(A). 
  3. Sourcing rules. The final regs make several changes to the general sourcing rule provided in Prop Reg §1.864(c)(8)-1(c)(2)(i).
  4. Look-back rule for inventory property. The final regs provide a look-back rule for determining the foreign source portion of deemed sale EC gain or EC loss attributable to inventory property that is held by the partnership on the date of the deemed sale. 
  5. Look-back rule for intangibles. To minimize the difficulty of applying the sourcing rules to intangible property and to provide more certainty, the final regs provide a separate rule for intangibles (including going concern value) that determines the foreign source portion of deemed sale gain or loss attributable to intangibles by using a proxy method that is based on the source of the partnership’s historic gross ordinary income. (Reg §1.864(c)(8)-1(c)(2)(ii)(C)) 
  6. Depreciable personal property. The final regs provide a two-part approach for determining the foreign source portion of deemed sale EC gain and EC loss attributable to depreciable personal property. The first part applies a recapture principle to the extent of depreciation adjustments taken with respect to the property. The second part focuses on where the property is located to the extent the property has deemed sale EC gain in excess of its depreciation adjustments or if the property has deemed sale EC loss. (Reg §1.864(c)(8)-1(c)(2)(ii)(D)) 
  7. Material change in circumstances rule. The final regs provide a material change in circumstances rule for inventory and intangibles. When this rule applies, the foreign source portion of deemed sale EC gain or EC loss attributable to inventory property or intangibles may be determined using a modified look-back period. Taxpayers can use this material change in circumstances rule to remedy an incorrect sourcing result with respect to inventory property and intangibles. (Reg §1.864(c)(8)-1(c)(2)(ii)(E)) 
  8. Treaty coordination. The final regs retain the general rule that prevents taxation of gain on assets that do not form part of a U.S. permanent establishment, but also address certain gains that may be taxed without regard to whether there is a U.S. permanent establishment (for example, gains from the disposition of certain USRPI). (Reg §1.864(c)(8)-1(f)) The final regs also add a rule coordinating these regs with treaty provisions governing the disposition of USRPI, which allow the U.S. to tax gain derived from the disposition of the USRPI without regard to whether the USRPI forms a part of a partnership’s permanent establishment. (Reg §1.864(c)(8)-1(f)) Partner-specific exclusions and exceptions. Under the final regs, a foreign transferor’s distributive share of deemed sale EC gain or EC loss does not include any amount that is excluded from the foreign transferor’s gross income or otherwise exempt from U.S. Federal income tax under the Code. (Reg §1.864(c)(8)-1(c)(3)(i)) 
  9. Clarification of Sec. 897 coordination rule with respect to nonrecognition provisions. The final regs clarify the interaction between the Code Sec. 897 coordination rule and the nonrecognition provision described in Reg §1.864(c)(8)-1(b)(2)(ii). Specifically, the final regs provide that any transfer of an interest in a partnership as part of a nonrecognition transaction will not be subject to Code Sec. 864(c)(8) to the extent that the gain or loss on the transfer is not recognized. Instead, if the partnership owns one or more USRPI, Code Sec. 897(g) and its regs will apply with respect to the unrecognized gain or loss. (Reg §1.864(c)(8)-1(d)) 

The final regs generally apply to transfers occurring on or after December 26, 2018 (that is, the date on which the proposed regs were filed with the Federal Register). While not subject to these final regulations, transfers occurring on or after November 27, 2017, but before December 26, 2018, are subject to Code Sec. 864(c)(8). In addition, the final regs apply to amounts taken into account on or after December 26, 2018, pursuant to an installment sale occurring on or after November 27, 2017 and before December 26, 2018. (Reg §1.864(c)(8)-1(j) and Reg §1.897-7(c)) 

Have IRS Tax Problem?


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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) 

Sources

IRS

Thomson Reuters

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