Florida Tax Attorney Blog

Florida taxpayers must take affirmative actions to comply with the Foreign Account Tax Compliance Act. Originally enacted in 2010, the Foreign Account Tax Compliance Act ("FATCA") targets non-compliance by U.S. taxpayers using foreign accounts. On February 8, 2012, the Treasury Department and the Internal Revenue Service issued proposed withholding and reporting regulations for the next major phase of FATCA.

Under the step-by-step process outlined in the proposed regulations, all foreign financial institutions (FFIs) are required to report information about financial accounts held by U.S. taxpayers or by foreign entities in which U.S. taxpayers hold a substantial ownership interest to the IRS.

Under the proposed regulations, a participating FFI will have to enter into an agreement with the IRS to:

(1) Identify U.S. accounts;

(2) Report certain information to the IRS regarding U.S. accounts;

(3) Verify the FFI's compliance with its obligations pursuant to the agreement; and

(4) Ensure that a 30 percent tax on certain payments of U.S. source income is withheld when paid to non-participating FFIs and account holders who are unwilling to provide the required information.

Registration will take place through an online system, which will become available by January 1, 2013. FFIs that do not register and enter into an agreement with the IRS will be subject to withholding on certain types of payments relating to U.S. investments.

The proposed regulations, which become effective January 1, 2013, will ultimately impact current account opening processes, transaction processing systems, and "know your customer" procedures used by both U.S. and foreign companies. It is important for companies to start their compliance risk assessment and make any modifications to their policies and procedures now and not wait until the rules become effective next year.

Continue reading "Action Needed to Comply with Foreign Account Tax Compliance Act Proposed Regulations" »

The IRS's 2009 and 2011 Offshore Voluntary Disclosure Initiatives ("OVDI") have been very successful in terms of having taxpayers come forward to report their offshore accounts. One of the reasons so many have come forward is that within the past few years, the IRS and Department of Justice have been unyielding in their enforcement efforts and continue their investigations into non-U.S. banks that assisted U.S. taxpayers in hiding assets from the IRS.

Once the IRS believes that an offshore bank holds unreported accounts for U.S. taxpayers, it can compel the bank to disclose the name of the account holders. In fact, the IRS has either been working with, or pursuing enforcement action against, many non-U.S. banks for some time now. These actions are no longer limited to the large Swiss banks, like UBS and Credit Suisse, which are automatically brought to mind when talking about offshore accounts.

While the investigations may have started with the Swiss banks, they have since rapidly expanded. Specifically, Israeli, Japanese, and several other European banks seem to be the IRS's target as of the past year. While many mistakenly believed that the IRS would be reluctant to investigate Israeli banks because of Israel's close association with the U.S., Israel and the U.S. actually have a long-standing cooperative arrangement when it comes to tax matters - one that would encourage cooperation from the Israeli banks.

Some of the banks that are under examination and/or investigation include Bank Leumi and Bank Hapoalim in Israel, HSBC, Bank Julius Baer, Wegelin Bank, Liechtensteinische Landesbank (Liechtenstein). While investigations into these banks have been more public, there are likely many more banks in various other countries under the same scrutiny. Many of these banks are urging their U.S. account-holders to come forward to the IRS before they are forced to turn over the account information. If the IRS receives the information from the bank or from any third party source, the U.S. taxpayer will be precluded from entering into the OVDI.

Continue reading "IRS Expands Investigation of Offshore Accounts Beyond Swiss Banks to Israeli, Japanese, and other European Banks " »

Eight Swiss banks recently turned over data on its U.S. clients suspected of tax evasion to U.S. officials. At the Swiss government's request, however, the data was encrypted and will remain so until certain of their own demands are met. According to the Swiss government, the encryption key will not be turned over until Switzerland and the United States reach a broader agreement on information exchange.

Under current Swiss law, non-encrypted data can be transferred only in individual cases under the following circumstances:

(1) U.S. authorities submit a request through the current income tax treaty between the U.S. and Switzerland and

(2) Only if the individual in question has broken Swiss law.

The eleven Swiss banks currently under investigation are: Credit Suisse, Bank Julius Bär, Bank Wegelin & Co., Basler Kantonalbank, Zürcher Kantonalbank, HSBC Private Bank (Suisse), NZB, the Swiss daughter bank LLB, and the Israeli banks Leumi, Hapoalim and Mizrahi. The encrypted data that was transferred includes between 4 and 6 million e-mails between Swiss bankers and their U.S. clients.

Continue reading "Swiss Banks "Cooperate" with U.S. Officials" »

On February 2, 2012, the 6th Circuit Court of Appeals reversed Defendant Timothy Parkes' convictions of bank fraud on all counts and granted his motion for judgment of acquittal. The 6th Circuit held that the district court had incorrectly denied the defendant's motion for acquittal following the jury trial.

Mr. Parkes and his partner, Mr. Mourier, were each charged with ten counts of bank fraud based on loans made to more than ten limited liability companies by Benton Bank. The aggregate amount of these loans totaled millions of dollars. At trial, the government's theory was that Mr. Parkes and the bank's president jointly created the fictitious entries in an effort to disguise some of the bank's earlier, troubled loans to Mr. Parkes. The bank president, also charged with bank fraud, pled guilty. The jury found Co-Defendant Mr. Mourier not guilty on all charges.

Other than the bank fraud counts, Mr. Parkes was also charged with making a false statement to the special agents during the investigation. Mr. Parkes was found guilty on three counts of bank fraud and one count of making a false statement.

The theory of Mr. Parkes' defense was that the president acted alone. However, he was precluded from bringing this defense. He also made a motion for a mistrial after the prosecutor in this case improperly told the jury if they acquitted the defendant, he would get to keep more than $4 million of the bank's money. Mr. Parkes motion for a mistrial was denied. He then timely moved for a judgment of acquittal based on insufficient evidence. The district court further denied this motion and the defendant appealed, challenging the sufficiency of the government's evidence, the exclusion of evidence that the bank's president has previously engaged in identical frauds, and the prosecutor's misconduct.

Continue reading "Parkes Found Guilty of Bank Fraud for Loans to LLCs" »

Worker classification issues have been the focus of an increasing amount of attention from the IRS within recent months. While these issues have been around for decades, the attention they receive has significantly increased. In September of 2011, the IRS established a new Voluntary Classification Settlement Program, also known as "VCSP," providing "partial relief from federal employment taxes for eligible taxpayers that agree to prospectively treat workers as employees." IRS Announcement 2011-64 (Sept. 21, 2011).

The IRS also entered into a memorandum of understanding with the Department of Labor to share information with regard to the classification, and more importantly, the "misclassification" of employees and independent contractors. Finally, President Obama included a worker classification provision in his plan "Living within our Means and Investing in the Future: The President's Plan for Economic Growth and Deficit Reduction."

Worker classification issues tend to boil down to one thing - is the worker an employee or an independent contractor? Determining the status of a worker depends on a common law facts and circumstances test regarding whether the service recipient has the right to direct and control how the services are provided. Too often, the results of this test are unclear. To resolve these issues, the IRS is now offering taxpayers a program that allows for the voluntary reclassification of workers as employees. To participate in the program, a taxpayer must meet certain eligibility requirements; submit an application; and enter into a closing agreement with the IRS.

To be eligible, the taxpayer must: (1) have consistently treated its workers in the past as nonemployees; (2) have filed all required Forms 1099 for the workers for the past three years; and (3) not currently be under audit by the IRS, the DOL, or a state agency concerning worker classification matters. A taxpayer who was previously audited for these issues will be eligible only if the taxpayer has complied with the results of such audit.

Continue reading "IRS Launches New Voluntary Classification Settlement Program for Worker Classification" »

Due to the destruction Hurricane Irene left in her path, the IRS recently announced that it has postponed the deadline for its 2011 Offshore Voluntary Disclosure Initiative (OVDI) to September 9, 2011. Before the extension, taxpayers had been required to complete all requirements for the program, or make a good-faith effort to comply and request a 90-day extension, by August 31, 2011.

Taxpayers who have not yet submitted requests and documents under the program must do so by the new deadline by submitting identifying information to the IRS' Criminal Investigation office and sending a request for a 90-day extension for submitting a complete voluntary disclosure information package to the IRS.

About OVDI

The IRS announced the 2011 OVDI in February. The program is designed to bring money held in foreign accounts back into the U.S. tax system and to help taxpayers with income from offshore accounts to comply with federal tax law. While there are legitimate business reasons for keeping an account outside of the United States, there are no legal reasons not to report those accounts and pay taxes on the money they earn.

Under the initiative, taxpayers who disclose previously undisclosed foreign accounts and comply with the terms of the program can avoid civil penalties and criminal prosecution. There was a similar program in 2009 that resulted in nearly 15,000 formerly undeclared accounts. After the 2009 program ended, thousands of more taxpayers came forward. In response to this demand, the IRS initiated the 2011 OVDI, which began in February and ends now on September 9th.

The largest difference between the 2009 program and the 2011 program is that while the 2009 program levied penalties only on financial assets, the 2011 program levies penalties on all assets kept abroad. The penalties are steep under the OVDI -- up to 25 percent of the value of the assets, assessed on the highest value of those assets over the last eight years. However, taxpayers can avoid even steeper penalties, as well as criminal prosecution if they opt out and are caught later.

Continue reading "Hurricane Causes the IRS to Extend the 2011 OVDI Filing Deadline" »

There are risks associated with owning or having ownership interest in a foreign account (which includes being signatories) and failing to disclose its existence to the IRS. The Foreign Account Tax Compliance Act ("FATCA") was passed requiring foreign banks to disclose information about accounts that are associated with or owned by United States citizens.

As part of the Bank Secrecy Act (Title 31), qualifying individuals must file Form TD F 90-22.1, Report of Foreign Bank Account and Financial Accounts ("FBAR") which was recently revised in March 2011. This Form is separate and in addition to other filing requirements by the IRS.

Form TD F 90-22.1 must be received by the U.S. Department of Treasury by June 30, 2011. Because the FBAR technically is part of the Bank Secrecy Act (Title 31) rather than the Income Tax Code (Title 26), it contains traps for the unwary. Unlike the filing income tax forms which follow the mailbox rule, FBAR forms must be received by June 30, 2011 the due date, not just mailed by it. There is no electronic filing option for the FBAR. The FBAR must be mailed to a special address in Detroit rather than a taxpayer's usual IRS service center.

Another critical distinction is that the due date for filing cannot be extended. As a result any extensions a taxpayer receives for filing an income tax return are not applicable to the FBAR. Unless Congress changes the law, the FBAR due date will remain June 30, which is out of sync with the normal tax deadlines of April 15 and October 15 (for those on extension).

Therefore, taxpayer should be aware that in addition to disclosing foreign accounts on Form 1040, Schedule B, Part III, Form TD F 90-22.1 must be timely filed, i.e. received by the U.S Department of Treasury in Detroit Michigan no later than June 30, 2011.

Continue reading "What Are The Reporting Requirements If You Have A Foreign Bank Account?" »

The Florida Constitution (F.C.) (Article 10, Sec. 4) protects homestead property from levy of creditors of the owner. The F.C. provides that homestead property should be liberally construed in favor of the homesteader against the creditor. The person claiming the homestead exemption must be a Florida resident who establishes that he or she made, or intends to make, the real property his or her permanent residence.

A permanent residence is the address listed on your driver's license, the place from which you register your cars, or file your income tax return or vote. If this property is not your permanent residence, or you are not a resident of Florida, you must notify the Property Appraiser. It is also important to note that only natural persons may claim homestead (not corporations or other like entities). If you are receiving a residency based exemption or benefit in another county, state or country; you are not eligible for exemption.

Homestead must be established before levy of the judgment creditor. However, homestead is subject to forced sales for property taxes, mortgages on the property, and mechanics liens arising from improvements of the property. Homestead inures to the benefit of the surviving spouse and minor children. Homestead consists of a ½ acre of contiguous land including a residence within a municipality. Outside of a municipality one may claim up to 160 contiguous acres. Homestead also protects personal property to the value of one thousand dollars.

If homestead is sold, the proceeds are considered to retain homestead exemption provided the owner has good faith intent to reinvest the proceeds in another homestead within a reasonable time. In other words, if you moved to a new home, the homestead exemption does not transfer automatically. To receive a new or additional exemption, you must make the application before March 1, of this year. If you have moved from another home within the state of Florida and you had homestead on your previous property, you may be eligible to bring your homestead savings with you.

To be eligible you must apply for and receive a homestead exemption on your new property within two years of leaving your previous homesteaded property and submit a (DR-501T) Homestead Assessment Difference form to the Property Appraiser's Office. However, it is important to note that if the homestead is abandoned, the protection may be forfeited.

Continue reading "Are You Eligible For The Florida Homestead Exemption?" »

Whether Florida attorneys' fees are deductible depends on the nature of the underlying claim. If the character of the claim brought is for business purposes, the fees are deductible; if the underlying claim is personal, the attorney fees are not deductible.

To recover attorneys' fees from the opposition, the prevailing party must show that the underlying claim was business related. Otherwise, the attorneys' fees are not deductible. Additionally, the ruling in Commissioner v. Banks, clarifies that even if such fees are deductible, they qualify as itemized deduction, and as such, are subject to the 2 percent floor, mandated by I.R.C. Section 68. 543 U.S. 426 (2005).

However, as part of the American Jobs Creation Act of 2004, Section 62(a)(20) was implemented which allows for attorneys' fees incurred in connection with any action for unlawful discrimination to be deducted. Additionally, this section provides that attorneys' fees incurred for this specific purpose are not considered itemized deductions that would be subject to the 2 percent floor.

Continue reading "Are Your Florida Legal Fees Deductible?" »

In today's society, many Florida taxpayers do not file their tax returns simply because they cannot pay their taxes. However, one of the most serious offenses an individual can commit, with respect to the IRS, is failure to file a tax return. Under Title 26 of the United States Code, Section 7203, it is a federal crime or offense for anyone to willfully fail to file a federal income tax return when required to do so by Internal Revenue laws or regulations. A person's willful failure to supply information or pay tax is also punishable as a crime under Section 7203. In some cases, a person convicted of these crimes may be imprisoned for up to 5 years.

In addition to the risk of criminal prosecution, there are severe civil penalties that are imposed for failure to file a tax return. For example, the failure to file penalty pursuant to Section 6651 is assessed by the IRS at a rate of 5% per month or partial month up to a 25% maximum. The failure to pay penalty is assessed by the IRS at a rate of 0.5% per month or partial month up to a 25% minimum. If both the failure to file and failure to pay penalties are assessed, the failure penalty is reduced by the failure to pay penalty. Hence, penalties are greater when a taxpayer fails to file versus when a taxpayer fails to pay.

Similarly, as mentioned above, there are serious underpayment penalties to taxpayers. One example would be criminal fraud, which is your basic example of tax evasion. This can result in imprisonment, fines, or both. Another example would be civil fraud, where the taxpayer fraud does not rise to the criminal fraud level. If this happens, the penalty can be up to 75% of the portion of tax underpayment which is directly linked to the determined fraud. Moreover, there are penalties for frivolous returns. A frivolous return is where the taxpayer omits or is incorrect with respect to information which is required to determine the taxpayer's tax liability. This can result in a penalty for $500 dollars for each and every frivolous return that is filed with the IRS. Furthermore, in the event a refund is owed to the taxpayer, this refund may be given up if not claimed in time (a specific example of this would be the earned income tax credit).

Moreover, interest on underpayments run from the due date of the tax return, i.e. April 15th of the given year. In other words, taxpayers can expect to pay a lot more than they owe to the IRS once interest accumulates. For example, the interest on unpaid balances is around 4% annual interest on unpaid balances. Interest is updated on a quarterly basis, so this number can fluctuate dramatically.

Continue reading "Death and Taxes in Florida: What Happens When You Don't File Your Tax Return?" »

According to IRS Tax Tip 2011-21, if a taxpayer itemizes deductions on a Form 1040, a taxpayer may be able to deduct his or her expenses paid in the year 2010 for dental and medical care expenses. This would include dental or medical care expenses paid for the taxpayer, the taxpayer's spouse, and the taxpayer's dependents. For instance, taxpayers may be able to deduct medical care expenses only if the "total" medical care expenses for the year "exceed" 7.5% of total adjusted gross income (AGI).

It is important to note, however, that a deduction is only allowed for medical or dental expenses when they are "primarily paid for the prevention or alleviation of a physical or mental defect or illness." In other words, medical care expenses generally include payments for "the diagnosis, cure, mitigation, treatment, or prevention of disease, or treatment affecting any structure or function of the body." Similarly, only prescription drugs are deductible when, except that insulin prescriptions are nondeductible.

In addition, a taxpayer, in formulating his or her tax return, may only include medical expenses that are "actually" paid during the year, reduced reimbursements from insurance companies or other like entities. This rule applies regardless of whether the reimbursement is paid to a doctor, hospital, or other like person or entity. Likewise, transportation costs may be deductible as a "medical expense" if they can be linked to being necessary for medical care. For example, things such as transportation by a bus, ambulance, car, taxi, helicopter, and the like may be deductible as a "medical expense." Specifically, in using a car for medical transportation, a taxpayer may be able to deduct "out-of-pocket expenses" which include, but are not limited to, gas, oil, tolls, and parking fees.

Furthermore, taxpayers may include "qualified medical expenses" for the taxpayer, the taxpayer's spouse, and the taxpayer's dependents, which generally also include a person a taxpayer claims as a dependent under a "multiple support agreement." In addition, a taxpayer may be able to deduct medical expenses for a child if either parental taxpayer claims a child as a dependent under that state's standard rules for divorce.

Furthermore, "medical expenses" may also possibly be deductible if the person would have qualified as the taxpayers dependent but for the fact that the dependent did not qualify under the joint return or gross income tests. Finally, it is important to note that withdrawals from Flexible Spending Arrangements, as well as distributions from Health Savings Accounts, may be tax exempt under certain situations.

As with every tax season, this year's tax season comes with both its good and bad. While the tax deadline was extended to April 18, 2011, some taxpayers must wait until mid to late February to file their taxes.

On December 23, 2010 the IRS warned that because of the late enactment of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (PL 111-312), which extended various expired provisions, it would need time to reprogram its systems and update Schedule A. As a result, taxpayers who itemize deductions on Schedule A and those taxpayers who take certain extended deductions would not be able to file their returns at the start of tax season. Those taxpayers who need to wait are:

1) Taxpayers Claiming Itemized Deductions on Scheduled A.
2) Taxpayers Claiming the Higher Education Tuition and Fees Deduction; and
3) Taxpayers Claiming the Educator Expense Deduction.

Additionally, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act also extended those deductions for 2011 along with a number of other tax deductions and credits for 2011 and 2012.

Except for those asked to wait to file, the IRS will begin accepting e-file and Free File returns on January 14, 2011.

Every person who owns and resides on real property in Florida on January 1 and makes the property their permanent residence is eligible to receive a homestead exemption up to $50,000. The first $25,000 applies to all property taxes, including school district taxes. The additional exemption up to $25,000, applies to the assessed value between $50,000 and $75,000 and only to non-school taxes.

When filing for the first time, the homeowner should be prepared to answer these questions:

1. In whose name or names was the title to the dwelling recorded as of January 1st?

2. What is the street address of the property?

3. How long have you been a legal resident of the State of Florida? (A Declaration of Domicile or Voter's Registration will be proof of date before January 1st).

4. Do you have a Florida license plate on your car and a Florida driver's license?

5. Were you living in the dwelling on January 1st (January 1st is the date on which permanent residence is determined)?

The deadline for filing without a fee is March 1st. All applicants must have:

1. A valid Florida driver's license (a license valid only in the state of Florida is not acceptable); and

2. A Florida voter's registration or a notarized, recorded Declaration of Domicile.

The Internal Revenue Service developed and enforces rules designed to discourage U.S. investors from deferring tax on investment income by holding passive investments through non-U.S. companies that do not distribute their earnings currently. The rules impose significant additional tax burden on gains and certain dividends derived from investments in a Passive Foreign Investment Company (PFIC) and are very broadly drafted and construed. IRC 1297(a).

PFIC rules extend anti-deferral rules to certain foreign corporations, regardless of the level of U.S. stock ownership. A U.S. person who owns any percentage of PFIC shares is potentially subject to these rules.

A foreign corporation is generally a PFIC if it meets either the Income Test (IRC 1297(a)(1)) or the Asset Test (IRC 1297(a)(2)). To meet the Income Test, at least 75% of its gross income for the tax year is passive income (defined in IRC1297(b)). To meet the Asset Test, at least 50% of its assets by value generate (or are held for the production of) passive income (determined under 1297(e)). For these purposes, passive income includes interest, dividends, certain rents and royalties, and gains from the sale of investment property.

It is not difficult for a foreign corporation to be classified for a taxable year as a PFIC under either of the above-mentioned tests. The Income Test is based on gross income, rather than net income, and the Asset Test is also extremely broad.

The PFIC rules create a punitive scheme for taxing deferred income, by eliminating the lower rates on capital gains and any deferral benefit through the imposition of the interest charge.

Has your Florida debt been forgiven? Don't be surprised if the IRS considers this income!

Historically, any discharge of indebtedness or other relief from debt is taxable as income under the Internal Revenue Code (IRC). In general under the IRC, when a lender decides to forgive all or a portion of a borrower's debt and accept less than the original amount owed, the forgiven amount is considered as income for the borrower and may be taxed.

However, the Mortgage Debt Forgiveness Relief Act of 2007 was enacted to provide relief to qualifying homeowners who would have otherwise suffered a tax consequence because of the forgiveness of mortgage debt. The Mortgage Debt Forgiveness Act has paved the way for many additional amendments to help taxpayers exclude qualifying debt that has been forgiven from income and eliminate potential tax liabilities. Recently the Emergency Economic Stabilization Act of 2008 has extended the tax relief until 2012.

This benefit is only available to qualifying taxpayers. Discharged acquisition indebtedness is only excludable if it is incurred with respect to the taxpayer's principal residence (Code Sec. 108(h)(2), as added by P.L. 110-142). The term "principal residence" as it applies here has the same meaning as used in determining whether the exclusion under Code Sec. 121 applies to the gain from the sale of the residence (Code Sec. 108(h)(5), as added by P.L. 110-142). Under regulations issued pursuant to Code Sec. 121, whether a residence is the taxpayer's principal residence depends on an examination of the facts and circumstances, such as the taxpayer's place of employment and mailing address (Reg. §1.121-1).

Continue reading "Can the IRS Potentially Consider Your Florida Debt Forgiveness Income?" »