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 Originally enacted in 2010, the Foreign Account Tax Compliance Act ("FATCA") targets non-compliance by U.S. taxpayers using foreign accounts.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.

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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" »

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 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.

Nonresident alien crew members working onboard a foreign flagged yacht may not be subject to the United States Internal Revenue Code's federal tax withholding requirements found in I.R.C. §§ 3402 or 1441, so long as that yacht is engaged in transportation between the U.S. and a foreign country or U.S. possession.

The specific exclusion carved out in the Taxpayer Relief Act of 1997 (Section 1174, Public Law 105-34) ("Act") and codified in I.R.C. § 861(a)(3) states: "Compensation for labor or services performed in the United States shall not be deemed to be income from sources within the United States if the labor or services are performed by a nonresident alien individual in connection with the individual's temporary presence in the United States as a regular member of the crew of a foreign vessel engaged in transportation between the United States and a foreign country or a possession of the United States."

It should be noted that this discussion applies if the nonresident alien crew member performs certain services in the U.S. in connection with the individual's temporary presence in the U.S. Compensation earned by a nonresident alien crew member while working only in international waters should also not be U.S. source income. Additionally, according to the definition of the United States, Puerto Rico, the U.S. Virgin Islands, and their territorial waters are not considered part of the U.S. This is the definition applicable to determine the source of compensation derived from rendering personal services.

Therefore, even if a vessel is in or around Puerto Rico or the U.S. Virgin Islands, compensation paid to nonresident alien crew should not be from U.S. sources and thus, should be exempt from U.S. income taxes and withholding requirements.

Continue reading "Taxation of Nonresident Alien Crew Members Working Onboard a Foreign Flagged Yacht" »