Brotman Law Presents

International Tax Attorney in a Box: The Complete Guide to International Tax Compliance

Shady, secret offshore banks accounts make great fodder for fiction novels and binge-worthy dramas, but in fact, there are many legitimate reasons why U.S. taxpayers have offshore accounts. 

Some of these reasons include diversification, better interest rates and that some of the best money managers in the world are found outside the United States. Other reasons include convenience while travelling or if living abroad, maintaining inherited assets in a foreign country, and having relatives back in another country whom they are supporting. 

American business interests have also grown across the globe, and both multinational corporations and individuals maintain accounts abroad to fund their various business operations or their living expenses.

Under the law, U.S. citizens, resident aliens and certain nonresident aliens are required to report worldwide income from all sources including foreign bank and financial accounts to the IRS under the Foreign Account Tax Compliance Act (FATCA). 

Additionally, under FATCA, taxpayers must certify their foreign or nonforeign status by filing forms Form W-8BEN or Form W-9, respectively. Taxpayers are required to pay taxes on income from these accounts at their individual tax rates. 

This overseas income is reported on a disclosure form, Foreign Bank Account Report (FBAR) and must be filed by certain taxpayers with respect to financial accounts maintained abroad. Although this is often a concern for the millions of expatriates living and working in foreign countries, FBAR applies to an even broader demographic of taxpayers. Remember the acronym FBAR; we will be referring to it a lot.

U.S. taxpayers using offshore accounts, including foreign banks, security accounts and trusts, to avoid paying taxes are committing fraud

The Departments of Justice and Treasury have joined forces to crack down on the failure to report foreign accounts and income. They are utilizing the Internal Revenue Service, Financial Crimes Enforcement Network (FinCEN), and the United States Attorney General’s office in a collaborative effort to target individuals, banks, foreign financial institutions, and countries who don’t comply with FATCA and the U.S. tax laws. 

As their effort has proved profitable with $6.5 billion dollars of collected revenue, more assets have been allocated to allow Justice and Treasury to expand upon their success.

This is where the services of an experienced tax attorney are advantageous. While your CPA may excel at preparing your tax returns, international tax laws are very complex. Recent changes have been made to the reporting requirements and deadlines, and two IRS voluntary disclosure programs have ended. 

This tightening up of the “escape hatches” has made taxpayers with foreign assets more vulnerable to scrutiny and that is where our firm, Brotman Law, can help. We have helped many clients untangle the knots associated with FACTA and with completing the numerous disclosure forms.

That is why we created this free book, “The Ultimate Guide to International Taxation.” Whether you were actively looking for information on this topic or stumbled upon it and realize you need help, you are in the right place. 

Our firm has helped many clients with their FBAR filings or voluntary compliance plans. Whether or not you retain us to represent you in your international tax dealings, we wanted to make this information available. Information is power.

Thank you in advance for reading “The Ultimate Guide to International Taxation.” It was a labor of love and our law firm welcomes all questions, comments, concerns, and feedback that you may have about this free resource.

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FATCA – The Foreign Account Tax Compliance Act: What You Need to Know

The Foreign Account Tax Compliance Act (FATCA) mandates that U.S. taxpayers, including those living outside of the United States, report their financial accounts held outside of the U.S. It also requires that foreign financial institutions report information to the IRS about their U.S. clients.

The U.S. is also in pursuit of Intergovernmental Agreements (IGAs) with other countries to make sure that the requirements of FATCA are carried out by foreign financial institutions. Currently, there are 113 countries that have IGAs with the U.S.                 FATCA was passed on March 18, 2010, as an amendment to an appropriations bill known as the HIRE Act.

FATCA has three main provisions::

  •   It requires foreign financial institutions, such as banks, to enter into an agreement with the IRS to identify their U.S. personal account holders and to disclose the account holders’ names, TINs, addresses, and the transactions of most types of accounts. Some types of accounts, notably retirement savings and other tax-favored products, may be excluded from reporting on a country-by-country basis. U.S. payers making payments to non-compliant foreign financial institutions are required to withhold 30 percent of the gross payments. Foreign financial institutions which are themselves the beneficial owners of such payments are not permitted a credit or refund on withheld taxes absent a treaty override.
  •   Form 8938: Statement of Specified Foreign Financial Assets

  U.S. persons owning these foreign accounts or other specified financial assets must report them on a new Form 8938 which is filed with the person’s U.S. tax returns if the accounts are worth more than $50,000 at the end of the year or more than $75,000 at any point during the year; a higher reporting threshold applies to U.S. persons who are overseas residents and others. This form should  be submitted with your tax returns by the tax deadline. More on this form will be discussed in Chapter 6.

  • It closes a tax loophole that foreign investors had used to avoid paying taxes on U.S. dividends by converting them into “dividend equivalents” through the use of swap contracts.

Armed with new weapons to make foreign governments and financial institutions comply, the Departments of Treasury and Justice wasted no time in testing out their new powers. The first target was the most obvious: Switzerland.

UBS was the target of an aggressive enforcement action. In the end, UBS was forced to turn over the names and information of 4,000 U.S. taxpayers. In order to settle a corporate criminal action for failure to comply, UBS paid a $780 million dollar fine.

Switzerland’s oldest bank, Wegelin & Co. fared far worse. It paid only $74 million in fines, restitution and forfeitures, but it was dealt the death penalty when its board agreed to cease to do business to avoid criminal liability.

In August of 2013, to avoid further prosecutions, the United States and Switzerland signed an agreement that provides for fines in exchange for non-prosecution agreements for banks that have facilitated American tax evasion.

Given the success in shutting down the Switzerland offshore banking industry for U.S. taxpayers, it is believed that the Treasury and Justice will be launching its next assault on Israel and the Caribbean.

Keep reading to learn more about FACTA and FBAR, filing requirements, how to complete the forms, penalties and appeals. The following is an overview and summary of each of the different chapters in “A Tax Attorney’s Complete Guide to International Taxation.”

Chapters

 

 

1

US Taxpayers and Dual Tax Filers

The book will begin with a discussion of which people qualify as US persons for tax purposes. Additionally, we will delve into the specific rules regarding individuals who are considered “dual tax filers,” a designation given to individuals who change their residency status during the tax year. Determining which category of filer you fall under will serve as the basis for determining your reporting requirements.

2

Types of Foreign Income that Trigger Filing Requirements

In this chapter, we will dive into the two categories of sources of income that you must be aware of as a foreign tax payer: effectively connected income (ECI) and fixed, determinable, annual or periodical (FDAP) income.

3

FBAR, the Statute, Filing Requirements and Statute of Limitations

This chapter discusses what FBAR is and spells out exactly who is supposed to file and what types of holdings are exempt. We will also get into the specific language that the IRS uses in the statute so that you will have a clear understanding of what they are referring to and will not get tripped up by terminology. Next, we will delve into how foreign assets are valued, which we find can often be a trigger point for an audit. We will also talk about filing deadlines and postponements, which is especially important to be aware of during the COVID-19 pandemic. Lastly, we will outline the IRS statute of limitations and why you should pay attention to it.

4

International Tax Considerations for Individual 1040 Filings

In this chapter, we will discuss the familiar Form 1040 with a particular emphasis on some of the questions you may want to pay close attention to from an international tax perspective.

5

Form 3520/3520A - Trusts and Gifts

In this chapter, we will discuss the filing requirements for Forms 3520 and 3520A. Namely, the chapter expounds upon the types of trust and gift transactions that trigger a filing requirement, as well as the process for filing these forms. The chapter also provides information applicable to those who have inherited foreign trusts or assets.  Additionally, in this chapter, you can learn about the penalties that may be imposed for noncompliance.

6

Filing Requirements for Those With Foreign Assets, Form 8938

In this chapter, we will discuss Form 8938, a form that requires “specified individuals” and “specified entities” to report certain assets if they surpass the thresholds set by law. Along with defined “specified individuals” and “specified entities,” we will provide information on which types of assets may trigger Form 8938 filing requirements. Because the rules surrounding this form are complex and difficult to summarize, we will give you a high level overview of some of the key information, along with links to the IRS resources on the form. This chapter will also discuss the filing process and potential penalties you may face if you fail to comply.

7

Filing Requirements for Those with an Interest in Foreign Corporations, Form 5471

In this chapter, we will give an overview of the five categories of individuals and entities who must file this form so that you may get a general sense as to the form’s applicability to your specific situation.  We will discuss the filing requirements and penalties that are imposed for delinquent Form 5471 filings, along with providing appropriate links to the IRS resources in the event that you wish to dive deeper into any of the topics covered regarding this form.

8

Other Important Filing Requirements for Those with International Interests

Completing the FBAR and all of the attachments deserves an entire chapter in itself. This is where you can learn about the nuances of each form, with focus on specific questions and line items that if completed incorrectly, could trigger an audit. We also link to pages on the IRS website that have more detailed instructions and examples. This will save you hours of having to navigate the IRS site. In this chapter, we will also talk about the various penalties that may be imposed if you fail to file these informational forms, file them late or file them erroneously.

9

Willful Penalties

This chapter will discuss penalties that the IRS may apply for willful violations, as well as other criminal penalties that taxpayers may face for non-FBAR violations. The chapter will discuss the types of facts that may lead to a finding of willfulness and will go into the financial repercussions and criminal recourse for such actions — which could mean time behind bars. This is another good reason why you need an experienced tax attorney on your side if you run afoul of the IRS regulations in regard to your international accounts.

10

Non-willful Penalties

This chapter will discuss the types of evidence that the IRS may use to find that a failure to file or underpayment was non-willful. Along with outlining the penalties that may be imposed, this chapter will discuss how having excuses for non-filing that constitute “reasonable cause” can spare you from paying penalties. Additionally, this chapter will  introduce the topic of streamline programs which are available to taxpayers who committed non-willful violations.

11

Appeals and Other Resolutions for Getting Into Compliance

In this final chapter, we will walk through the steps you can take if you cannot come to an agreement with the IRS. There are many options including appeals, litigation and resolution programs, and streamline programs. Specifically, this chapter discusses the Revised Offshore Voluntary Disclosure Program, SFOP (Streamlined Foreign Offshore Procedures, SDOP (Streamlined Domestic Offshore Procedures), First Time Abatement (FTA), and extensions and installment agreements. We will outline the eligibility criteria and the filing procedure for each of these programs. Additionally, this chapter will discuss  relief procedures that exist for former U.S. citizens and the process for filing delinquent returns if you miss the deadline for filing your FBAR or FinCEN 114.

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