By Michael Magagna
On June 18th, the IRS implemented new changes to the requirements for both the Offshore Voluntary Disclosure Program (OVDP) as well as the Streamlined Filing Compliance Procedures (SFCP). These process changes are relevant to taxpayers who participate in these programs with undisclosed foreign financial accounts and/or foreign assets. Under the 2012 OVDP, the IRS offered people with undisclosed income from their foreign assets to voluntarily join the program in order to become current with their tax returns while paying a one-time penalty of 27.5% (12.5% if maximum aggregate balance was less than $75,000). The Streamlined Filing Compliance Procedures were implemented in order to certify taxpayers’ failure to report their foreign financial accounts and to pay all taxes due. These procedures allow taxpayers the ability to file amended/delinquent returns while providing terms to rectify their tax and penalty obligations. The following changes occurred to OVDP and SFCP, effective as of July 1st.
NOTE: The 2014 OVDP is a continuation of the 2012 OVDP, not a new program
The penalty is still 27.5% in most cases; however, it is raised to 50% (beginning August 4th) if the taxpayer has an account with a foreign bank or facilitator that is under public investigation. Additionally, there are no longer any reduced penalties of 12.5% or 5%. Taxpayers are now required to pay offshore penalties up front and are able to opt out of penalties if they are disproportionate to the taxpayer’s situation.
Another change to OVDP is the removal of frequently asked questions (FAQ’s) 17 and 18. Under the 2012 OVDP, FAQ’s 17 and 18 related to taxpayers who failed to file some FBARs and/or information reports, but did report all of their worldwide taxable income on their annual US income tax returns. Since the purpose of the voluntary disclosure program is to provide taxpayers a way to come forward regarding unreported taxable income from the past, the program does not apply to these two questions. Thus, they were removed from the FAQ’s.
A final change to the OVDP is the expansion of preclearance. A request now has to include the identities of all foreign financial institutions where the taxpayers’ accounts were or where their assets were being held. This information is needed in addition to account statements and taxpayers’ identifying information.
With the SFCP changes, there are several general requirements that apply to both Foreign and Domestic taxpayers. All taxpayers must certify that prior US tax and reporting noncompliance was non-willful. Non-willful conduct is conduct that is due to negligence or conduct that is the result of a good faith misunderstanding of the requirements of the law. Additional SFCP requirements include that the procedures are only available for individual taxpayers and their estates, and they are not available if the IRS has started a civil or criminal investigation in regards to the taxpayer. A taxpayer must also choose either OVDP or SFCP; they cannot switch between the two programs (unless they entered OVDP before 7/1/14 and request a transition to SFCP).
Foreign requirements include all of the listed general requirements in addition to a non-residency requirement. US citizens and green-card holders meet this requirement if for any one of the last three years for which the US tax return due date has passed, they did not have a US abode and were physically outside the US for more than 330 days. Individuals who are not citizens or green-card holders meet the requirement if in any one of the last three years they did not meet the substantial presence test. Finally, taxpayers must have failed to report income from a foreign financial asset, and this noncompliance must be due to non-willful conduct.
Domestic requirements include all of the listed general requirements as well as failing to meet any of the non-residency requirements. Taxpayers must have previously filed a US tax return (if required) for the last three years in addition to having failed to report gross income from any foreign account. Finally, noncompliance must again be non-willful.
The Wolf Group has assisted several hundred clients coming into U.S. tax compliance and avoiding the draconian penalties that the IRS may impose on U.S. persons with undisclosed accounts. Please contact us at (703) 502-9500 with any questions or to set up a consultation.
The annual filing requirements for shareholders of a passive foreign investment company (PFIC) are in effect for the current tax season. The annual filing requirement is imposed on U.S. persons who are PFIC shareholders who do not currently file Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund. Thus, almost all PFIC shareholders (with some exceptions discussed below) are required to complete and file Form 8621 with the IRS. This filing requirement applies to tax years ending on or after Dec. 31, 2013, which means it affects the current tax reporting and filing season.
To learn more about whether you are subject to the PFIC filing requirement, please read Michele’s article published on the American Institute of CPAs’ Corporate Taxation Insider. Please click here to view the full article.
Ever hear the expression “it’s what I don’t know that concerns me?” There couldn’t be a more valid “truism” than this when it comes to sending employees abroad on assignment. Most of us think our countries’ laws are too complex or the bureaucracy too entrenched. But as costly as dealing with these difficulties is, imagine dealing with them in an almost completely unknown world. . . the legal and tax environment of a foreign country. The cost and the frustration of dealing in an unknown legal world is often daunting, and fraught with risk. This leads most companies to obtain advice from an advisor familiar with the host country’s legal and tax environment.
Given the limited timeline, individuals who wish to participate in the program can request an extension of up to 90 days under certain circumstances if they do so by August 31, 2011. While The Wolf Group cannot provide assistance in the process of extension requests at this late date, we can refer you to an appropriate attorney to provide legal counsel to ensure the advisability of OVDI participation, and to prepare the legal forms and documents for the extension requests. Once the extension requests are filed and approved, we can assist you in filing the requisite forms and schedules.
If you think you have (or had) undisclosed foreign financial accounts or assets, you can contact our International Tax Director, Dale Mason, at (703) 502-9500 x120, or firstname.lastname@example.org to discuss the matter.
The Wolf Group
On May 27, the IRS released a draft version of the new Form 8938, Statement of Specified Foreign Financial Assets. The form is required to be filed each year by any U.S. person who owns foreign financial assets with an aggregate value in excess of $50,000.
New Form 8938 Required In Addition to Existing Disclosure Forms
Congress passed the Foreign Account Tax Compliance Act (“FATCA,” part of the HIRE Act of 2010) in order to make it more difficult for U.S. taxpayers to evade income taxes by hiding assets overseas. FATCA requires U.S. persons to file an additional disclosure form (Form 8938) to report their foreign financial accounts and other foreign financial assets to the IRS, including interests in foreign companies and trusts.
Form 8938 is required to be attached to an individual’s U.S. income tax return. The first Forms 8938 will be due in 2012, attached to 2011 tax returns and reporting foreign assets held since January 1, 2011. This new requirement is in addition to existing information forms, including the Form TD F 90-22.1 (“FBAR”) that is required to report foreign financial accounts worth more than $10,000 in aggregate, Form 3520 reporting transactions with foreign trusts, Form 5471 related to foreign corporations, etc. Given the depth and complexity of these various reporting requirements, it is more important than ever for U.S. persons to keep detailed records of their foreign financial assets.
Form MUST BE Filed by U.S. Persons with over $50,000 of Foreign Financial Assets
While the nature of the Form 8938 is similar to the FBAR, and there will be significant overlap in reporting, there are some important differences between the forms. The FBAR must be filed by any U.S. person who has a financial interest in, or signature authority over, foreign financial accounts in excess of $10,000. The FBAR must be received by the Treasury by June 30 each year (without extensions); it is not filed with the tax return. The Form 8938 must be filed by any U.S. persons who own foreign financial assets (not just accounts) in excess of $50,000, and it is due with the income tax return. While many individuals will file both the FBAR and the Form 8938 to report substantially the same information, it is possible that some individuals will only need to file one form or the other, as a result of the different filing thresholds and which asset types must be reported on each form. Additionally, the Form 8938 may require substantially more time to prepare than the FBAR, since it requires the reporting of “tax items” shown on the tax return that are attributable to the assets reported on the Form 8938, including tracing the income, deductions, and credits related to the foreign assets to the specific line where they are reported on the return.
As with the FBAR, substantial penalties may apply for failing to file the Form 8938. The IRS has not yet issued instructions for Form 8938, and there are many areas where the form is still unclear. We will provide additional updates as the IRS issues additional guidance on the new foreign financial asset reporting requirements under FATCA. If you have any questions about the information contained in this Tax Alert, please contact our New Client Lead, Fan Chen, at email@example.com or 703-502-9500.
- The employee is not a citizen of the United States;
- The employee performs similar services to those performed by U.S. government employees abroad; and
- The employee’s government grants an equivalent exemption to U.S. government employees performing similar services in that country.
Section 893 also asks the Secretary of State to certify 1) which foreign countries grant an equivalent exemption to U.S. government employees and 2) what services U.S. employees perform abroad.
Until recently, the IRS had taken the position that foreign government employees could not qualify for the tax exemption provided by Section 893 until they received the above certification from the State Department. Earlier this year, the IRS lost a case related to this issue: Abdel-Fattah v. Commissioner of Internal Revenue. In that case, the Tax Court ruled that the State Department certification was not a prerequisite for the tax exemption, and that a foreign government employee’s wages are not subject to U.S. federal income tax if they meet the three requirements listed above.
In response to the Tax Court’s decision, the IRS recently released Action on Decision 2010-004, stating that it will no longer take the position that State Department certification is a prerequisite for the tax exemption. The burden of proof remains on the employee to show that he has met the above conditions and therefore qualifies for the tax exemption on his wages.
If you have any questions related to this tax alert, or any general taxation questions, please feel free to contact Kristen Colston at firstname.lastname@example.org or at 703-502-9500.