So Trump Did Not Win the Election - Is It Time to Expatriate? - Part III

 As we previously discussed in So Trump Did Not Win the Election - Is It Time to Expatriate? - Part I & Part II, whatever your motives, just because you leave the United States and renounce your citizenship, don't assume you can leave U.S. taxes (or U.S. tax forms and complexity) behind, particularly if you are financially well-off and there are 10 things you need to know about Expatriation:

 

1. Uncle Sam taxes income worldwide.
2. Expatriating means really leaving.
3. The old 10-year window is closed.
4. Big changes came in 1996.
5. Tax avoidance is now irrelevant.
6. There are special rules for long-term residents.
7. There's an exit tax for expatriations on or after June 17, 2008.

 8. Some expatriates can escape the exit tax. 

In general the exit tax is unforgiving and has broad application. Yet if you have less than $600,000 of income from the deemed sale of your assets on expatriation, you pay no tax. This exemption amount is adjusted for inflation and is $627,000 for 2010. If your gain exceeds this amount, you must allocate the gain pro rata among all appreciated property. 

However, this exclusion amount must be allocated to each item of property with built-in gain on a proportional basis. This involves a complicated process of multiplying the exclusion amount by the ratio of the built-in gain for each gain asset over the total built-in gain of all gain assets. The exclusion amount allocated to each gain asset may not exceed the amount of that asset's built-in gain. Moreover, if the total allowable gain of all gain assets is less than the exclusion amount, the exclusion amount that can be allocated to the gain assets will be limited to that amount of gain. For example, in 2010, if the total allowable gain in an expatriate's assets was $500,000, then that $500,000 would be the limit instead of $627,000.

Fortunately not all expatriates face the exit tax; only "covered expatriates" do. Under prior law, you generally had to give notice you were expatriating to trigger the rules. Now if you relinquish your passport or green card, it's generally automatic. But some expatriates, even under the new law, can escape the exit tax. The financial thresholds (see point five above) can still exempt you. Some people born with dual citizenship who haven't had a substantial presence in the U.S. and certain minors who expatriated before the age of 18-and-a-half are also exempt. However, those people must still file an IRS Form 8854 Expatriation Information Statement. 

9. You can elect to defer the exit tax. 
If you do face the exit tax, you can make an irrevocable election (on a property-by-property basis) to defer it until you actually sell the property. This election allows people to leave the U.S. and expatriate without triggering immediate tax as long as the IRS is assured it will collect the tax in the future. To qualify, a covered expatriate must provide a bond or other adequate security for the tax liability. There are specific requirements for these security bonds. Plus, there is an updating and monitoring of the bond in case it becomes inadequate to cover the tax. The IRS scrutinizes these elections on a case-by-case basis, so hire an expert. There are detailed requirements for filing the deferral election, including documentation, and copies of various documents. 

One of these requirements is appointing a U.S. agent for the limited purpose of accepting communications with the IRS. Plus, the taxpayer must waive any tax treaty benefits that might otherwise impact the IRS getting its money. It doesn't appear that many of these deferral elections have been made so far. 

There's another reason, other than the bond, not to defer. When you do sell, you'll pay taxes at the rate then in effect, which will likely be higher. If the Obama Administration has its way, when the Bush tax cuts expire at the end of this year, the top rate on long-term capital gains will rise from 15% to 20%. Plus, the just-passed House reconciliation package to the Senate's health care bill (if also approved by the Senate) is supposed to impose an additional 3.8% tax on net investment income for taxpayers with threshold income amounts of $200,000 for individuals and $250,000 for joint filers. This could raise the top capital gains rate to 23.8% for those taxpayers.

10. You'll need professional help. 
As you might expect, there are forms to file and procedures to follow if you expatriate. In fact, if you are wavering, the paperwork alone may keep you stateside! You must file IRS Form 8854 (in some cases for 10 years). Additional special forms (Form W-8CE if you have any deferred compensation items, a specified tax deferred account, certain non-grantor trusts, etc.) are also required. A good source is IRS Notice 2009-85.

Still, get some professional help. As this mere scratching of the surface suggests, the tax rules regarding expatriation for citizens and long-term residents are complex, even dizzying. Gone are the days when one could renounce U.S. citizenship and stand a good chance of avoiding U.S. tax. If you're facing these issues, or even if you are a beneficiary of someone else who is facing them, get some professional help. Bon voyage!

"Should I Stay or Should I Go?"

Need Advise on Expatriation? 

 

Contact the Tax Lawyers at 

Marini & Associates, P.A.   

for a FREE Tax Consultation contact us at:

www.TaxAid.com or www.OVDPLaw.com or

Toll Free at 888-8TaxAid (888) 882-9243

  

 

TC Holds That a U.K. Corp That Failed to File Return Is Not Entitled to Tax Deductions Nor Credits

A UK corporation was not entitled to deductions or credits against its U.S. income for 2009 and 2010 because it failed to submit returns for those years before the IRS prepared returns for it. The Tax Court also held that its interpretation of Code Sec. 882(c)(2) did not violate either the business profits article or the nondiscrimination article of the US-U.K. income tax treaty.

Adams Challenge (U.K.) Limited (“Adams”) was a U.K. corporation whose sole income-producing asset for 2009 and 2010 was a multipurpose support vessel. The vessel was chartered by a U.S. firm to assist in decommissioning oil and gas wells and removing debris on portions of the U.S. Outer Continental Shelf in the Gulf of Mexico.

During 2009 and 2010, Adams derived from the charter gross income of about $32 million, which the Tax Court determined was effectively connected with the conduct of a U.S. trade or business. The Court also found that the US-U.K. bilateral income tax treaty did not exempt that income from US taxation because the company had a permanent establishment in the US. However, Adams did not file Federal income tax returns for either 2009 or 2010. 

In April 2014, the IRS prepared substitute returns for 2009 and 2010 for Adams that included the charter income but did not include any deductions or credits to offset that income. The IRS then issued Adams a deficiency notice that determined that Adams was not entitled to deductions or credits for 2009 and 2010 because it failed to file returns for those years.

In 2015, Adams timely filed a petition for redetermination, and in 2017 filed with the IRS its own returns for 2009 and 2010.  

The Tax Court held that Adams was not entitled to deductions or credits to reduce its income tax for 2009 and 2010 because it didn’t submit returns as required under IRC Section 882(c)(2).

The Tax Court rejected Adams arguments that the IRS’s refusal to allow it to claim deductions and credits in these circumstances violated Articles 7(3) and Article 25 of the Treaty. 

The Court Found That a Foreign Corporation is Entitled to Article 7(3) Deductions Only if it:
(1) Files A Return; and
(2) Files That Return Before The IRS
Has Prepared a Return For it.

The Court also found that Adams failed to show that the requirement to file returns under Code Sec. 882(c)(2) imposed a heavier burden on it than the burden on domestic corporations. 

Although Adams argued that Code Sec. 882(c)(2) subjects it to more burdensome requirements because US companies do not forfeit all their deductions if they neglect to file returns by an “arbitrary deadline," the Court found that foreign corporations have more time to submit returns before the IRS disallows deductions and credits (e.g., foreign corporations have 23½ months after the close of their tax year to file returns before Code Sec. 882(c)(2) applies but domestic corporations must file their returns within 3½ month of the close of their tax year) and may preserve their rights to deductions and credits by filing protective returns reporting zero income and deductions. 

What a foreign taxpayer should do if they believe they are not engaged in a US trade or business, is to file a protective income tax return stating your beliefs as to why you're not engaging a US trade or business in this way where the IRS later disagrees you can file an amended return with all associated deductions and credits.

Remember that where Adams was claiming a tax treaty position for only no US tax, they would still need to file corporate income tax return with a Form 8833 - Treaty – Based Return Position Disclosure.

Have IRS Tax Problems?

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or Toll Free at 888 8TAXAID (888-882-9243) 

Comm'r Rettig Says IRS No Longer Behind on Mail

On October 7, 2020 we posted IRS Has a Backlog of Unopened Mail and is Experiencing Processing Delays, where we discussed that the IRS was experiencing processing delays as it works through its unopened mail backlog and that at one point, due to the suspension of services, the IRS had a backlog of more than 11 million pieces of unopened mail. 

Now according to Commissioner Charles Rettig, who said on Thursday, that the mail backlog won’t be an issue going forward. 

“We Actually are Current, Believe It or Not,” 

Rettig said during a webcast hosted by the Urban-Brookings Tax Policy Center. “We’re not too far off of where we would be in the ordinary course.” 

The IRS had to sort through a massive backlog of paper-filed returns and other mail.

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 Toll Free at 888 8TAXAID (888-882-9243) 

DC - Non-Willful FBAR Penalty Applies Per Form Not Per Account

A district court has found that the $10,000 non-willful FBAR penalty (for failure to file the FBAR) applies per FBAR form, not per the number of bank, etc. accounts required to be reported on the form. Two district courts have now come to this conclusion. One district court has found the opposite.

Under 31 USC § 5314(a), every U.S. person that has a financial interest in, or signature or other authority over, a financial account, or accounts, in a foreign country must report the account, or accounts, to IRS annually on a FinCEN Report 114, Report of Foreign Bank and Financial Accounts (commonly referred to as an FBAR or FBAR form) if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year.

One FBAR is used to report multiple foreign financial accounts. (FBAR instructions)

The penalty for violating the FBAR requirement is set forth in 31 USC § 5321(a)(5). The amount of the penalty depends on whether the violation was non-willful or willful.

The Maximum Penalty Amount For A Non-Willful Violation Of The FBAR Requirements Is $10,000.

 (31 USC § 5321(a)(5)(B)(i))

One district court has held that the penalty for a non-willful FBAR violation relates to each account required to be shown on the FBAR. Thus, IRS could impose the statutory maximum penalty of $10,000 for each of the taxpayer's thirteen accounts that should have been reported on one FBAR. (US v. Boyd, (DC CA 2019) 123 AFTR 2d 2019-1651).

But another district court came to the opposite conclusion. It found that the $10,000 non-willful penalty applies only to the FBAR form itself, not the number of accounts required to be shown on the FBAR. (US v. Bittner  (DC TX 6/29/2020).

In 2010, Mr. Kaufman had 17 foreign accounts, the balance of which, in aggregate, exceeded $10,000. He was required to file an FBAR, but he did not do so.

A court found that his failure was non-willful, and the IRS imposed a penalty of $170,000, i.e., $10,000 for each account.

Mr. Kaufman argued that the penalty should be capped at $10,000, i.e., $10,000 for failure to file one FBAR.

The district court, finding the court's argument in Bittner persuasive, found the non-willful FBAR penalty applies per form, not per account. Thus, the penalty was capped at $10,000.

The district court found the arguments in Boyd unpersuasive. And the court noted that the Boyd decision was not binding on it. Him

 Have an FBAR Penalty Problem?

Want to Know Which OVDP Program is Right for You?

 

 

 

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So Trump Did Not Win the Election - Is It Time to Expatriate? - Part II

On January 4, 2021, we posted So Trump Did Not Win the Election - Is It Time to Expatriate? - Part I, where we discussed that whatever your motives, just because you leave the United States and renounce your citizenship, don't assume you can leave U.S. taxes (or U.S. tax forms and complexity) behind, particularly if you are financially well-off. 

For those who expatriate after June 16, 2008, the rules are different, since Internal Revenue Code Section 877A applies instead of Section 877. You are subject to an immediate exit tax, which deems you (for tax purposes) to have sold all of your worldwide property for its fair market value the day before your departure from the U.S.
We also discussed in So Trump Did Not Win the Election - Is It Time to Expatriate? - Part I:

1. Uncle Sam taxes income worldwide. 

2. Expatriating means really leaving. 

3. The old 10-year window is closed. 

Herein will discuss 7 more, of the 10 things you need to know about Expatriation:

(set forth below and in one subsequent blog posts)

4. Big changes came in 1996. 
Thirty years later, in 1996, after the Forbes story on "The New Refugees" created a stir, Congress tried again. As part of the Health Insurance Portability and Accountability Act of 1996 (otherwise known as HIPAA), Congress added a presumption of tax avoidance if an expatriate's five-year average net income tax exceeded $100,000, or if the expatriate's net worth was $500,000 or more (both adjusted each year for inflation). But people could--and with the help of skilled lawyers did--rebut the presumption, and the IRS still had to show tax avoidance in most cases.

5. Tax avoidance is now irrelevant. 
In 2004 (in the American Jobs Creation Act), Congress threw out the tax avoidance motive test altogether, imposing 10 years of U.S. tax on U.S. source gross income and gains on a net basis if you left the country for any reason. However, Congress increased the threshold for determining who was subject to this expatriation tax. An individual was only subject to the expatriation tax if he had an average net annual income tax for the five years preceding expatriation of $124,000, or if he had a net worth of $2 million or more on the date of expatriation. (If you expatriated on or after June 17, 2008, under the new Section 877A, there is a higher net worth threshold--currently $145,000 of annual net income tax for 2010.) 

In some cases, even if you're below these thresholds, you'll get taxed. For example, expatriates must certify their past U.S. tax compliance by filing an IRS Form 8854. Any expatriate who fails to certify compliance with U.S. federal income tax laws for the five taxable years preceding expatriating is subject to the expatriate income tax even if he didn't meet the income tax liability or net worth tests. 
Plus, later U.S. visits can be expensive if you expatriated before June 17, 2008 (and Internal Revenue Code Section 877 applies). In that case if an expatriate comes back to the U.S. for more than 30 days in any year during the 10 years following expatriation, that person is considered a resident of the U.S. for that whole tax year. That means the person would again be subject to U.S. tax on his worldwide income, not just his U.S.-source income. Ouch! 

This 30-day rule does, however, have an exception for any days (up to a 30-day limit) that the individual performed personal services in the U.S. for an employer (who is not related). This exception only applies if that individual either had certain ties with other countries or was physically present in the U.S. for 30 days or less for each year in the 10-year period on the date of expatriation or termination of residency. 

6. There are special rules for long-term residents. 
It's easy to define who is or is not a U.S. citizen, but the term "long-term resident" isn't quite so clear. A long-term resident is a non-U.S. citizen who is a lawful permanent resident of the U.S. in at least eight years during the 15-year period before that person's residency ends. A "lawful permanent resident" means a green card holder. However, a person is not treated as a lawful permanent resident for purposes of this eight-year test in a year in which that person is treated as a resident of a foreign country under a tax treaty, and does not waive the treaty benefits applicable to the residents of that country. Caution: holding a green card for even one day during a year will taint the whole year. 

7. There's an exit tax for expatriations on or after June 17, 2008. 
The Heroes Earnings Assistance and Relief Tax Act of 2008 (generally known as the Heroes Act) changed the method of taxation for those who became expatriates on or after June 17, 2008, adding even more complexity and usually higher U.S. taxes. If you are a U.S. citizen or long-term resident who expatriates on or after June 17, 2008, you will be deemed (for tax purposes) to have sold all of your worldwide property for its fair market value the day before you leave the U.S.! All that gain is subject to U.S. tax at the capital gains rate. Plus, all your gain is taken into account without regard to any ameliorative tax provisions in the Internal Revenue Code. 
Put differently, you get all of the bad parts of the tax code, and none of the good. That would include, for example, the inability to benefit from the $250,000 per person ($500,000 per couple) exclusion from gain on a principal residence (Section 121 of the Internal Revenue Code) and many other rules. The exit tax is like an estate tax, in the sense that everything that would be part of your estate will be subject to income tax on unrealized gains as of the day before you expatriate, as if you sold all your assets the day before leaving. In effect this is Congress' way of making sure your assets don't escape the estate tax entirely through expatriation. 

"Should I Stay or Should I Go?"

Need Advise on Expatriation? 

 

Contact the Tax Lawyers at 

Marini & Associates, P.A.   

for a FREE Tax Consultation contact us at:

www.TaxAid.com or www.OVDPLaw.com or

Toll Free at 888-8TaxAid (888) 882-9243

  

Section 965 Transition Tax Can Be Included In Offers In Compromise

• Did your CFC have a lot post 1986 Retained Earnings at the end 2017, which caused it to have a transition tax under IRC section 965? 
• Is your CFCs business not doing so well since 2017, as a result of Covid and other economic factors? 

Consider Making An Offer In Compromise 

For IRC Section 965 Transition Tax.

The IRS recently released guidance on including transition tax liabilities under IRC Section 965 for settlement under its offer in compromise program. Section 7122 of the Internal Revenue Code authorizes the settlement of Title 26 liabilities, penalties, and interest. Since the transition tax on untaxed foreign earnings is a Title 26 tax, it can be included in a settlement offer.

Under The New Guidelines of IRM 5.8.4.23.7 (09-24-2020)
“IRC §965 (Transition Tax) Liabilities,” if the §965 Liability
Has Been Assessed and No Election Was Made
Under IRC §965(H), the Tax May Be Included in the Offer.

Under the right factual circumstances, an Offer In Compromise may provide an opportunity for settling transition taxes under Section 965. 

Since an Offer In Compromise based on Doubt As To Collectability will only be accepted where a taxpayer does not have the ability to pay the tax, you must examine the taxpayer’s financial situation, not just their CFC's financial situation, and consider a taxpayer’s assets, the equity and liability of those assets, the gross income and expenses of that taxpayer. This inquiry includes the valuation of any businesses, business assets, including any foreign businesses or foreign assets of the taxpayer. 

As with any Offer in Compromise, the taxpayer must be compliant with their all of their tax filings including FBARs, FACTA requirements, payroll, return filing requirements, and any estimated payments that may be due. 

Furthermore, since the Offer in Compromise program only settles Title 26 tax, penalties, and interest, you must consider the timing of the offer in compromise settlement proposal and whether the taxpayer is liable for any FBAR penalties or restitution, as neither FBAR penalties nor restitution can be settled as part of an offer in compromise. 

For tax years involving civil tax liabilities and criminal restitution, offers can include the civil tax liabilities, but not the restitution-based assessment. If there are restitution assessments, FBAR penalties, or other non-title 26  liabilities, it  is  usually in the taxpayer’s best interest to pay off or otherwise resolve those liabilities through installment payment arrangements before submitting an offer in compromise to settle Title 26 liabilities since the payment of the other liabilities will decrease the taxpayer’s available equity in assets and potentially increase a taxpayer’s allowable expenses such that a lower settlement amount may be obtained for the taxpayer through the offer in compromise program.

Have IRS Tax Problems?

 Contact the Tax Lawyers at
Marini & Associates, P.A. 

Sources

Fla Bar Tax Section Bulletin - Fall 2020

Treasury Report Reflects A Record 6,047 Individuals Expatriated During the 1st 3 Quarters of 2020!

The Treasury Department published the names of individuals who renounced their U.S. citizenship or terminated their long-term U.S. residency “Expatriated” during the third quarter of 2020. The latest U.S. Department of the Treasury Report reflects that a record 6,047 individuals expatriated during the first three quarters of 2020. 

Why are some Americans Individuals expatriating?

• Trump Did Not Win the Election.
• The Democrat's Now Control the House & the Senate.
• Obama-Care with its associated additional 3.8% Obama Care Tax make you feel like leaving the country?
• You're so sick of liberal Democrats trying to socialize the United States by taxing wealthy people?
• Or maybe you're a naturalized U.S. citizen or permanent resident who has prospered here, but would now like to move back the old country for retirement or to start a new  venture?

Whatever your motives, just because you leave the United States and renounce your citizenship, don't assume you can leave U.S. taxes (or U.S. tax forms and complexity) behind, particularly if you are financially well-off. 

The increase in expatriation also has caught the attention of the Treasury Inspector General for Tax Administration (TIGTA), which, in a recent report, emphasized that the Internal Revenue Service (IRS) should have controls in place to better enforce U.S. tax and reporting provisions relating to expatriates.

On April 8, 2015, we posted Is it Time to Expatriate, where we discussed that the 2014 list of US expatriates’ shows an increase in the number of Americans who are renouncing their US citizenship or turning in their green card.
The graph to the left is based solely on IRS data and shows the number of published expatriates per year since 1998.

The connection between the list of expatriates and the IRS implies a link to tax policy. 

The U.S. is one of a very small number of countries that tax based on nationality, not residency, leaving Americans living abroad to face double taxation. 

The escalation of offshore penalties over the last 20 years is likely contributing to the increased incidence of expatriation.

In view of the significant uptick in expatriation activity, this Marini & Associates has posted 3 Posts titled So Trump Did Not Win the Election - Is It Time to Expatriate? reviewing the essential elements of expatriation from a tax perspective.

Should I Stay or Should I Go?

Need Advise on Expatriation?

 

Contact the Tax Lawyers at 

Marini & Associates, P.A.   

for a FREE Tax Consultation contact us at:

www.TaxAid.com or www.OVDPLaw.com or

Toll Free at 888-8TaxAid (888) 882-9243