Estate Responsible for Penalties For Decedent's Failure to Report Foreign Trust

The Internal Revenue Service Office of Chief Counsel, in a chief counsel advice memorandum released Feb. 24, said an estate is responsible for Section 6677 penalties for failure to file information returns regarding foreign trusts for tax years ending prior to the decedent's death.

The estate is responsible for “initial” penalties asserted against the decedent where Forms 3250, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, and 3250-A, Annual Information Return of Foreign Trust With a U.S. Owner, were not timely filed with respect to a foreign grantor trust established by the decedent, the office said in CCA201208028

FATCA Clears Way for Mexican Authorities to Investigate U.S. Accounts

The Mexican Tax Administration Service (SAT) can access information on thousands of U.S. bank accounts held by Mexican citizens “automatically” under a new collaboration with the IRS.

The agreement is part of a reciprocity mechanism between the U.S. and Mexican tax systems stemming from the Foreign Account Tax Compliance Act (FATCA), through which IRS can access information on U.S. citizens holding taxable bank accounts or financial assets in Mexico.

FATCA also applies to foreign financial assets or offshore accounts held by U.S. citizens around the world.

As SAT authorities have increased information-sharing with IRS, the IRS is doing the same for SAT, according to leading accountants in Mexico City.

“This comes as a reciprocity response from the U.S. to allow the SAT to look into large bank accounts held by Mexicans in the U.S. to ensure they are paying the correct tax, or the tax they claim to be paying,” said Carlos Martinez, PricewaterhouseCoopers LLP senior accountant in Mexico City.

Collaborating on banking information should help lower Mexico's tax evasion rate, which currently stands at 23.3% or 316 billion pesos ($24.5 billion) a year—equivalent to 2.62 per cent of its GDP.

In the past, Mexican tax officials interested in a particular individual's account had to ask IRS to provide it with information—a process that sometimes took significant time.

This is in line with what the SAT is already doing for IRS, observers said.

Martinez said SAT is interested in catching big Mexican tax evaders holding millions of U.S. dollars in accounts across the border.

Under Mexican law, citizens holding U.S. accounts must pay tax on interest and foreign exchange gains.

Depending on the amount to be taxed, the rate is gradual, capped at 30%.

While Mexicans can pay some tax under special double-tax agreements in the U.S. or in other countries, most must be paid in Mexico, Roja noted.

Also, under Mexican law, Mexican businessmen operating businesses abroad must report their earnings to SAT.

Roja said the newly strengthened collaboration between IRS and SAT will give the latter a lot more flexibility in policing Mexicans who flout their tax obligations.

 

IRS determines sourcing of credit card interest and ATM fees received from outside the U.S.

In Chief Counsel Advice (CCA), IRS has determined the sourcing of credit card interest and fees received by a financial services firm from U.S. citizen and resident alien customers living outside the U.S. and from ATM fees earned by the firm in connection with customer transactions made on third-party ATMs located outside the U.S.

The CCA concluded that the interest and OID income that Taxpayer received from Customers generally should be treated as foreign source income. However, interest and OID income that Taxpayer received from the following groups of Customers should be treated as U.S source income:

·        alien individuals (other than lawful permanent residents) who are treated as U.S. residents under the substantial presence test or first-year election in Code Sec. 7701(b).

·        U.S. citizens and lawful permanent residents who would be treated as U.S. residents under the substantial presence test in Code Sec. 7701(b). While noting that there is a question as to how interest should be sourced if it is paid by a lawful permanent resident who lives outside of the U.S. at the time of payment, the CCA concludes (by analogy to the rules for U.S. citizens) that sourcing of interest payments by such individual should be based on the individual's place of physical residence, determined under the substantial presence test at the time of the interest payment.

·        dual resident taxpayers who make an election under Reg. § 301.7701(b)-7 to be treated as nonresident aliens but who meet the substantial presence test in Code Sec. 7701(b). That is, the CCA concludes that for purposes of Code Sec. 861(a)(1), a dual resident taxpayer's election to be treated as a nonresident alien should be disregarded.

·        Servicemembers who, under the Servicemembers Civil Relief Act (SCRA), are residents of a state or D.C. but are stationed in a U.S. territory pursuant to military orders. Under SCRA, a servicemember retains his jurisdiction of residence, which may be a State, D.C., or a U.S. territory, notwithstanding his presence in or absence from such pursuant to military orders.

·        Beginning in 2009, spouses of servicemembers who, under the Military Spouses Residency Relief Act (MSRRA), are residents of a state or D.C. but are accompanying their servicemember spouses, who are serving pursuant to military orders, to a U.S. territory. Under MSRRA, the same rules as in SCRA apply beginning in 2009 to the spouse of a servicemember if the spouse is present in or absent from any State, D.C., or any U.S. territory solely to be with the servicemember, who is serving in compliance with military orders, and both spouses retain the same residence.

The CCA concluded that it appeared that Taxpayer's income from ATM fees should be treated as U.S. source income. Taxpayer's activities with regard to processing the ATM transactions appeared to have been solely in the nature of personal services—i.e., processing Customer withdrawals of funds made on third-party ATMs. There didn't appear to be any credit risk associated with these transactions since Customers could only withdraw available funds and no overdrawals seemed to have been allowed. Accordingly, the fees were compensation for Taxpayer's processing of the transactions through use of its computers, software, and other equipment located in the U.S. Under Code Sec. 861(a)(3), compensation for labor or personal services performed in the U.S. is treated as income from sources within the U.S.

Chief Counsel Advice 201205007

New Reporitng for Foreign Investors in U.S. Partnerships

Foreign investors are now required to file a special form, Schedule P. It applies to the ownership of any U.S. partnership including a limited liability company.

Now, the 2012 Schedule P (Form 1120-F) is required by a foreign corporation’s ownership of a U.S. partnership. Schedule P also reports the distributive shares of partnership effectively connected income and the foreign corporation’s effectively connected outside tax basis in interest.

Part I is used to identify all partnership interests the foreign corporation directly owns that give rise to distributive share of income or loss that effectively connected with a trade or within the United States of the corporation.

Part II is used to the foreign corporation’s distributive share of ECI and allocable expenses with the total income and expenses reported to it on Schedule K-1 1065), Partner’s Share of Income, Deductions, Credits, etc.

Part III is used to: report the corporation’s outside its directly-held partnership that include ECI in the corporation’s distributive share is apportioned between ECI and non-ECI Regulations section 1.884-1(d)(3) determine the average value treated as asset for interest expense allocation purposes under Regulations .

IRS Has $1 Billion for People Who Have Not Filed a 2008 Income Tax Return

WASHINGTON — Refunds totaling more than $1 billion may be waiting for one million people who did not file a federal income tax return for 2008, the Internal Revenue Service announced today. However, to collect the money, a return for 2008 must be filed with the IRS no later than Tuesday, April 17, 2012.

The IRS estimates that half of these potential 2008 refunds are $637 or more.

For 2008 returns, the window closes on April 17, 2012. The law requires that the return be properly addressed, mailed and postmarked by that date. There is no penalty for filing a late return qualifying for a refund.

If you need help filing your delinquent taxes call (888) 882 9243.

Tax Crimes as a ‘Predicate Offense' for Money Laundering?

The global body that sets standards for combating money laundering and terrorist financing said Thursday that governments should treat tax crimes as a red flag for other types of financial malfeasance, a sign that international cooperation against tax cheats is gaining momentum.

The body, the Financial Action Task Force, said it was expanding its list of “predicate offenses for money laundering” to include Serious Tax Crimes.

The changes reflect a growing movement toward international cooperation to catch tax cheats. Governments have become much less lenient on the subject since the financial crisis began four years ago, with tax havens like Switzerland coming under pressure to cooperate.

On Feb. 8, six countries, including the United States, France, Germany and Britain, announced that they would work together to fight tax evasion in the context of putting the Foreign Account Tax Compliance Act in place, a United States initiative to find hidden accounts overseas.

The focus is not on tax evasion per se, but rather on how ill-gotten gains might be put to use. Officials acknowledged that the definition of tax crimes differed from country to country and that it would be up to national officials to define and act on the information they found.

The most hotly argued topic relating to money laundering is whether laws do - or even should - relate to tax crimes.

The issues revolve around two main areas. First is whether tax offences are a predicate crime within any particular jurisdiction. Many places around the world do not raise income by income tax, for example. And so evasion of income tax cannot be a crime. The second issue that there has long been a basic principle of international law that one country does not enforce the tax laws of another.

In recent years, however, several inter-governmental bodies have sought to create a climate where tax investigations can be conducted across borders and then, by the application of laws relating to, for example, document fraud claim that the issue is not one of tax but of a simple criminal offence.

Notwithstanding the debate on international issues, within any country, the question of whether tax crimes are a predicate offence for the purposes of money laundering laws is a question of the express provision of the counter-money laundering laws, or the interpretation of those laws by the Court. In most countries that have "all crimes" counter-money laundering laws, it is almost certain that tax crimes will fall within the catch-all provisions.

Tax offences fall on the border of what is and is not laundering in that the general principle that money a person lawfully receives cannot be laundered. However, the issue is, in fact, easy to understand. If a person who is liable to pay a 40% marginal rate of income tax receives $100 for work and fails to declare it, then $40 is money "stolen" from the Treasury. Therefore, he does not launder the $100, he launders the $40. It is the tax evaded that is laundered. One complication that makes this difficult to understand is that in order to retain the $40, he actually puts the whole $100 through the laundering process. He has to try to show that he received $100 legitimately, in order to evade payment of $40.

Another complication is that the $40 is said to have been "commingled" with the remaining $60 and it has tainted the otherwise clean money. Therefore under general principles of asset seizure as applied in many countries, anything that is purchased with the $60 may be subject to freezing or forfeiture

Text of FATF's recommendations is at http://www.fatf-gafi.org/document/17/0,3746,en_32250379_32236920_49656209_1_1_1_1,00.html.

Text of a U.S. Treasury Department release on the recommendations is available at http://op.bna.com/dt.nsf/r?Open=emcy-8rjlek.

The President’s 2012 Estate & Gift Revenue Proposals

The Treasury Department has just released the GeneralExplanations of the Administration's Fiscal Year 2013 Revenue Proposals (the "Greenbook"). Attached are the Greenbook proposals to modify the estate and gift tax provisions.

These proposals would: 

• Reduce the unified estate, gift and Generation-Skipping Transfer (GST) exclusion amounts from the current $5,120,000 to $3,500,000 for estate and GST purposes and to $1,000,000 for gift tax purposes (effective 1/1/2013);
• Increase the top tax rate for estate, gift and GST to 45% from the current 35% (effective 1/1/2013);
• Impose a consistency in value requirement for transfer tax and income tax purposes (effective on date of enactment);
• Modify the rules on valuation discounts available under current law by further restricting the use of discounts in family-controlled entities (effective generally for transfers after date of enactment);
• Require a minimum 10 year term for Grantor Retained Annuity Trusts (GRATs) (effective for trusts created after enactment);
• Limiting the duration of the GST exemption (effective generally for trusts created after date of enactment);
• Require coordination of certain income and transfer tax rules applicable to grantor trusts (effective generally for trusts created after date of enactment); and
• Extend the estate tax lien period for estate tax deferral provided under Section 6166.

There still is a 10 month window for estate, gift and GST planning under the existing 2012 rules discussed below.  The current rules can provide significantly better planning opportunities than  either the President's proposals discussed above or the sunset provision discussed below.

Generous new estate and gift tax provisions are available only through the end of this year:

• Temporary two year provisions were enacted as part of the overall extension of the Bush tax cuts.
• Most significant provision was to reunify the estate, gift and generation-skipping tax (GST) exemptions and increase those exemptions to $5,000,000 ($10,000,000 for a married couple) while reducing the top transfer tax rate to 35%.
• The exemptions have been adjusted for inflation for 2012 to $5,120,000 ($10,240,000 for a married couple).
• Previously, the gift tax exemption was only $1,000,000.

Transfer Tax Rules will "sunset" effective December 31, 2012:

• This will happen automatically if Congress takes "no action" (a skill that they have honed into a fine art).

On January 1, 2013 the exemptions will revert to $1,000,000 and the top estate, gift and GST rate will go back up to 55%.

Please contact Ronald Marini or Robert Blumenfeld at (305) 374-4424 for further assistance.