May 21, 2009

Do You Have A Foreign Financial Account?

Do You Have a Foreign Financial Account?

If you have authority over or own a foreign financial account, including a brokerage account, unit trust, mutual fund, bank account or other types of financial accounts, then you may be required to report the account yearly to the IRS. Under the Bank Secrecy Act, each United States person must file a Report of Foreign Bank and Financial Accounts (FBAR), if

1. The value of the account exceeds $10,000 at any time during the calendar year, and

2. The person has financial interest in, signature authority (or other authority that is comparable to signature authority) over one or more accounts in a foreign country.

The FBAR is a tool to help the United States government identify persons who may be using foreign financial accounts to circumvent United States law. Investigators use FBARs to help identify or trace funds used for illicit purposes or to identify unreported income maintained or generated abroad.

A United States person is not prohibited from owning foreign accounts. The FBAR is required because foreign financial institutions may not be subject to the same reporting requirements as domestic financial institutions.

Definition of Terms

What is an FBAR?

Who must file an FBAR?

When is the FBAR due?

Where are FBAR forms available?

What are the exceptions to the FBAR filing requirement?

How do foreign account holders report their accounts to the IRS?

Where do account holders file the FBAR?

How long should account holders retain records of the foreign accounts?

What is a United States person?

Would a foreign athlete or entertainer that occasionally visits the U.S. in order to compete or perform in an event, be considered a United States person for FBAR purposes?

What is a foreign country?

What is a financial account?

Does more than one form need to be filed for a husband and wife owning a joint account?

What constitutes signature or other authority over an account?

What does “maximum value of account” mean (for Box 15 on the FBAR)?

Is an FBAR required if the account generates neither interest nor dividend income?

How does an FBAR filer amend a previously filed FBAR?

What is the statute of limitations for assessing civil penalties for violations of the FBAR requirements?

What happens if an account holder is required to file an FBAR and fails to do so?

An American citizen, X, gives a person who is a citizen or resident of the U.S. power of attorney to X’s Canadian bank accounts. X files an FBAR form annually. Does the power of attorney also need to file an FBAR?

A fiduciary who is a U.S. person has control as a trustee for an IRA with a foreign account. Should an FBAR be filed?

Does the term “other authority over a financial account” mean that a person, who has the power to direct how an account is invested, but who cannot make disbursements to the accounts, has to file an FBAR?

Must a U.S. person file an FBAR on a Eurodollar account in the Cayman Islands?

A N.Y. corporation owns a foreign company that has foreign accounts. The corporation will file an FBAR for the foreign company’s accounts. Do the primary owners of the U.S. Company also have to file?

A company has over 25 foreign accounts. What should they enter in Part ll of the FBAR?

A person is a non-resident alien and only visits the United States to manage his personal interests, such as rental property. Does that person have to file an FBAR?

Reporting and Filing Information

A person who holds a foreign account may have a reporting obligation even though the account produces no taxable income. Checking the appropriate block on Form 1040 Schedule B, and filing Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts, satisfies the account holder’s reporting obligation.

A foreign account holder must mail the Form TD F 90-22.1 on or before June 30 of the following year to:

U.S. Department of the Treasury
P.O. Box 32621
Detroit, MI 48232-0621.

The FBAR is not to be filed with the filer’s Federal income tax return.

The granting, by IRS, of an extension to file Federal income tax returns does not extend the due date for filing an FBAR. There is no extension available for filing the FBAR.

Account holders who do not comply with the FBAR reporting requirements may be subject to civil penalties, criminal penalties, or both.

Exceptions to the Reporting Requirement

There are exceptions to the reporting requirement. These exceptions include:

1. Accounts in U.S. military banking facilities operated by a United States financial institution to serve U.S. Government installations abroad are not considered to be accounts in a foreign country for purposes of the reporting requirement.

2. An officer or employee of a bank that is subject to the supervision of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Office of Thrift Supervision, or the Federal Deposit Insurance Corporation, is not required to report having signature or other authority over a foreign account if the officer or employee has no personal interest in the account.

3. An officer or employee of a domestic corporation whose equity securities are listed on a national securities exchange or which has assets exceeding $10 million and 500 or more shareholders of record, is not required to report having signature or other authority over a foreign account if the person has no personal financial interest in the account, and the officer or employee has been advised in writing by the chief financial officer of the corporation that the corporation has filed a current report that includes the foreign account.

The IRS has launched a "tax amnesty" for those who turn themselves in within the next 5 months. It is critical that clients be made aware of this program, and be counseled on whether it is in their best interest to participate. The issues are complex, and require a balancing of a number of financial, tax and criminal considerations including the non-applicability of the federal authorized tax practitioner privilege. The "amnesty" will expire on September 22, 2009, so time is of the essence. Current year FBARs are due June 30th.

May 19, 2009

U.S. Tax Court Announces e-Filing Pilot

The United States Tax Court will begin a pilot eFiling program through Practitioner Access and Petitioner Access on May 7, 2009.

The pilot will be restricted to petitioners and practitioners in good standing with the Court who have registered for eAccess, agreed to its Terms of Use, and consented to eService. The pilot applies to all cases first calendared for trial or hearing after August 31, 2009.

For example, if you have registered for Practitioner Access, consented to eService, and your case is first calendared for trial or hearing on September 21, 2009, you may eFile in that case during the pilot, but not if the case was set for hearing or trial before September 1, 2009. You can also participate in the pilot if your case has not been set for trial. If your case is set for trial or hearing before September 1, 2009, you may not eFile in that case during the pilot.

Please note that eFiling in a particular case can be commenced only after the petition has been filed with the Tax Court in that case. All petitions must be submitted to the Court in paper form.

May 15, 2009

Tax Scams

The Internal Revenue Service issued its 2009 “dirty dozen” list of tax scams, including schemes involving phishing, hiding income offshore and false claims for refunds.

Tax schemes are illegal and can lead to problems for both scam artists and taxpayers who risk significant penalties, interest and possible criminal prosecution.

The IRS urges taxpayers to avoid these common schemes:

Filing False or Misleading Forms

The IRS is seeing scam artists file false or misleading returns to claim refunds that they are not entitled to. Frivolous information returns, such as Form 1099-Original Issue Discount (OID), claiming false withholding credits are used to legitimize erroneous refund claims. The new scam has evolved from an earlier phony argument that a “strawman” bank account has been created for each citizen. Under this scheme, taxpayers fabricate an information return, arguing they used their “strawman” account to pay for goods and services and falsely claim the corresponding amount as withholding as a way to seek a tax refund.

False Claims for Refund and Requests for Abatement

This scam involves a request for abatement of previously assessed tax using Form 843, Claim for Refund and Request for Abatement. Many individuals who try this have not previously filed tax returns. The tax they are trying to have abated has been assessed by the IRS through the Substitute for Return Program. The filer uses Form 843 to list reasons for the request. Often, one of the reasons given is "Failed to properly compute and/or calculate Section 83-Property Transferred in Connection with Performance of Service."

Hiding Income Offshore

The IRS aggressively pursues taxpayers and promoters involved in abusive offshore transactions. Taxpayers have tried to avoid or evade U.S. income tax by hiding income in offshore banks, brokerage accounts or through other entities. Recently, the IRS provided guidance to auditors on how to deal with those hiding income offshore in undisclosed accounts. The IRS draws a clear line between taxpayers with offshore accounts who voluntarily come forward and those who fail to come forward.

Taxpayers also evade taxes by using offshore debit cards, credit cards, wire transfers, foreign trusts, employee-leasing schemes, private annuities or life insurance plans. The IRS has also identified abusive offshore schemes including those that involve use of electronic funds transfer and payment systems, offshore business merchant accounts and private banking relationships.

Return Preparer Fraud

Dishonest return preparers can cause many headaches for taxpayers who fall victim to their ploys. Such preparers derive financial gain by skimming a portion of their clients’ refunds and charging inflated fees for return preparation services. They attract new clients by promising large refunds. Taxpayers should choose carefully when hiring a tax preparer. As the saying goes, if it sounds too good to be true, it probably is. No matter who prepares the return, the taxpayer is ultimately responsible for its accuracy. Since 2002, the courts have issued injunctions ordering dozens of individuals to cease preparing returns, and the Department of Justice has filed complaints against dozens of others, which are pending in court.

Phishing

Phishing is a tactic used by Internet-based scam artists to trick unsuspecting victims into revealing personal or financial information. The criminals use the information to steal the victim’s identity, access bank accounts, run up credit card charges or apply for loans in the victim’s name.

Phishing scams often take the form of an e-mail that appears to come from a legitimate source, including the IRS. The IRS never initiates unsolicited e-mail contact with taxpayers about their tax issues. Taxpayers who receive unsolicited e-mails that claim to be from the IRS can forward the message to phishing@irs.gov. Further instructions are available at IRS.gov. To date, taxpayers have forwarded scam e-mails reflecting thousands of confirmed IRS phishing sites. If you believe you have been the target of an identity thief, information is available at IRS.gov.

Zero Wages

Filing a phony wage- or income-related information return to replace a legitimate information return has been used as an illegal method to lower the amount of taxes owed. Typically, a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 is used as a way to improperly reduce taxable income to zero. The taxpayer also may submit a statement rebutting wages and taxes reported by a payer to the IRS. Sometimes fraudsters even include an explanation on their Form 4852 that cites statutory language on the definition of wages or may include some reference to a paying company that refuses to issue a corrected Form W-2 for fear of IRS retaliation. Taxpayers should resist any temptation to participate in any of the variations of this scheme.

Abuse of Charitable Organizations and Deductions

The IRS continues to observe the misuse of tax-exempt organizations. Abuse includes arrangements to improperly shield income or assets from taxation and attempts by donors to maintain control over donated assets or income from donated property. The IRS also continues to investigate various schemes involving the donation of non-cash assets, including easements on property, closely-held corporate stock and real property. Often, the donations are highly overvalued or the organization receiving the donation promises that the donor can purchase the items back at a later date at a price the donor sets. The Pension Protection Act of 2006 imposed increased penalties for inaccurate appraisals and new definitions of qualified appraisals and qualified appraisers for taxpayers claiming charitable contributions.

Frivolous Arguments

Promoters of frivolous schemes encourage people to make unreasonable and unfounded claims to avoid paying the taxes they owe. The IRS has a list of frivolous legal positions that taxpayers should stay away from. Taxpayers who file a tax return or make a submission based on one of the positions on the list are subject to a $5,000 penalty. More information is available on IRS.gov.

Disguised Corporate Ownership

Some taxpayers form corporations and other entities in certain states for the primary purpose of disguising the ownership of a business or financial activity. Such entities can be used to facilitate underreporting of income, fictitious deductions, non-filing of tax returns, participating in listed transactions, money laundering, financial crimes, and even terrorist financing. The IRS is working with state authorities to identify these entities and to bring the owners of these entities into compliance.

Misuse of Trusts

For years, unscrupulous promoters have urged taxpayers to transfer assets into trusts. While there are many legitimate, valid uses of trusts in tax and estate planning, some promoted transactions promise reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes. Such trusts rarely deliver the promised tax benefits and are being used primarily as a means to avoid income tax liability and hide assets from creditors, including the IRS.

The IRS has recently seen an increase in the improper use of private annuity trusts and foreign trusts to divert income and deduct personal expenses. As with other arrangements, taxpayers should seek the advice of a trusted professional before entering into a trust arrangement.

Abusive Retirement Plans

The IRS continues to uncover abuses in retirement plan arrangements, including Roth Individual Retirement Arrangements (IRAs). The IRS is looking for transactions that taxpayers are using to avoid the limitations on contributions to IRAs as well as transactions that are not properly reported as early distributions. Taxpayers should be wary of advisers who encourage them to shift appreciated assets into IRAs or companies owned by their IRAs at less than fair market value to circumvent annual contribution limits. Other variations have included the use of limited liability companies to engage in activity which is considered prohibited.

Fuel Tax Credit Scams

The IRS is receiving claims for the fuel tax credit that are unreasonable. Some taxpayers, such as farmers who use fuel for off-highway business purposes, may be eligible for the fuel tax credit. But some individuals are claiming the tax credit for nontaxable uses of fuel when their occupation or income level makes the claim unreasonable. Fraud involving the fuel tax credit is considered a frivolous tax claim, potentially subjecting those who improperly claim the credit to a $5,000 penalty.

How to Report Suspected Tax Fraud Activity

Suspected tax fraud can be reported to the IRS using Form 3949-A, Information Referral. Form 3949-A is available for download from the IRS Web site at IRS.gov. The completed form or a letter detailing the alleged fraudulent activity should be addressed to the Internal Revenue Service, Fresno, CA 93888. The mailing should include specific information about who is being reported, the activity being reported, how the activity became known, when the alleged violation took place, the amount of money involved and any other information that might be helpful in an investigation. The person filing the report is not required to self-identify, although it is helpful to do so. The identity of the person filing the report can be kept confidential.

May 11, 2009

Your Rights As A Taxpayer

The IRS publishes a thorough explanation of your rights as a taxpayer.

You have rights as a taxpayer when dealing with the IRS. Whether you file a Form 1040 or a complicated corporate return, you will benefit from knowing your rights as a taxpayer and being familiar with the IRS' obligations to protect them.

The Taxpayer Advocate Service (TAS) is an IRS program that provides an independent system to assure that tax problems, which have not been resolved through normal channels, are promptly and fairly handled.

What should you do if you receive a notice from the IRS?

You have rights to representation - learn more about granting power of attorney.

The IRS accepts most taxpayer's returns as filed. If it inquires about your return or select it for examination, it does not suggest that you are dishonest. The inquiry or examination may or may not result in more tax. Learn about your rights during the examination process and get information about how audits are conducted.

It is your right to appeal any action taken by the IRS to change your account.

Learn about the collection process IRS may follow to collect overdue taxes, including a summary of your rights and other important information about the collection process.

For further tax help, call former IRS attorney Mitchell A. Port at (310) 559-5259.

May 5, 2009

Offers In Compromise For California Businesses

A request for an Offer in Compromise from the IRS or the California Franchise Tax Board can also be used by businesses to resolve outstanding corporate income and payroll taxes.

Similar to an Offer in Compromise for an individual, the offer for a business is computed based upon the business’s current assets and financial disclosure statement. The IRS uses the company’s reasonable collection potential to determine the Offer amount. The reasonable collection potential for a business is computed in a manner similar to that of an individual. However, unlike individual expenses, the IRS does not have “national standards” for business expenses. In most circumstances the IRS will allow all ordinary and necessary expenses of the business.

The IRS’s recent revisions to its Internal Revenue Manual make these types of Offers more difficult.

Offers submitted by an in-business taxpayer with payroll/trust fund recovery penalty liabilities will not be investigated unless the trust fund portion of the taxes are paid, the trust fund recovery penalties are assessed against all responsible persons, or the trust fund package has been forwarded for assessment.

To submit an Offer for an ongoing business, all of the responsible persons must either agree to be assessed with the trust fund recovery penalties, or pay the underlying trust fund amount.

Offers submitted by active businesses with trust fund liabilities no longer require that the Offer amount include the reasonable collection potential of both the entity and all responsible persons. Instead, the ongoing business is only required to offer an amount reflective of its reasonable collection potential.

This policy is likely due to the IRS’s renewed focus on the collection of the trust fund liabilities from all responsible persons, despite an Offer at the entity level.

The IRS will continue to collect the trust fund portion of the liability from the responsible persons despite the entity’s successful Offer; most responsible persons would not be motivated to file an Offer on behalf of the company due to their continued liability. The IRS’s interest in collecting from all responsible persons diminishes some of the benefits of an Offer for an ongoing business taxpayer.

These policies leave most responsible persons in a precarious situation because the Offer for the business will not alleviate their personal liabilities. Unless all of the responsible persons independently qualify for a personal Offer in Compromise, this might not be the best solution for the business. However, it may be the only solution available for the entity to remain in business.

For tax help on your unpaid payroll or income tax, call Mitchell A. Port at (310) 559-5259.

May 1, 2009

Standards of Conduct for Attorneys, CPAs, EAs and Enrolled Actuaries

Standards of Conduct for Certified Public Accountants, Attorneys, Enrolled Actuaries and Enrolled Agents are available at the IRS website. Circular 230 contains regulations governing the practice of attorneys, certified public accountants, enrolled agents, enrolled actuaries, and appraisers before the Internal Revenue Service.