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Navigating the Global Tax Landscape in 2024 – Third Quarter Roundup

Navigating the Global Tax Landscape in 2024 – Third Quarter Roundup

by | Oct 10, 2024 | Taxes, 2024, Compliance, International, U.S.

Navigating the Global Tax Landscape in 2024 – Third Quarter Roundup

Jack Brister s p 500

Jack Brister

Founder, International Wealth Tax Advisors

Jack Brister, Founder of International Wealth Tax Advisors, is a noted international tax expert, with over 25 years of experience. Jack specializes in U.S. tax planning and compliance for non-U.S. families with international wealth and asset protection structures. Jack is a frequent featured speaker at numerous international financial conferences and has been named a Citywealth Top 100 U.S. Wealth Advisor.

Contact IWTA

To schedule an introductory phone conference with IWTA  founder Jack Brister simply click here. Email IWTA at bloginquiries@iwtas.com Or call the IWTA New York City office at 212-256-1142

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Navigating the Global Tax Landscape in 2024 – Third Quarter Roundup

It’s been a busy year for global tax issues, between the Global Minimum Tax, worldwide calls for a wealth tax, and significant judicial decisions in the United States. Navigating these complex changes requires a keen understanding of the evolving legal and regulatory environment.

OECD Initiatives Move Forward

The year led off with discussions around the Global Minimum Tax, specifically, the continued rollout under Pillar Two of the Base Erosion and Profit Shifting (BEPS) initiative. The GMT, aimed at curbing profit shifting and ensuring a fairer tax regime, is reshaping international tax strategies. Many countries are adjusting their tax laws to comply, aiming to ensure multinational enterprises pay at least a 15% tax rate on profits. 

 The tax has been agreed to by 140 countries—but not the United States. Japan and South Korea have already enacted domestic Pillar Two legislation, and other countries, including the UK, Switzerland, Ireland, and Germany, have released draft legislation or publicly announced their plans to introduce legislation based on the OECD Model Rules. 

 The U.S. hasn’t signed on to the initiative yet—and is missing out on tax revenue as other countries opt-in. Though U.S. domestic tax regulations haven’t changed, American companies face potential impacts from the agreement. For example, U.S companies operating in Switzerland may need to pay a 15% tax in Switzerland, regardless of existing U.S. tax structures. 

 While the U.S.Treasury Department actively participates in discussions and contributes to technical aspects of the implementation, the next resident of the White House will have an impact on what the United States does next. Democratic Presidential candidate Kamala Haris has proposed increasing the corporate tax rate to 28% to boost revenue if she’s elected president, which raises questions about changes to the corporate tax base and the future of the OECD’s global tax deal.

 The United Nations Weighs In

 G20 leaders are also calling for a global tax on billionaires. And the United Nations is answering the call. As ministers from several countries have suggested a 2% tax for the global fight against poverty, inequality and climate change, the UN General Assembly started negotiations on a new fairer global tax architecture. 

 In the United Nations Framework Convention on International Tax Cooperation, the international organization seeks a way to better coordinate international tax policy, and to reform what they view as a flawed tax system, riddled with loopholes that permit corporations and wealthy individuals to avoid paying taxes. The convention has already met twice, determining the parameters that will guide the negotiation. Cross-border services were prioritized. The final draft of the parameters will go to a vote at the UN General Assembly near year-end.

 U.S. Court Cases Question Wealth Tax Rules

 While the rest of the world is looking to increase wealth taxes, pivotal court cases in the United States are setting new precedents that could have far-reaching implications for wealth management and tax planning. Moore v. United States involved whether the government could tax a company’s owners on income that is earned by the company, but that has not actually been distributed to those owners. The Tax Cuts and Jobs Act (TCJA)  imposed a one-time tax on certain investors in foreign corporations that could offset lost revenue due to the broader corporate tax cuts contained in the TCJA.

 The high court rejected the Moores’ challenge that the tax was a one-time federal tax, and that it did not violate the Constitution because it was a tax on income, which is permitted under the Sixteenth Amendment. The decision affirmed that the government could tax unrealized gains, even if the income had not been distributed to the shareholders, thereby expanding the scope of taxable income and setting a precedent for future taxation of unrealized gains.

 While the ruling upheld the government’s ability to impose taxes on income that has not been directly received by the taxpayer, the opinion by Justice Brett Kavanaugh contained information about the ability to impose a wealth tax. In a footnote Kavanaugh says that his opinion does not resolve the question of whether Congress could impose a wealth tax and also suggests that certain wealth taxes could be unconstitutional.

 The U.S. Presidential Election: Tax Cuts or Hikes Hang in the Balance

 Heading into the end of the year, much attention will be paid to the U.S. presidential election. Besides evaluating each candidate’s tax policies, there is the pressing issue of the expiring tax breaks from the Tax Cuts and Jobs Act, as one estimate shows that over 60% of taxpayers could see higher taxes in 2026 if the provisions are not extended. 

 The fourth quarter of 2024 promises to be an interesting turn of tax and other financial events, as global policies shift, the U.S. presidential election takes place, foreign wars continue to escalate, and businesses grapple with integrating AI technology and an untethered workforce. Watch this space for breaking U.S and international tax news as it develops.

 IWTA Provides Guidance and Know-How

 Jack Brister and his capable team know U.S. and international tax statutes inside and out. We’re here for a consultation, an evaluation and as a trusted advisor and accounting partner. Whether you call Detroit, Dublin or Dubai your home, if you have investments, business or residences in the USA, we’re here to help. 

 

IRS: Partial Penalty Relief Still Available for 2019 and 2020 Returns, But it Depends…

IRS: Partial Penalty Relief Still Available for 2019 and 2020 Returns, But it Depends…

by | Oct 12, 2022 | Taxes, 2022, Compliance, U.S.

IRS: Partial Penalty Relief Still Available for 2019 and 2020 Returns, But it Depends…

Jack Brister s p 500

Jack Brister

Founder, International Wealth Tax Advisors

Jack Brister, Founder of International Wealth Tax Advisors, is a noted international tax expert, with over 25 years of experience. Jack specializes in U.S. tax planning and compliance for non-U.S. families with international wealth and asset protection structures. Jack is a frequent featured speaker at numerous international financial conferences and has been named a Citywealth Top 100 U.S. Wealth Advisor.

Contact IWTA

To schedule an introductory phone conference with IWTA  founder Jack Brister simply click here. Email IWTA at bloginquiries@iwtas.com Or call the IWTA New York City office at 212-256-1142

IRS: Partial Penalty Relief Still Available for 2019 and 2020 Returns, But it Depends…

 

Amidst the upheaval of the COVID-19 pandemic, some U.S. taxpayers were unable to file their 2019 or 2020 income tax returns within the IRS’ filing deadlines The Internal Revenue Service, in a show of understanding, fully waived penalties for individual taxpayers and businesses who filed certain late returns by September 30, 2022. Although the deadline has recently passed  — and the IRS is not extending it — taxpayers who file late 2019 or 2020 returns may nonetheless be eligible for partial penalty relief, according to the IRS. According to the IRS, the agency will calculate failure to file penalties based on an October 1st start date, not the date that a taxpayer’s returns were originally due. This means that taxpayers who missed the September 30th should nonetheless file their delinquent returns as early as possible. 

IRS Extends Provisional Grace

On August 24, the IRS announced that it would provide automatic, broad-based penalty relief for taxpayers filing several different kinds of tax and information returns, including Form 1040, U.S. Individual Income Tax Return; Form 1041, U.S. Income Tax Return for Estates and Trusts; and Form 1120, U.S. Corporation Income Tax Return (Notice 2022-36).

The relief also applies to taxpayers filing certain international information returns, including

Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts; Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner (Under section 6048(b)).

The IRS’ relief exempts eligible taxpayers from paying a failure-to-file penalty, which is a 5 percent penalty applied monthly, up to 25 percent of the unpaid tax when a federal income tax return is filed late, according to the IRS.

Importantly, the relief did not apply to situations where a fraudulent return was filed, or where the penalties were part of an accepted offer in compromise, a closing agreement, or were finally determined by a court.

Since the relief is automatic, taxpayers simply had to file their late 2019 or 2020 income tax returns on or before September 30, 2022. Taxpayers who had already paid their penalties received those back in the form of refunds or credits.

Tax Industry Seeks Penalty Forgiveness Extensions

After the IRS made its announcement, some lawmakers and accounting industry stakeholders asked the IRS to extend its deadline.

A group of Republican lawmakers wrote the IRS and requested an extension until mid-to-late November, noting that the five week period between August 24 and September 30 might be insufficient for taxpayers who need to gather information and supporting documents.

The American Institute of CPAs (AICPA) asked the IRS to extend the deadline to December 31, 2022, due to concerns that the timeline would overburden practitioners and might be too short for taxpayers living abroad.

“Given the complex facts often associated with international information reporting and that many affected taxpayers live abroad, the September 30 deadline is unrealistic and will fail to prompt a critical mass of impacted taxpayers to avail themselves of the benefits of the Notice,” said the AICPA.

The AICPA followed up with another letter asking the IRS to extend penalty relief to several international forms, including Form 8288, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests; Form 8938, Statement of Foreign Financial Assets; and FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR)

Partial Penalty Relief Still Available

The IRS declined to extend the filing period or expand relief to the forms listed by the AICPA. In a statement, IRS Commissioner Chuck Rettig said the IRS understood the concerns of taxpayers and practitioners, but needed to keep the September 30 deadline so it can prepare for the upcoming 2023 tax filing season.

However, taxpayers who missed the September 30 deadline may still receive partial penalty relief for the returns listed in Notice 2022-36. In the same statement, the IRS explained that taxpayers who file for the first few months after September 30 will be eligible for partial relief.  

According to the IRS, failure to file penalties for eligible returns filed after the deadline will start accruing on October 1, 2022, not the return’s original due date. However, failure to pay penalties and interest will accrue based on the return’s original due date.

 

Post Sep 30, 2022 Options

Taxpayers who missed the September 30 filing deadline for returns covered by Notice 2022-36 should immediately engage the help of a trusted tax advisor to file their returns as quickly as possible and take advantage of the IRS’ partial penalty relief. For taxpayers whose returns are not listed in the IRS’ notice, options for penalty relief may be more limited; counsel from a tax professional will be necessary to determine the proper course of action. 

IRS New JSEIT Unit Will Use Crowdsourcing, Cooperative Intra-Agency Intelligence and Media Alerts to Quash Emerging Tax Fraud Schemes

IRS New JSEIT Unit Will Use Crowdsourcing, Cooperative Intra-Agency Intelligence and Media Alerts to Quash Emerging Tax Fraud Schemes

by | Oct 3, 2022 | Compliance, 2022

IRS New JSEIT Unit Will Use Crowdsourcing, Cooperative Intra-Agency Intelligence and Media Alerts to Quash Emerging Tax Fraud Schemes

Jack Brister s p 500

Jack Brister

Founder, International Wealth Tax Advisors

Jack Brister, Founder of International Wealth Tax Advisors, is a noted international tax expert, with over 25 years of experience. Jack specializes in U.S. tax planning and compliance for non-U.S. families with international wealth and asset protection structures. Jack is a frequent featured speaker at numerous international financial conferences and has been named a Citywealth Top 100 U.S. Wealth Advisor.

Contact IWTA

To schedule an introductory phone conference with IWTA  founder Jack Brister simply click here. Email IWTA at bloginquiries@iwtas.com Or call the IWTA New York City office at 212-256-1142

IRS New JSEIT Unit Will Use Crowdsourcing, Cooperative Inter-Agency Intelligence and Media Alerts to Quash Emerging Tax Fraud Schemes

 

The Internal Revenue Service is upping its game with a newly formed team to identify and quickly address emerging tax compliance issues. 

Announced in June, the Joint Strategic Emerging Issues Team, or JSEIT, combines expertise from units across the agency, including Criminal Investigation, Tax Exempt/Government Entities, Large Business & International, and Small Business/ Self Employed.

JSEIT’s goal is to act before a tax scheme becomes a widespread issue. Acting as a conduit between taxpayers with compliance issues and the relevant IRS division, JSEIT hopes to provide early communication to prevent abusive fraud. Any transactions that have already been identified as abusive by the IRS will not be in focus. 

So how will JSEIT find these issues? According to the Agency, the group does not have a planned agenda, but instead will rely on communications from the public, from their peers at the agency and by combing through social media posts for potential issues. Their main goal is to quickly identify emerging issues and collaborate with all relevant teams to best address issues of noncompliance. An example would be a question on a scheme that an IRS official receives at a speaking engagement.

The Dirty Dozen

Every year the IRS compiles a list of 12 common scams that taxpayers may encounter, called the “Dirty Dozen.” As many of these schemes peak as returns during filing season, with the help of JSEIT, the Agency will prioritize those that are easily replicable, with the intention to alert the public and try to stop the issue before it becomes prevalent, such as those on the Dirty Dozen. 

Micro captive-insurance companies, (captive insurance companies operating with annual gross premiums up to 2.2 million) are an example of widespread tax abuse that the IRS is looking to shut down. The taxpayer/tax-paying entity forms a company to self insure; providing coverage in exchange for a tax-deductible premium. These captive insurance companies can then elect to be taxed only on the insurance premiums received. However, the company insured by the policies can still deduct the amount of premiums it pays as an ordinary business expense under IRC Sec. 162. Due to these attractive tax benefits as well as potential for tax evasion, the IRS identified these as “transactions of interest” in 2016, resulting in audits and Tax Court decisions that ruled for the IRS.

Other potentially abusive schemes listed on the 2022 IRS report included pandemic-related scams, monetized installment sales and use of charitable remainder annuity trusts.

JSEIT’s agenda is to promote voluntary compliance. Tax professionals and taxpayers should remain vigilant, as schemes can be found in emails, on social media platforms and through online advertisements. It is vital to keep abreast of these trends and changes and seek the advice of a trusted tax advisor with international expertise to help prevent unintended tax crimes and penalties.

 

TIGTA Highlights the IRS’ FATCA Enforcement Woes

TIGTA Highlights the IRS’ FATCA Enforcement Woes

by | Jul 13, 2022 | Compliance, 2022, International, Taxes, U.S.

TIGTA Highlights the IRS’ FATCA Enforcement Woes

Jack Brister s p 500

Jack Brister

Founder, International Wealth Tax Advisors

Jack Brister, Founder of International Wealth Tax Advisors, is a noted international tax expert, with over 25 years of experience. Jack specializes in U.S. tax planning and compliance for non-U.S. families with international wealth and asset protection structures. Jack is a frequent featured speaker at numerous international financial conferences and has been named a Citywealth Top 100 U.S. Wealth Advisor.

Contact IWTA

To schedule an introductory phone conference with IWTA  founder Jack Brister simply click here. Email IWTA at bloginquiries@iwtas.com Or call the IWTA New York City office at 212-256-1142

TIGTA Highlights the IRS’ FATCA Enforcement Woes

 

 In the first 12 years of the U.S. Foreign Account Tax Compliance Act, the IRS has spent nearly $600 million on enforcement but has only managed to collect $14 million in penalties in return. This poor performance indicates that the agency strongly needs to revise its enforcement strategy according to a recent audit report by the Treasury Inspector General for Tax Administration.

Initially, the IRS had big compliance plans for FATCA and published a sprawling compliance roadmap addressing several aspects of FATCA. But years of budget constraints and other personnel resource issues led the IRS to shrink those plans to two compliance campaigns, which are handled by the IRS’ Large Business & International division.

The first campaign, Campaign 896, focuses on offshore private banking and U.S. taxpayers who have either underreported or failed to report their foreign assets on Form 8938. According to the IRS, over 330,000 taxpayers with foreign accounts exceeding $50,000 failed to file the form between 2016 and 2019. This means the government could collect at least $3.3 billion in penalties from the group, if each taxpayer pays the minimum FATCA penalty, which is $10,000.

The second campaign, Campaign 975, focuses on the accuracy of taxpayers’ FATCA filings, but the IRS has only been able to review one tax year — 2016 — leaving the agency far behind its goals.

All of this means that the IRS has a lot of work to do in monitoring FATCA and ensuring taxpayers are complying with the law. In an audit report published April 7, the Treasury Inspector General for Tax Administration described some of the IRS’ progress and setbacks with FATCA compliance. TIGTA conducted the audit to evaluate how the IRS has been using the information it gathers under FATCA to improve taxpayer compliance.

The most important takeaway is that the IRS is planning to increase its audits and reviews of U.S. foreign account holders, meaning that taxpayers with such accounts should prepare for increased scrutiny. If they have any unreported accounts, they should also evaluate voluntary disclosure and other options to potentially minimize any penalties from the government.

THE ABCs of FATCA

The U.S. government created FATCA to ensure transparency of U.S. taxpayers’ offshore financial accounts and combat tax evasion. Under the law, taxpayers with a certain threshold of foreign financial assets. must file Form 8938, Statement of Specified Foreign Financial Assets. The thresholds, which start at $50,000 and top out at $600,000, depend on the taxpayer’s marital status and whether they live in the U.S. or abroad. Foreign financial institutions also have reporting obligations. Those with U.S. taxpayer assets are required to share information about those clients’ financial accounts with the IRS. Institutions that fail to do soare subject to a 30 percent withholding rate on their U.S. source payments.

Updating Procedures and Tightening the Reins

The IRS has spent a lot of money on FATCA compliance — over $573 million dollars — yet it has only collected a small fraction of that amount — $14 million — in FATCA penalties. In light of this lackluster performance, TIGTA made six recommendations to the IRS, some of which the IRS said it has already implemented, and others it is currently working on.

The first TIGTA recommendation is that the LB&I (Large Business and International) Division needs to tighten its surveillance of taxpayers who underreport their foreign assets and step up its compliance activity for that group, including levying penalty assessments and conducting examinations on taxpayers who consistently underreport. The IRS said it has already implemented that recommendation. For a list of currently published LB&I campaigns click here.

The second recommendation is that the IRS should establish procedures for identifying taxpayers who fail to file Form 8938 and particularly focus on examinations or penalty assessments for that group. The IRS said it already has a filter that identifies potential non-filers. Importantly for taxpayers, the IRS revealed that it is currently conducting civil and criminal examinations on non-filing taxpayers and is considering penalties in examinations, when they are appropriate.

The third recommendation is that the LB&I Division needs to ensure that foreign financial institutions are also complying with FATCA, and should think about expanding the scope of Campaign 975 to address taxpayers and foreign financial institutions alike. The IRS said it agreed and that Campaign 975 is doing just that. According to the IRS, the agency has already reviewed about 4,000 foreign financial institutions and flagged potential noncompliance by 34 institutions. Although this is a good development, the seemingly small level of noncompliance suggests that the IRS should not devote extensive resources to this, and might be better served by focusing more heavily on individual taxpayers.

But TIGTA and the IRS disagreed over the auditor’s fourth suggestion. The IRS requires foreign financial institutions to include taxpayers’ taxpayer identification numbers on their FATCA report (Form 8966), but between 2017 and 2019 the IRS exempted some institutions, allowing more time to comply with the requirement. TIGTA believes the IRS should now issue a notice to foreign countries that their financial institutions must collect and provide the taxpayer identification numbers of U.S. individuals owning a foreign bank account.

The IRS believes this is not necessary because it issued a notice about this in 2017 (Article 2, Model 1A Reciprocal IGA; Notice 2017-46). TIGTA pushed back on this and wrote that the IRS should not assume that foreign financial institutions are aware of the 2017 notice and know what to do. They pointed out that less than half of the Form 8966s filed between tax years 2016 and 2019 had a valid TIN. The majority had an invalid TIN or completely lacked one. If the IRS does implement TIGTA’s recommendation, this could bring greater transparency to the agency’s investigations and compliance campaigns.

The fifth recommendation is that the IRS should establish goals, milestones, and timelines for FATCA campaigns in order to determine whether the campaigns are effective in meeting their objectives and affecting tax compliance. The IRS agreed with this and pledged to refine their metrics with respect to goals, milestones, and timelines.

Lastly, TIGTA recommended that the IRS should create an information sharing program that would allow the agency’s Small Business/Self-Employed division to access FATCA data and use it for examinations and collection actions. The IRS said it has implemented that recommendation.

A Tighter Leash for FATCA Compliance

The fact that the IRS already has implemented some of TIGTA’s recommendations demonstrates the agency’s seriousness about FATCA and ensuring that taxpayers and foreign financial institutions comply with the law. TIGTA’s report shows that the IRS’ FATCA issues are two-fold: first, the agency needs additional resources to oversee FATCA, but it also needs to better allocate the resources it does have. Considering that the Biden administration recently increased the IRS’ budget, a tighter leash for FATCA laggards and new FATCA-related compliance campaigns could be right around the corner.

 

The Cost of Non-Compliance With IRS Form 926

The Cost of Non-Compliance With IRS Form 926

by | Jul 8, 2022 | Compliance, 2022, International, Taxes, U.S.

The Cost of Non-Compliance With IRS Form 926

Jack Brister s p 500

Jack Brister

Founder, International Wealth Tax Advisors

Jack Brister, Founder of International Wealth Tax Advisors, is a noted international tax expert, with over 25 years of experience. Jack specializes in U.S. tax planning and compliance for non-U.S. families with international wealth and asset protection structures. Jack is a frequent featured speaker at numerous international financial conferences and has been named a Citywealth Top 100 U.S. Wealth Advisor.

Contact IWTA

To schedule an introductory phone conference with IWTA  founder Jack Brister simply click here. Email IWTA at bloginquiries@iwtas.com Or call the IWTA New York City office at 212-256-1142

The Cost of Non-Compliance With IRS Form 926

 

The 16th amendment of the U.S. Constitution empowers Congress to collect taxes from U.S. persons from whatever source, with no limitations on the collections of taxes or worldwide income. All United States tax laws and regulations apply to every U.S. Person whether he/she is working in the United States or in a foreign country and entities formed under U.S. law. The IRS takes this opportunity increasingly seriously, and taxpayers need to do the same.

IRS Form 926 is the form U.S. citizens and entities including estates and trusts must file to report certain exchanges or transfers of property to a foreign corporation. This would include transfers of cash over $100,000 to a foreign corporation, or situations in which the transfer of cash resulted in owning more than 10% of the foreign corporation’s stock.  This reporting requirement applies to outbound transfers of both tangible and intangible property. 

The primary purpose of Form 926 is to ensure that taxable gain is recognized and tax is paid. The reason for the complexity is the attempt of U.S. tax law to formalize distinction between legitimate business operations outside the U.S. and transactions considered to avoid tax.  

It is also designed to equalize the taxation between transactions within the U.S. and outside the U.S.  In that way there are no significant advantages to transactions and operations outside the U.S..

Form 926 must be complete, accurate, and filed with the taxpayer’s income tax return by the due date of the return (including extensions). 

Penalties are Severe and Limitless

In an attempt to prevent taxpayers from hiding assets offshore or earning unreported income overseas, the IRS has recently begun increasingly aggressive enforcement of cross-border corporate reorganizations, divisions, and liquidations.

 The rules surrounding Form 926 are extremely complex, therefore, correct filing of the form requires a high level of scrutiny. There are literally dozens of stipulations and technical details that must be followed. 

The failure to file, fully meet the filing requirements, or misrepresentation of assets can result in the levying of substantial penalties. For example, the statute of limitations doesn’t end until three years after the date Form 926 is filed.  However, if the form was never filed to begin with, the statute of limitations clock hasn’t started yet. This means the IRS could assess a penalty at any time, even 20 years after the missed mandatory deadline. 

Returns that are filed but that are not substantially complete and accurate are considered “un-filed” and may result in penalty assessments. Criminal penalties may apply to U.S. and foreign taxpayers who willfully fail to file a return (IRC 7203) or file a false or fraudulent return (IRC 7206 and IRC 7207).

Certain international information returns are also considered un-filed if the taxpayer does not provide required information when requested by the IRS, and penalties may be assessed even if the required return has been submitted.

 If a taxpayer under-reports on Form 926 and that leads to a tax underpayment, they can  receive a 40% penalty. Sometimes a tax penalty may be avoided if the filer can show that the misrepresentation was due to reasonable cause and they acted in good faith – but don’t count on it. 

IRS: Ignorance of the Requirements is No Excuse

The IRS maintains that taxpayers who conduct business or transactions offshore or in foreign countries have a responsibility to exercise ordinary business care and prudence in determining their filing obligations and other requirements. The IRS’s position is that lack of information or misinformation is not grounds for dismissal of taxes and penalties; therefore, it’s incumbent on the individual taxpayer or entity to learn and comply with the rules related to Form 926. Engaging the services of a qualified tax consultant-CPA and law firm specializing in international tax and business transactions will ensure compliance is met.

For more information on U.S. tax rules as they apply to U.S. taxpayers that are foreign investors or hold foreign assets, refer to the following articles on the International Wealth Tax Advisors website:

Foreign Asset and FBAR Reporting

 

Foreign Trusts, Estates and Gift Tax

 

Foreign Assets and Foreign Trusts

 

IWTA Answers to Foreign Trust FAQs

 

IRS Voluntary Disclosure

 

GILTI Tax and Controlled Foreign Corporations

 

FATCA Filing: What U.S. Citizens Need to Know

It Happened in South Dakota

It Happened in South Dakota

by | Oct 20, 2021 | Compliance, 2021, Taxes, U.S. Economic System

It Happened in South Dakota

Karma Martell 2019

Karma Martell

Karma Martell,  Founder of  KarmaCom, is a seasoned professional business commentator, writer, and marketer, and serves as virtual CMO for International Wealth Tax Advisors. 

Contact IWTA

To schedule an introductory phone conference with IWTA  founder Jack Brister simply click here. Email IWTA at bloginquiries@iwtas.com Or call the IWTA New York City office at 212-256-1142

Pandora Papers Thrusts South Dakota into

Tax Haven Spotlight

 

The Pandora Papers, a recent reveal of pervasive cross-border financial crime and elaborately-crafted tax dodging structures, as reported by a global network of investigative journalists, has already shaken up governments and elections, upended tax authorities and initiated criminal investigations.

Although the global sting reaches far and wide, from celebrities and sports figures to world leaders, dictators, captains of industry and oil tycoons, what is especially cringeworthy is that the structures designed for the ultimate in tax-dodging and wealth-hiding were set up by blue-chip U.S. legal and investment firms.

Perhaps the most intriguing revelation of all from a stateside perspective was the emergence of South Dakota as a preferred tax haven of the rich and famous.

While Bermuda, the British Virgin Islands and the Cayman Islands positively glow with the patina of privilege and preference, what makes South Dakota, recently dubbed “the Mount Rushmore of tax havens,” a territory for the titans of too-much-is-never-enough?

 

The Wild West of Bank and Finance Laws

Do you get a lot of credit card offers in the mail from banks you’ve never heard of? Chances are, the bank’s HQ is in, you guessed it, South Dakota. Flip over a few credit cards in your wallet and read the fine print. Why set up an issuing bank in South Dakota? In 1981, the state abolished laws limiting the interest rate on credit cards. South Dakota is home to the big sky, (sorry, Montana) and the sky’s the limit when it comes to interest rates on your Visa or Mastercard.

In 1983, South Dakota was the first state to establish perpetual trusts. In a nutshell, perpetual trusts allow monies to remain in place for generations, with no one having to pay inheritance taxes.

Trusts are wealth structures favored by high-net-worth families and individuals, and South Dakota has a history of legislating highly favorable laws for settlors and trustees. The sweet green icing on the money layer cake is no income tax, no capital gains tax and no inheritance tax. The cherry on top are laws that ensure the investor of extreme privacy and secrecy from any blue and brown suits that may try to penetrate their personal Fort Knox.  Assets held in South Dakota trusts have increased from 57 billion to $360 billion in the last 10 years.

According to the Pandora Papers, among South Dakota’s wealthy foreign opt-ins are Ecuador’s President Guillermo Lasso, Chinese real estate billionaire Sun Hongbin, and Guatemalan industrial products titan Federico Kong Vielman.

IWTA founder Jack Brister weighs in: “Though it is true that South Dakota, along with Wyoming, have strong state-level asset privacy laws, it should be known that these laws don’t allow U.S. or international persons a means of U.S. tax avoidance.  

U.S. persons are always subject to U.S. tax no matter where they reside or where their assets are located.  Trustees are held liable for the appropriate tax reporting and payment of tax due and no state law can remove these federally-mandated responsibilities. 

 The skinny on the matter is that the U.S.-legislated law in which the premise is a trust, even those established under U.S. law, are foreign trusts unless specific criteria are met. The purpose for enacting such a broad definition of what a foreign trust is was to cast a wide net to ensure U.S. persons could not use such structures to avoid their tax responsibilities without facing severe penalties.  In doing so, the U.S. limited its ability to tax trusts established in the U.S. by foreign persons where the trust had no U.S. assets or income and the beneficiaries were not residing in the U.S. 

 This is because the U.S. has no authority to tax foreign persons if they are not deemed to be U.S. residents and have no U.S. assets or income. Reminder: capital gains and most interest income are tax-exempt. Business income and real property gains are subject to taxation.   

These rules apply equally to aforeign trust.  Therefore, whena trust is established under state law where the primary fiduciary responsibilities are with a foreign person and not the U.S. trustee (generally a U.S. trust company), and the trust has no U.S.- sourced income, the trust treated as a foreign person, which means there is insufficient nexus to the U.S., resulting in the U.S. having no legal taxing authority.” 

Which U.S. States Have the Most Trusts According to the Pandora Papers?

According to Axios, trusts held in the states listed below account for about 1 trillion dollars in secretly-held assets. According to Bloomberg, South Dakota state data alone show one half trillion dollars of wealth in trusts.

How the U.S. Treasury Views Americans’ Reporting of Foreign Assets

The U.S. Bank Secrecy Act demands that foreign banks disclose assets and accounts held by U.S citizens, and that U.S. citizens report those accounts or face a penalty, with $10,000 being the threshold of compliance. FBAR, the Foreign Bank Account Report, is the most-commonly filed disclosure form, while those with assets over $200,000 if living abroad and $50,000 if living stateside, are required to file FATCA (Foreign Account Tax Compliance Act) form 8938. For more on FATCA filing rules, see our blog post. For more on FBAR rules and compliance see the IWTA FBAR primer. 

FATCA and the Banking Secrecy Act (BSA) are under the jurisdiction of FinCen, the Financial Crimes Enforcement Network of the U.S. Treasury. FinCen investigations take place worldwide, supporting partner countries in combating money laundering, terrorist financing and other financial crimes. 

One might assume that the U.S. would bring the same level of scrutiny to those transferring foreign wealth to U.S. financial institutions and shell companies, but that is not the case because the U.S. has no legal jurisdiction to assert taxing authority.

Why the U.S. is Becoming a Favored Foreign Tax Haven

Although the USA supports the OECD’s global tax effort, they have refused to sign on to the Common Reporting Standard (CRS) which pledges inter-country cooperation in reporting financial assets and accounts to outside jurisdictions. The CES was formed in 2014, per the request of the G20. 112 countries currently participate in the CRS.

The power and autonomy of individual state governance makes it possible for U.S. states to create what amount to independent tax havens under the umbrella of the USA. According to Axios quoting a study by Israeli academic Adam Hofri-Winogradow, 17 of the world’s 20 least-restrictive jurisdictions for trusts were American states.

Will Congress and The Fed Intervene?

On October 6th, 2021, members of congress introduced “The Enabler’s Act.” The Act would expand the 1970-era Bank Secrecy Act to legislating accountability to parties typical in aiding and abetting money laundering and tax evasion, such as accountants, lawyers, investment advisors, and even public relations professionals and art dealers.

The new provisions would in effect expand FinCen’s 2020 Anti-Money Laundering Act. According to The Hill, not only will the Enabler’s Act improve the chances of catching violators, it would close a loophole in the securities laws that currently exempts investment advisers from the same reporting and procedures that are required of broker-dealers, — in at least some circumstances.

The law does not call out registered investment advisers per se, but its definition of investment professionals is broad and could close the loop. Thus, a new set of whistleblowers may come forward with new insights and information regarding the shadowy world of dark money.

West May Still be Best

It should be noted that unless the Treasury Department revises the definition of a foreign trust for tax purposes, The Enabler’s Act, if passed, is not likely to impact the ability of foreign persons to use the U.S. as a place to establish wealth structures which may avoid their home country tax laws.

 

Are You FIRPTA Compliant? IRS Targets Foreign Holders of U.S. Real Estate

Are You FIRPTA Compliant? IRS Targets Foreign Holders of U.S. Real Estate

by | Oct 26, 2020 | Taxes, 2020, Business Investments, Compliance, International, Real Estate, U.S.

Are You FIRPTA Compliant? IRS Targets Foreign Holders of U.S. Real Estate

Jack Brister s p 500

Jack Brister

Founder, International Wealth Tax Advisors

Jack Brister, Founder of International Wealth Tax Advisors, is a noted international tax expert, with over 25 years of experience. Jack specializes in U.S. tax planning and compliance for non-U.S. families with international wealth and asset protection structures. Jack is a frequent featured speaker at numerous international financial conferences and has been named a Citywealth Top 100 U.S. Wealth Advisor.

Contact IWTA

To schedule an introductory phone conference with IWTA  founder Jack Brister simply click here. Email IWTA at bloginquiries@iwtas.com Or call the IWTA New York City office at 212-256-1142

The IRS is Targeting Foreigners Selling U.S. Real Estate Interests

Individuals, investors, families and businesses have all found it necessary to pivot to a greater or lesser extent in light of the 2020 pandemic and ensuing economic crises. The IRS is no different.

Given its current limitations in conducting larger-scale audits, the IRS has determined that its best play is to focus on “issue-based” non-compliance. In other words: catch bigger fish in the leaky loophole nets of the tax law.  There is much anecdotal evidence within international tax circles to know that FIRTPA is an area teeming with reporting and compliance errors—not just by foreign investors, but also by U.S. withholding agents. Thus, the campaign is underway.

Who or What is Subject to FIRTPA?

The U.S. Congress designed the Foreign Investment in Real Property Tax Act (FIRPTA) to collect tax on the sale of a U.S. property by a foreign person or business entity in order to ensure that foreign persons and entities paid tax on their U.S. source (situated) income (i.e., extract a type of capital gains tax that would normally not apply).

The U.S. Congress determined that the sale of a defined interest in U.S. real property (USRPI) is the same as receiving income from a U.S. trade or business, and therefore becomes a taxable capital gain. A USRPI can apply to many investments besides a direct ownership interest in U.S. real estate, so foreign investors that think they are in the clear from FIRTPA compliance could be in for a big surprise.

To get a better and more thorough understanding of who and what is subject to FIRTPA and how it applies to property-related investments, please see the IWTA Services page on U.S. Real Estate and Foreign Investments. 

Our section entitled “Navigating  Real Estate Structures for Non-Resident Aliens” on our Tax Planning for Non-Resident Aliens services page also has some useful FIRPTA pointers.

What you Need to Know Now

On October 5th 2020, the IRS Large Business & International Division (LB&I) issued a notice regarding their resumption of an enforcement campaign to target NRAs receiving rental income from USRPIs. Nonresident alien (NRA) and other non-US taxpayer rental property owners can be subject to a 30% withholding tax on the gross amount of collected rental income unless they elect to categorize the income as effectively connected with US trade or business activities.

The LB&I’s previous announcement on Sept 14, 2020 announced their campaign to aggressively enforce tax withholding and reporting obligations of foreign investors, including foreign trusts, of U.S. real property and property interests.

According to a report by Statista, foreign property investment by foreign nationals is a major source of investment in the United States.  Property sales to foreign buyers totaled a whopping 78 billion dollars in 2019.

“In recent years, the largest share of foreign residential buyers originated from China and Canada, followed by Mexico. Foreign buyers of U.S. real estate prefer properties in suburban areas to properties in small towns and central areas of major cities,” says Statista.

Is it any wonder that the IRS is putting some firepower behind FIRPTA enforcement?

Forewarned is forearmed. The international cross-border tax experts at IWTA will gird you, your family, your trust, or business against the coming FIRTPA onslaught and help you emerge in good financial shape.

Contact us here to set up a consultation.

Additional IWTA Articles on FIRPTA:

https://iwtas.com/top-tips-for-international-tax-clients-during-the-covid-19-crisis/

Any questions or comments on this article? We’d love to hear them! Email us

 

 

Breaking News Update: U.S. Department of Treasury Offers Tax Relief to NRAs Remaining in USA During Covid-19 Pandemic

Breaking News Update: U.S. Department of Treasury Offers Tax Relief to NRAs Remaining in USA During Covid-19 Pandemic

by | May 1, 2020 | Compliance, 2020, Taxes, U.S.

Breaking News Update: U.S. Department of Treasury Offers Tax Relief to NRAs Remaining in USA During Covid-19 Pandemic

Jack Brister s p 500

Jack Brister

Founder, International Wealth Tax Advisors

Jack Brister, Founder of International Wealth Tax Advisors, is a noted international tax expert, with over 25 years of experience. Jack specializes in U.S. tax planning and compliance for non-U.S. families with international wealth and asset protection structures. Jack is a frequent featured speaker at numerous international financial conferences and has been named a Citywealth Top 100 U.S. Wealth Advisor.

Contact IWTA

To schedule an introductory phone conference with IWTA  founder Jack Brister simply click here. Email IWTA at bloginquiries@iwtas.com Or call the IWTA New York City office at 212-256-1142

 

The following is an addendum to our original blog post of April 20, 2020 entitled:

“The Perfect Storm of Timing, Tragedy and Tax Law: NRAs and Covid-19”

Recognizing the unusual circumstances non-resident aliens have faced while sick, trapped or morally obligated to remain in the USA during the Covid-19 pandemic, the U.S. Department of Treasury has relaxed rules regarding what is commonly referred to as “the substantial presence test.”

Under Revenue Procedure 2020-27, as issued on April 21, 2020, a non-resident alien who had to remain in the USA due to personal circumstances or government policies can now pick a starting date from a 60-day date range beginning on February 1, 2020 and ending April 1, 2020, in which they will not be considered to have violated the substantial presence test. Aliens violating the substantial presence test are subject to U.S. tax obligations and possible penalties.

From the IRS Revenue Procedure 2020-27 FAQ Page:

“A nonresident alien, foreign corporation, or a partnership in which either is a partner (Affected Person) may choose an uninterrupted period of up to 60 calendar days, beginning on or after February 1, 2020, and on or before April 1, 2020 (the COVID-19 Emergency Period), during which services or other activities conducted in the United States will not be taken into account in determining whether the nonresident alien or foreign corporation is engaged in a USTB, provided that such activities were performed by one or more individuals temporarily present in the United States and would not have been performed in the United States but for COVID-19 Emergency Travel Disruptions.”

“UTSB” is an acronym for “U.S. Trade or Business”, which means the NRA is on U.S. soil principally for the purpose of conducting business. Normally an individual engaged in a UTSB during the pandemic period would not be exempt from U.S. tax obligations. However, the U.S. Treasury is cutting those engaged in UTSB some slack during the Covid-10 period. If the individual had no recourse than to perform business activities because they could not return to their home country, they are exempt from tax collection. The above applies to nonresident or foreign corporations if they have been conducting business activities that under normal circumstances, would not have been performed on U.S. soil.

The IRS further states: “In all events, the Affected Person should retain contemporaneous documentation to establish the period chosen as the COVID-19 Emergency Period and that the relevant business activities conducted by individuals temporarily present in the United States during the COVID-19 Emergency Period would not have been undertaken in the United States but for COVID-19 Emergency Travel Disruptions. The Affected Person should be prepared to provide that documentation upon request by the IRS.”

“Nonresident aliens and foreign corporations (including those that are partners in partnerships) may make protective filings of their annual U.S. tax returns, even if they believe they are not required to file for the 2020 taxable year because they were not engaged in a USTB, to avail themselves of the benefits and protections that arise from such filings (such as those relating to deductions, statutes of limitations, and claiming tax treaty-based relief.”

International Wealth Tax Advisors echoes the IRS in advising all foreign national clients that currently meet NRA or UTSB status to:

  • Keep records of all their business and personal activities within their chosen 60-day Covod-19 emergency period
  • Check in with us periodically to ascertain whether Revenue Procedure 2020-27 has been further updated; or whether new guidelines relating to NRAs and UTSBs have been issued.

If you have NRA or UTSB status and would like a consultation with international tax expert Jack Brister, https://iwtas.com/booking-page/

Contact IWTA in regards to any cross-border tax and investment management. We welcome your inquiries.

 

 

 

The Perfect Storm of Timing, Tragedy and Tax Law: NRAs and Covid-19

by | Apr 20, 2020 | Taxes, 2020, Compliance, U.S.

The Perfect Storm of Timing, Tragedy and Tax Law: NRAs and Covid-19

Jack Brister s p 500

Jack Brister

Founder, International Wealth Tax Advisors

Jack Brister, Founder of International Wealth Tax Advisors, is a noted international tax expert, with over 25 years of experience. Jack specializes in U.S. tax planning and compliance for non-U.S. families with international wealth and asset protection structures. Jack is a frequent featured speaker at numerous international financial conferences and has been named a Citywealth Top 100 U.S. Wealth Advisor.

Contact IWTA

To schedule an introductory phone conference with IWTA  founder Jack Brister simply click here. Email IWTA at bloginquiries@iwtas.com Or call the IWTA New York City office at 212-256-1142

 

Update: The day after we broke this story, The U.S. Department of Treasury recognized the potentially serious hardships the “substantial presence test” was imposing on non-resident aliens and UTSBs stuck in the U.S.A. in the midst of the Coronavirus pandemic. CLICK HERE TO READ OUR UPDATED POST on this developing change to U.S. tax law.

The outbreak of COVID-19 (the coronavirus) has significantly disrupted and impacted the world. The global nature and dramatic lock down /stay at home orders undertaken by governments around the world have left many individuals and families dislocated. Among the victims:  non-United States persons (NRAs) stricken with the disease while visiting the U.S. and unable or unwilling to return to their country of residence.

The results of this for non-U.S. persons (NRA) could have severe U.S. tax implications. Though many were not able to return home due to travel restrictions by the U.S. and their countries of origin, they were unaware that by exceeding their length of stay they could be subject to U.S. income taxes on their worldwide income and assets and severe tax penalties related to non-compliance.

For foreign visitors temporarily remaining in the U.S. due to coronavirus, the unintended-yet-significant consequences may be able to be avoided. U.S. tax liability may be avoided if a swift review of U.S. tax residency is conducted and appropriate planning is undertaken, if needed.

Why would any NRA affected while in the U.S. be concerned? They are not a citizen or resident of the U.S. so how could this possibly have any impact on their lives?

If an NRA is deemed a U.S. tax resident they will be treated as a U.S. citizen for U.S. tax purposes and will be subject to the same rules as a U.S. citizen such as:

  1. Taxation of income from wherever sourced (worldwide income)
  2. Reporting of worldwide assets and international business activities / and investment transactions
  3. Potential taxation by a U.S. State. New York and California have some of the highest tax rates in the U.S.
  4. State tax rates can be as high as 13{105615a82985984cf1704e8776ec685e1345b73ddec43811fd3f038097961455}, and would be imposed in addition to the federal income tax liability.
  5. Potential issues of U.S. gift and estate tax could occur as a result of a status change from NRA to U.S. tax resident.

Take note:  the U.S. imposes severe penalties on all taxpayers for non-reporting of worldwide financial and business activities that meet certain criteria and thresholds regardless of any income generated.  The penalties start at $10,000 per transaction, activity or account per year and can be as high as $50,000 per transaction, activity, or account per year.

Estate and gift taxes can be as high as 40{105615a82985984cf1704e8776ec685e1345b73ddec43811fd3f038097961455} of the value of the asset which is transferred during life or at death.

As you can see, the severity of financial loss should be of concern to NRAs should they be deemed to be a U.S. tax resident, even if that wasn’t their intention!

Will the Current Tax Law Allow for Covid-19 Exceptions?

At this point you are probably wondering: How could such a situation put a person at risk for U.S. tax residency? This does not seem possible!

NRAs who are stuck in the U.S. due to an illness or quarantine of themselves or loved ones or due to legal or practical restrictions could unintentionally stumble over the U.S. tax residency rules and find themselves entangled in the U.S. tax system.

The tests for U.S. tax residency are in the U.S. tax code. (Title 26 of the United States Code aka the Internal Revenue Code, (“IRC)), specifically IRC §7701(b) which was enacted by the U.S. Congress in 1984.) When these rules were enacted they did not contemplate such a situation as a pandemic like the current coronavirus. This means there is no guidance except the Code itself and related regulations in relation to this current situation.

The above-mentioned law provides two tests to determine a non-U.S. citizen’s U.S. tax residency status. 

  1. The Green Card Test

The first test is generally referred to as the “green card” test which basically states that if a non-U.S. citizen has obtained permanent U.S. residency status they are treated as U.S. income tax residents. The tax rules are the same as a U.S. citizen, absent any determination of foreign residency pursuant to a tax treaty between their home country and the U.S.

  1. The Substantial Presence Test

The second test is generally referred to as the “substantial presence test” (SPT). This test is the more relevant one in regards to the COVID-19 situation. The SPT is relevant only to NRAs who do not have lawful permanent resident status (a U.S. Green Card). It is the SPT test that must be carefully reviewed to avoid U.S. tax residency status. Under this test an NRA will be treated as a U.S. tax resident for a calendar year if the individual is present in the U.S. for at least 183 days in the current year or more during the calendar year. OR, if the NRA is present at least 31 days during the calendar year and the sum of the number of days for the current calendar year and the preceding two calendar years averages more than 121 days per year.

There is an exception to the above rule. If the person who meets the SPT is not in the U.S. for at least 183 days in the first year and they have what is defined as a “tax-home” in a foreign country they may be able to claim what is known as a “closer connection” exception to the SPT rules.  However, this exception is not available if the individual has taken intentional measures to apply for a Green Card (i.e., U.S. permanent resident status). However, if the closer connection exception is not available due to the fact the person was present in the U.S. for 183 days or more, they may still avoid U.S. tax residency.  If the NRA’s home country has a tax treaty with the U.S., and if under the residency rules of that treaty they can meet tests similar to that of the closer connection exception tests, they are exempted.  Generally, the closer connection exception tests and tax treaties consider: the number of days spent in each of the countries where a person’s tax home (generally place of work / business) is located, where items of significance are primarily located, and their citizenship status with each country.

Exceptions to the SPT Rules

U.S. tax law also provides additional exceptions to the strict SPT rules. Such as, an NRA is not treated as being in the U.S. on any day the individual is considered a so called “exempt individual”. This includes an NRA who is a full-time student on a student visa and has not been in the U.S. more than 5 years. There are also exceptions for teachers, certain diplomats and other foreign-government related persons, professional athletes performing for charitable purposes, an NRA who is in transit to another foreign country, or is a regular commuter to and from Mexico or Canada for employment purposes. An individual can also gain exemption if they meet a medical condition exception.

It is this exception that may be most useful for some NRAs in the U.S. who have been affected by the Covid-19 situation. The rule states that if a person was struck down by the virus while in the U.S., they will generally not have to be concerned with the amount of days spent in the U.S. due to their inability to return to their home country.  But unfortunately, in the absence of additional U.S. government guidance, this does not apply to individual family members who were not infected with the virus.

Hence, a family member who was not infected or diagnosed with Covid-19 but may have for practical reasons, legal matters or other practical matters had difficulty leaving the U.S., will, without further guidance, have a tough time claiming a medical exception to the U.S. tax residency rules.

It should be noted that there are separate residency rules for U.S. estate and gift taxes, and as mentioned there could also be U.S. State income tax issues resulting from being in the U.S. as a result of the Covid-19 pandemic. The States are not required to abide by any tax treaty rules established by the U.S. federal government and a foreign country.

IWTA Can Assist Non-Resident Aliens with Urgent Tax Matters

International Wealth Tax Advisors can provide assistance by calculating the number of days spent in the U.S. for purposes of the SPT, including evaluating your prospects for successfully relying on either the medical condition exception, a treaty, or the “closer connection” test provided under U.S. tax law.  We can also assist in preparing any tax return required to take advantage of tax law exceptions.

For assistance or more information. please contact Jack Brister. You can book a virtual appointment here.

 

What is a Withholding Agent and Why are They Important?

What is a Withholding Agent and Why are They Important?

by | Feb 26, 2020 | Taxes, 2020, Compliance, International

What is a Withholding Agent and Why are They Important?

Jack Brister s p 500

Jack Brister

Founder, International Wealth Tax Advisors

Jack Brister, Founder of International Wealth Tax Advisors, is a noted international tax expert, with over 25 years of experience. Jack specializes in U.S. tax planning and compliance for non-U.S. families with international wealth and asset protection structures. Jack is a frequent featured speaker at numerous international financial conferences and has been named a Citywealth Top 100 U.S. Wealth Advisor.

Contact IWTA

To schedule an introductory phone conference with IWTA  founder Jack Brister simply click here. Email IWTA at bloginquiries@iwtas.com Or call the IWTA New York City office at 212-256-1142

The following will describe in detail how the United States (U.S.) tax law also known as the IRC (Internal Revenue Code) or Code defines a withholding agent. I’ll provide information on the definition of a withholding agent, and what role and responsibilities are assigned to them.

How the IRS Defines a Withholding Agent

IRC 1473(4) and 1.1473-1(d), define a withholding agent as any person in whatever capacity having control, receipt, custody, disposal, or payment of any item of income of a foreign person that is subject to withholding. In the eyes of the U.S. federal tax authorities, a person is considered to have custody of, or control over a distribution of funds or income, if a person is the one who ultimately has the authority to release the funds or income.  If such person does not properly withhold the correct amount of tax they will be subject to pay the tax not withheld.

How the IRS Defines a Non-Resident Alien

A non-resident alien (NRA) is a person who is not a U.S. citizen.

A NRA is not a person who has the legal right to permanently reside within the U.S. (a green card holder), and not a person who has resided or been in the U.S. for more than 183 days or an average of 121 days a year for the prior three years. 

These persons are foreigners for U.S. income tax purposes and therefore they are not subject to U.S. income tax unless they derive income from sources within the U.S. such as dividends, rents, royalties, business income or income and gains from real property located within the U.S.  If this is the case, then the person who is deemed to be the withholding agent must ensure that the appropriate tax is withheld and submitted to the U.S. tax authorities.  

In other words, a foreign person who is considered a nonresident under the U.S. tax code is subject to thirty percent tax withholding on U.S source income unless a double tax treaty (e.g., income tax treaty) between the U.S. and the country of residence of the foreign person says otherwise.

Therefore, thee withholding agent is legally liable to withhold tax payments before the distribution. The IRS can demand payment from the agent if the tax was not withheld. 

 When a foreign person tries to open a bank or investment account, and the foreign financial institution (FFI) and U.S. financial institutions see that the foreign person might have a U.S. connection of almost any kind, (even a U.S. care-of address will be sufficient) they will  request the foreign person complete and submit U.S. forms W-8BEN-E, W-8ECI, W-8IMY, W-8EXP. If the financial institution does request or attain the form submissions, the U.S. tax authorities (and sometimes the U.S. Department of Justice) can impose penalties or decline a FFI’s ability to use the U.S. financial markets. They can also choose to prosecute the institution for violation of U.S. law. 

Depending on the relationship of the investor and investment, the financial institution itself may be considered the withholding agent and therefore subject to ensuring proper U.S. tax withholding.  The aforementioned W8 forms will be an indication for the foreign financial institution what tax, if any should be withheld from the account holder and if the FATCA rules (Foreign Account Tax Compliance Act) may apply to the account holder. (See our FATCA blogpost here.)

Since the enactment of FATCA, most foreign and U.S. financial institutions follow procedural due diligence and ongoing monitoring when opening accounts for U.S. and foreign persons. The withholding agent monitors income from U.S.-sourced interest, dividends, rents, royalties, services, or wages. They calculate the tax is required to be withheld and ensure and that the appropriate amount is withheld to avoid penalties or more severe action.  

In addition, to withholding the appropriate tax, withholding agents are required to file a Form 1042 (Annual Withholding Tax Return for U.S. Source Income of Foreign Person) and submit the tax to the U.S. taxing authorities. Note: If there is a failure to provide correct statements to recipients and reasonable cause cannot be shown, a penalty of up to $260 may be imposed for each failure to furnish Form 1042-S when due.  A penalty may also be imposed for failure to include all required information or for furnishing incorrect information on Form 1042-S. The maximum penalty is $3,218,500 for all failures to furnish correct recipient statements during a calendar year. 

Special rules apply for withholding agents in determining whether a flow-through entity (trust estate, or partnership) must treat a payment of U.S. source FDAP income to the to the beneficiaries or partners as taxable. In the case of partnerships, simple trusts, complex trusts, and estates, rules similar to the rules that apply when determining withholding under IRS rules Chapter 3 (income tax withholding) apply. 

There are many exceptions that apply in the calculation of withholding payments to the IRS. The requirements are very complex and should be discussed with your tax advisers. IWTA is more than happy to assist with your international tax consulting and computation needs. Click here to contact us.

FACTA Filing: What U.S. Citizens Need to Know About Foreign Asset Reporting

by | Feb 6, 2020 | Taxes, 2020, Compliance, U.S.

FACTA Filing: What U.S. Citizens Need to Know About Foreign Asset Reporting

Jack Brister s p 500

Jack Brister

Founder, International Wealth Tax Advisors

Jack Brister, Founder of International Wealth Tax Advisors, is a noted international tax expert, with over 25 years of experience. Jack specializes in U.S. tax planning and compliance for non-U.S. families with international wealth and asset protection structures. Jack is a frequent featured speaker at numerous international financial conferences and has been named a Citywealth Top 100 U.S. Wealth Advisor.

Contact IWTA

To schedule an introductory phone conference with IWTA  founder Jack Brister simply click here. Email IWTA at bloginquiries@iwtas.com Or call the IWTA New York City office at 212-256-1142

The Foreign Account Tax Compliance Tax Act (FATCA) became law in 2010 and is a major development in the taxation of Americans living abroad. FATCA is a tax law that requires U.S. citizens at home and outside of the United States (U.S.) to file annual reports on any foreign account holdings. FATCA is intended to prevent tax evasion by U.S. citizens and residents via the use of offshore accounts. The FATCA rules run parallel to the withholding rules applicable to any fixed, determinable, annual or periodical (FDAP) income of a nonresident alien or foreign corporation received from U.S. sources.

Certain U.S. taxpayers holding financial assets outside the United States must report those assets to the IRS on Form 8938, Statement of Specified Foreign Financial Assets. In addition to that, the U.S. person is required to report foreign financial accounts on FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR). 

FATCA also requires certain foreign financial institutions to report directly to the Internal Revenue Service (IRS).  Banks and other foreign financial institutions must report information about financial accounts held by U.S. taxpayers or by foreign entities in which U.S. taxpayers hold a 10{105615a82985984cf1704e8776ec685e1345b73ddec43811fd3f038097961455} or greater interest (defined as a substantial ownership interest). 

FFIs and NFFEs

To comply with FATCA, all entities need to be evaluated to determine whether they fall under the definitions of Foreign Financial Institution (FFI) and Non-Foreign Financial Entity (NFFE). 

FFIs are financial institutions that are foreign entities which are not defined as a U.S. person pursuant to U.S. tax law (U.S. Code Title 26, aka as the Internal Revenue Code (IRC)).

 NFFEs are foreign entities that are not financial institutions, including territory entities. FATCA mandates that FFIs participate in the information-sharing network or face a 30 percent withholding tax on U.S.-source investment income (theirs or their client’s investment account income).

Thus, FATCA withholding will be imposed on any withholdable payments made to an FFI, unless they abide by the IRC and related U.S. Treasury Regulations or an Intergovernmental Agreement (IGA) between the U.S. and the FFIs country of residence.  Therefore, if you set up a new account with a foreign financial institution, they will ask you for information regarding your U.S. tax residence and for proof of U.S. tax filing compliance.

Reporting thresholds vary based on whether you file a joint income tax return or live abroad. If you are single or file separately from your spouse, you must submit a Form 8938 if you have more than $200,000 of specified foreign financial assets at the end of the year and you live abroad; or more than $50,000, if you live in the United States, If you file jointly with your spouse, these thresholds double. 

Who Needs to File FBAR? 

Exceptions to the reporting requirement that include: 

  • A financial account maintained by a U.S. payor. A U.S. payor includes a U.S. branch of a foreign financial institution, a foreign branch of a U.S. financial institution, and certain foreign subsidiaries of U.S. corporations. Therefore, financial accounts with such entities do not have to be reported. 
  • At the time of filing the required income tax return, the taxpayer was not aware that he or she had a beneficial interest in a foreign trust or a foreign estate. 

With some exceptions, if specified foreign financial assets were reported on other forms then they are not required to be reported a  second time on Form 8938. These include  any of the following:

    • Transactions with foreign trusts and foreign gifts reported on Form 3520 or Form 3520-A (filed by the trust). Form 3520 A instructions. 
    • Activity of a Controlled Foreign Corporation reported on Form 5471
    • Transactions with Passive Foreign Investment Companies (PFIC) reported on Form 8621.  With some exceptions, a PFIC is generally a foreign investment / hedge fund. 
    • Activity of a Foreign Controlled Partnership(s) reported on Form 8865
    • Transactions with a Registered Canadian retirement savings plans reported on Form 8891

Form 8938 Penalty

Non-compliance or late filing of Form 8938 is subject to a penalty of $10,000  and an additional penalty of up to $50,000 for continued failure to file after IRS notification, and a 40 percent penalty on the amount of any understated tax  attributable to non-disclosed of foreign financial assets.

The statute of limitations is extended up to six years after the filing of an income tax return .  There is no statute of limitations if the FACTA Form 8938 is not filed.  

If you make a showing that any failure to disclose is due to reasonable cause and not due to willful neglect, no penalty will be imposed for failure to file Form 8938. Reasonable cause is determined on a case-by-case basis, considering all relevant facts and circumstances.  It should be noted that the IRS will not accept as reasonable cause that the tax professional who prepared the U.S. income tax return for the person had no knowledge or a lack of understanding of the U.S. tax law if such professional is not a U.S. professional.  For example, if it is claimed as reasonable cause that a Canadian tax professional or tax professional from the United Kingdom who prepared a U.S. income tax return was not aware or knowledgeable of  the U.S. international tax rules, such reasonable cause is generally not accepted by the IRS.     

Please consult your tax advisers. IWTA is more than happy to assist you with any international tax planning and compliance.

China Tightens Tax Evasion Rules Amid Increased CRS Enforcement

China Tightens Tax Evasion Rules Amid Increased CRS Enforcement

by | Dec 29, 2019 | 2019, Compliance

China Tightens Tax Evasion Rules Amid Increased CRS Enforcement

Jack Brister s p 500

Jack Brister

Founder, International Wealth Tax Advisors

Jack Brister, Founder of International Wealth Tax Advisors, is a noted international tax expert, with over 25 years of experience. Jack specializes in U.S. tax planning and compliance for non-U.S. families with international wealth and asset protection structures. Jack is a frequent featured speaker at numerous international financial conferences and has been named a Citywealth Top 100 U.S. Wealth Advisor.

Contact IWTA

To schedule an introductory phone conference with IWTA  founder Jack Brister simply click here. Email IWTA at bloginquiries@iwtas.com Or call the IWTA New York City office at 212-256-1142

As Beijing increases its efforts to prevent tax evasion, wealthy Chinese are facing a variety of new tax rules both at home and abroad. The increased focus on reporting comes as the country experiences a boom in wealth, with some experts reporting that personal wealth in China skyrocketed to $24 trillion and $1 trillion of that is held outside the country.

Increased global cooperation through the CRS
‍At the forefront of worldwide anti-tax evasion efforts is the introduction of a global financial disclosure system – the Common Reporting Standard, or CRS – through which participating jurisdictions automatically share annual reports detailing reportable accounts, their balances, and their beneficiaries. For example, if a Chinese tax resident opens a bank account in the U.K., the CRS requires British authorities to send the information to Beijing as part of their report, and vice versa.

The CRS casts a broad net, with any entity or individual who’s a resident of a CRS signatory state being considered a reportable person (although real estate is an excluded asset). The process has become so common that even several tax-favorable jurisdictions have agreed to sign up for CRS. Last year, China started sharing information with approximately 100 participating jurisdictions.

However, there are holdouts – most of which are unsuitable as tax havens due to political, economic or social instability. Another notable exception is the U.S., as the country chose to maintain its own framework, the Foreign Account Tax Compliance Act (FATCA), through 113 bilateral agreements.

Domestic regulations tightened following the CRS
‍In addition to participating in the CRS framework, China is continuing its efforts to close loopholes in the system. Previously, wealthy Chinese citizens were not required to pay taxes on overseas earnings by acquiring a foreign passport or green card while maintaining Chinese citizenship. However, China recently began taxing global income from all holders of “hukou” household registrations, regardless of whether they may be citizens elsewhere.
Additionally, the government has implemented the “Golden Tax System Phase III,” a new data platform that gives it a more complete picture of a taxpayer’s finances. The government is hoping to stem the loss of tax revenue through means such as underground banks that facilitate illegal foreign exchange transactions. Uncertainty over those new rules has led certain Chinese taxpayers to create overseas trusts. For example, in late 2018, four Chinese tycoons transferred more than $17 billion into family trusts with ownership structures involving entities solely in the British Virgin Islands.

Participation in CRS, changes to the “hukou” system, and the implementation of the Golden Tax System together signal the Chinese government is tightening its anti-tax evasion legislation and enforcement. Chinese taxpayers with investments or property overseas should be aware of the new disclosure requirements and seek professional advice.

A Group You Should Hope to Never Meet: The J5

A Group You Should Hope to Never Meet: The J5

by | Oct 27, 2019 | Compliance, 2019

A Group You Should Hope to Never Meet: The J5

Jack Brister s p 500

Jack Brister

Founder, International Wealth Tax Advisors

Jack Brister, Founder of International Wealth Tax Advisors, is a noted international tax expert, with over 25 years of experience. Jack specializes in U.S. tax planning and compliance for non-U.S. families with international wealth and asset protection structures. Jack is a frequent featured speaker at numerous international financial conferences and has been named a Citywealth Top 100 U.S. Wealth Advisor.

Contact IWTA

To schedule an introductory phone conference with IWTA  founder Jack Brister simply click here. Email IWTA at bloginquiries@iwtas.com Or call the IWTA New York City office at 212-256-1142

 Did you know that a new group of international tax compliance superheroes, the Joint Chiefs of Global Tax Enforcement, was formed in 2018?

Created to fight international tax crime and money laundering, the group of regulators is known as the J5 and is comprised of five member-countries: the United States, the United Kingdom, Canada, Australia and the Netherlands.

According to Accounting Today, J5’s first operation took place this week. The group swooped in on a Central American financial institution suspected of money laundering and worldwide tax evasion.

“This … should degrade the confidence of anyone who was considering an offshore location as a way to evade tax or launder the proceeds of crime,” said Australian Tax Office deputy commissioner and Australia’s J5 chief Will Day. “Never before have criminals been at such risk of being detected.”

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