IRS announces new filing procedure for non-resident US taxpayers – What you must know

In the last few years, the  (IRS) has been focusing on tracking offshore accounts of its residents and citizens. There are several forms to be filed with the US treasury department declaring one’s offshore account information with  compliance becoming  stringent. To help ‘low compliance risk’ US citizens and green card holders living abroad to comply with their offshore disclosures, a new IRS procedure went into effect from September 1st 2012. The new  initiative is aimed at ‘taxpayers who have only just become aware of their filing obligations and now seek to come into compliance with the law.’ The new procedure does not offer protection from criminal prosecution if the IRS and Department of Justice determine that the taxpayer’s particular circumstances deserve such prosecution.

Here is a quick glance at the details of this new procedure:

• Who is eligible?
  

While this procedure is available for non-resident US taxpayers who have resided outside of the US since January 1, 2009 and who have not filed a US tax return during the same period, these taxpayers must present a low level of compliance risk

• Understand low compliance risk
  

On the nonexistence of any excessive risk factors, if the proposed returns and application is less than $1,500 in tax owing in each of the years, they will be treated as low risk and handled in a streamlined manner. There is a probability of the risk level increasing  under several circumstances. For instance if the return filed under this program is an amended return or it the taxpayer has not declared all of his/her income in his/her country of residence or if the taxpayer is under audit or investigation by the IRS etc.

• What is the procedure to participate
  

One needs to submit a complete and accurate delinquent tax returns and mention ‘Streamlined’ at the top of the return to indicate that these returns are being filed under the new initiative. It is also essential to pay all the taxes due along with interest and penalty, if any, for delay, and submit a questionnaire as prescribed by the IRS to present the compliance risk profile.

This procedure is an initiative from the IRS that provides US green card holders and citizens a likelihood of coming into compliance and is for exceptionally low risk taxpayers.  With newer and more stringent laws like FATCA, the opportunities to come into compliance in the future may not be easily available. Taking advice from the professionals will save one from paying extra taxes. Taking the  help of a professional will give you the necessary support and guidance in all your tax planning issues and overseas voluntary disclosure.

Read More About:Entity Formation, FBAR

Tax-Wise Tips to Reduce Your Legal Expenses

No one likes to pay large amounts in legal fees, however one may be relieved to know that certain tax rules can help reduce your bills. While it is almost impossible for taxpayers to be aware of their various tax rules, a tax planner can be of great help. Here are a few tips that can help reduce legal fees.

• Personal Legal Fees are not deductible.

Most of the personal legal expenses like divorce, etc. are not deductible.

• Legal Fees for Tax Advice Are Deductible.

Legal fees for tax advice whether tax planning,  tax qualifies, income, estate, gift, property, sales, use and excise tax, (even though the taxes are personal) are deductible.

• Business Legal Fees Are Deductible.

Any legal fees incurred in business are deductible by corporations, LLCs, partnerships and proprietorships.  However, some fees must be capitalized and added to the basis of assets.  

• Investment Legal Fees Are Miscellaneous Itemized Deductions.

If legal expenses don’t relate to your business but only to investments, you can still deduct them but usually only as a miscellaneous itemized deduction.  That means a 2% threshold, phase-outs and (worst of all) Alternative Minimum Tax    

• Beware Contingent Lawyer’s Fees.

If you recover $1 million in a lawsuit and owe 40% to your contingent fee lawyer, as you have $600,000 the tax has to be paid only on this amount.   In a pure personal physical injury the entire recovery is tax-free, so therefore  it doesn’t usually matter whether you consider the recovery including legal fees. Usually, there is often confusion about what is and is not tax-free.

• Legal Fees in Employment Cases Are Fully Deductible.

Most employment lawsuit recoveries include  either wages (on a Form W-2) or non-wage income (on a Form 1099), even if your lawyer receives 40%, you still must include 100% in your income.  However, it is possible to  deduct the legal fees “above-the-line,” before reaching adjusted gross income.  That means you have no tax–no regular tax and no AMT–on the legal fees.

Tax deductions can alleviate some of the pain of high legal bills.  The tax analysis can be complicated, and you may incur legal fees falling into more than one category.  There are often several ways of allocating fees, so planning can pay off. Take the help of an expert who could offer you the best tax solutions and give you assistance in other taxes like FBAR, Overseas voluntary disclosure, etc.

Important Pointers For Global Tax Planning

Enterprises that are into foreign ventures and business, needs to implement an effective global strategy or they have a risk of witnessing adverse business tax return consequences. The most negative outcome that can take place is that organizations might be unaware and miss the benefits that are available for cross-border business ventures. Global tax hindrances and opportunities are present in even a small firm in U.S that sells products to U.S or is into foreign R&D.

Why global taxation is a complex process?

Several U.S and other foreign tax planning authorities have been aiming for cross-border revenue benefits. They are gradually becoming extremely active and careful in attempting the share of an organization’s FBAR. For instance, the changes and development that has happened in the last decade and the complex global transfer pricing guidelines, require companies to document their annual compliance to set standards for pricing inter-organization transfers of goods and services. This apart, other global taxation policies are changing and is gradually becoming a critical aspect of uninformed enterprise’s that are involved in cross-border business transactions.

Global tax consultants are able to restore the foreign and U.S tax sides of an organization’s business into a unified business and tax strategy. They are all updated with the changing concerns and trends that surround global tax planning and are tracking them consciously.

Efficient International Tax Strategy

If you want to carry out an apt global tax planning, then it is essential to set up a comprehensive global tax strategy that assists in fulfilling the global business objectives. This starts with having an in-depth understanding of an organization’s financial and business conditions, its global operating strategy and where and the manner in which it plans to operate outside with U.S. With these significant data a global tax consultant can help an organization to overcome with an overall global tax strategy that can be practiced and has an appropriate business sense. Global tax planning in case of certain concerns can be managed in a compact way by considering an enterprise’s larger international tax and functional strategies.

Global tax rules remain the same irrespective of the size of the corporate taxpayer. The difference lies in the fact as to how business firms utilize technicalities and legal interpretation to their benefit as compared to the profits of the small scale businesses that just complies with the tax guidelines. Useful tax planning solutions assists the small scale business owners to manage their operations and enable them to leverage the strategies resulting in a lower tax bill.

Read More About: IRS Amnesty

Understanding the Basics of OVDP 2012

The IRS started an open-ended Offshore Voluntary Disclosure Program (OVDP) back in January 2012 and may end it at any given time in the future. The IRS is providing individuals with undisclosed income from overseas accounts a chance to get current with their tax returns. The 2012 OVDP comes with a higher penalty rate than any other programs but provides benefits to encourage taxpayers to disclose foreign accounts instead of risk detection by the IRS and probable criminal prosecution.

Objective of OVDP

The objective of OVDP 2012 is the same as 2009 and 2011 i.e. to bring those taxpayers who have utilized undisclosed foreign accounts and foreign entities to evade taxes into compliance with the U.S tax laws.

Reasons to make a Voluntary disclosure

Taxpayers having undisclosed foreign incomes must make a voluntary disclosure as it helps them to stay compliant, avert substantial civil penalties and eradicate the chances of criminal prosecution and other penalties. An overseas voluntary disclosure also offers the scope to estimate with a logical degree of certainty, the total expense of resolving all overseas tax concerns. Today the IRS is proactively involved in searching out individuals who have undisclosed foreign accounts and the information is available to the IRS under tax treaties.

In order to aid the situation tax planning agencies today offer taxpayers with a comprehensive insight into the tax codes that is applicable to resident individuals in the U.S comprising US Citizens and Green Card Holders. It also helps the taxpayers and other individuals with the following:

• Complete compliance
• Consultation and impact analysis
• Planning and analysis to minimize FBAR Penalty
• AMT Strategies
• Foreign Tax Credit
• A review of 2009, and 2010 OVDI cases
• Mutual Fund or PFIC computations
• Form preparations that are required to take part in the OVDP program
• Preparation associated with Tax Amendments and Delinquent FBAR
  

United States residents, citizens and certain other individuals need to annually report their direct or indirect financial interest in or signature authority or any other authority that can be compared to signature authority over a financial account that a financial institution maintains located in a foreign country, in case in a calendar year the total value of all the foreign accounts surpass $10,000 at any time during the year. Typically, the civil penalty for willingly failing FBAR reporting can be as high as $100,000 or 50 percent of the total balance of the foreign account per violation.

Resolve Tax Issues with Overseas Voluntary Disclosure Programs

Tax relief programs are meant to help the public servant, business enterprises and every working individual pay their taxes  to the government without fail.  Taxpayers irrespective of them being an individual or a business enterprise,  in their busy schedule fail to follow  according to the norms of filing their tax returns. The income tax departments have designed and developed various amnesty and  voluntary disclosure programs allow these tax defaulters  to come forward to pay their taxes in full.

Effective tax planning on the part of the of the taxpayer will help them avoid the penalties that come with  delayed filing of taxes .  Today's  globalized  work environment has led to a large number of distantly distributed and offshore teams. With such a  mobile workspace, it becomes quite easy for individuals to avoid tax payments. However, Internal Revenue Service and U.S. Government organizations have  engaged themselves through various practices to  bring the taxpayer with  undisclosed foreign bank accounts meet the  tax regulations in compliance with the U.S requirements. This is so because under the U.S. Department of Treasury and FBAR policies, any  citizen of the United States  needs to file an annual FBAR if he has any  financial account that is situated outside U.S or the value of the account surpasses $10,000 during the financial year.

The Overseas Voluntary Disclosure Program developed by the IRS is meant to  assist people  who have unintentionally or intentionally failed to pay and report the taxes on their foreign income and instead tend to cancel their offshore accounts. With  less penalty added,  this program aims to help those individuals or business enterprises to  willingly admit their missing tax dues and report voluntary disclosures.  Similar   IRS amnesty programs implemented earlier helped the government generate more than $4.4 billion.

In the era of globalization, the US IRS tax code requires every US citizen irrespective of presently residing or being a non-resident to declare their global income,  failure of which may lead to penalties. The penalties however depend on the tax evasion activities. However, the OVDP penalty framework  for the present year requires defaulters  too

Pay a penalty up to the maximum of 27.5% of the highest aggregate balance in any undisclosed  foreign accounts for  eight full tax years prior to the disclosure

File all tax returns including  payment of  back-taxes and interest for up to eight years, as well as any penalties incurred.

Though effective  tax planning by efficient service providers and tax professionals will  help the tax payers, the defaulters who file their tax returns under the Overseas voluntary disclosure Program  are also benefited. The voluntary disclosure provides them total compliance with US tax laws, analysis and planning to reduce FBAR penalty,  AMT strategies and foreign tax credit besides other benefits.

Understanding Foreign Bank and Financial Account Report (FBAR)

With the governments acting tough, the tax evaders look at different means to evade taxes. One such way is to maintain foreign bank account/accounts. Such a move helps people to hide income generated or maintained abroad. However, today the federal government has made it mandatory for every U.S. citizen or resident and every entity (organized under U.S. law) to file foreign bank and financial accounts report with the U.S. Treasury annually.

Any United States person who has a financial interest in or signature authority, or other authority over any financial account in a foreign country must file FBAR. IN FBAR, there are certain terms that need to be understood clearly in order to avoid confusion. Hence, given below is a glossary of such terms to understand FBAR clearly.

FBAR

Foreign Bank and Financial Account Report (in short FBAR) is a form that IRS requires taxpayers to file to comply with the requirements of reporting Foreign Bank and Financial Accounts to tax authorities in the United States.

United States Person

A United States person is a citizen or resident of the United States, a domestic partnership, a domestic corporation or a domestic estate or trust.

Foreign country

A “foreign country” includes all geographical areas outside the United States, the Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands, and the territories and possessions of the United States (including Guam, American Samoa, and the United States Virgin Islands).

Financial Account

A “financial account” includes any bank, securities, securities derivatives, or other financial instruments accounts. The term includes any savings, demand, checking, deposit, or any other account maintained with a financial institution. Financial account also generally includes any accounts in which the assets are held in a commingled fund, and the account owner holds an equity interest in the fund (including mutual funds). Individual bonds, notes, or stock certificates held by the filer are not a financial account nor is an unsecured loan to a foreign trade or business that is not a financial institution.

Foreign Financial Account

Any account that includes checking, savings, demand, brokerage, securities accounts, or other accounts maintained with a financial institution or other institution or person performing the services of a financial institution that is physically located outside of the United States is a foreign financial account.

Like these, several other terms are there that need to be properly comprehended to understand the importance and requirements of FBAR.