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Diagnosing the multi-national taxpayer

Diagnosing the multi-national taxpayer

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Diagnosing the multi-national taxpayer

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  1. Diagnosing the multi-national taxpayer Special handling for taxpayers with offshore activities John schachter, ea John schachter + Associates, Inc. jschachter@johnschachter.com

  2. Essentials of multi-national compliance • Requires a fresh perspective: • Don’t assume that tax benefits available to domestic income or assets will apply. • Do assume special forms and disclosures will be required • Assume special penalties apply and statute of limitations stays open for noncompliance • Don’t assume big gift or estate-tax exemption Diagnosing the multi-national taxpayer - John Schachter EA - jschachter@johnschachter.com

  3. Be alert to Foreign… We are saving discussion of interesting issues for another day: Form 1120F, transfer pricing, foreign-owned real estate, exit tax and more Diagnosing the multi-national taxpayer - John Schachter EA - jschachter@johnschachter.com

  4. Foreign Bank and Financial Account • If aggregate high balance in local currency over $10,000 at any time FBAR required 31 CFR 1010.350 (not Title 26) • FINCEN Form 114 filed electronically by April 15/Oct 15 • Six year SOL • Harsh penalties for willful failure to file; $10,000 penalty for non-willful failure – per year • https://www.fincen.gov/sites/default/files/shared/FBAR%20Line%20Item%20Filing%20Instructions.pdf Diagnosing the multi-national taxpayer - John Schachter EA - jschachter@johnschachter.com

  5. Foreign Assets • FATCA requires Form 8938 if specified foreign financial assets exceed thresholds either during year or at end of year: • MFS limits ½ of MFJ • Specified domestic entities must file, too. • Failure to file tolls SOL, triggers penalties Diagnosing the multi-national taxpayer - John Schachter EA - jschachter@johnschachter.com

  6. Foreign Pension Plan • Assume no deferral of income • Check the treaty – e.g., UK does allow deferral • Employee deferrals are not deductible. Employer contributions are additional taxable compensation. HCEs pay tax on investment gains. • FBAR reportable – also Form 8938 • Grantor trust if employee paid more than half of contributions – Form 3520-A • Form 8833 if treaty exclusion • Tax credit mismatch if foreign tax paid in retirement in foreign country Diagnosing the multi-national taxpayer - John Schachter EA - jschachter@johnschachter.com

  7. Foreign “IRAs” • Typically no US tax benefit – IRC doesn’t recognize it • Examples: UK ISA, Israeli Keren Hishtalmut, French Assurance Vie • FBAR reportable – also Form 8938 • Probably not a trust • Beware of PFICs! • Exception – Canadian RRSP, UK SIPP Diagnosing the multi-national taxpayer - John Schachter EA - jschachter@johnschachter.com

  8. Foreign Mutual Fund, ETF, Hedge Fund • Passive Foreign Investment Company (PFIC) (75% income/50% assets). Sec 1291 • Form 8621 – required disclosures unless de minimis (under $25,000 in PFICs per taxpayer; $50,000 for MFJ). SOL tolled if not filed. 1298(f). • Dividends might not go to Sch B. Some might appear on Line 21 Other Income and some might go straight to Line 62 as an addition to tax. • FBAR/8938 reportable – check a box for duplicative reporting • To Form 8960 – generally, when distributed • Sec 1.1411-10(g) election lets you report QEF and CFC inclusions when included in regular tax. • State tax treatment could be favorable Diagnosing the multi-national taxpayer - John Schachter EA - jschachter@johnschachter.com

  9. Foreign Trusts • Form 3520 for transfers to/distributions from (and large foreign gifts and bequests) • Form 3520-A filed by foreign grantor trust – or pro-forma by US owner. • Exit tax on moving assets to foreign non-grantor trust. Sec 684(a) • Throwback tax on accumulation distributions – with interest charge • Default calculation of tax if trust fails to provide statements akin to K-1s • Harsh penalties and tolling of SOL for failure to disclose Diagnosing the multi-national taxpayer - John Schachter EA - jschachter@johnschachter.com

  10. I married a foreigner • Sec 6013(g): election to treat nonresident alien (NRA) spouse as resident • So can file MFJ • Separate election available for NIIT (Form 8960) • Very different gift and estate tax rules: • $60,000 lifetime exemption before gift tax kicks in: but NRA donor/decedent only taxed on gifted tangible property with US situs. Reg 20.2103-1 • Annual limit on tax-free gifts to non-citizen spouse: $152K for 2018, indexed. Sec 2523(i) Diagnosing the multi-national taxpayer - John Schachter EA - jschachter@johnschachter.com

  11. Controlled Foreign Corporations/Foreign Partnerships • If a US person owns at least 10% of a foreign corporation, at the least disclosures might be required • If US persons control the corporation, investment-type income cannot be deferred – Subpart F – and is taxed at ordinary rates • Special disclosures on Form 5471 of • Acquisitions and dispositions • Financials • Officers and directors • $10K penalty for inadequate disclosure Similar sorts of disclosures with respect to foreign partnerships on Form 8865 Transfers to foreign corporations of significant value must be reported on Form 926 Diagnosing the multi-national taxpayer - John Schachter EA - jschachter@johnschachter.com

  12. Foreign Students • Can stay nonresidents if in compliance with terms of F-1 visa by excluding days of presence. 7701(b)(5)(A)(iii) • Five years automatic, after that must show closer connection to foreign country • Form 8843 • But capital gains from US sources taxable if NRA in USA for more than 182 days regardless. Sec 871(a)(2) • Query what is US source? Tax home • Matters if student has money; most don’t. But some are beneficiaries of foreign trusts, etc. Diagnosing the multi-national taxpayer - John Schachter EA - jschachter@johnschachter.com

  13. Real property in foreign country • Rental • Cannot use MACRS/must use ADS • I.e., 40 years for residential rental, not 27.5 years • Sch E page 1/Form 8858 if held through local DRE or Form 5471 or 3520-A if held through local corporation or trust • Cannot do Sec 1031 exchange cross-border (but USVI property is ok) • Residence • Sec 121 is ok • Some countries tax home appreciation, some don’t tax capital gain on sale • Real estate in foreign trust triggers Form 3520-A • Property tax might not be ad valorem Diagnosing the multi-national taxpayer - John Schachter EA - jschachter@johnschachter.com

  14. Foreign Currency • Gain is ordinary. Sec 988. Loss is ordinary if non-personal • Can be good opportunity where dollar is up to trigger loss • Source is residence of taxpayer or of taxpayer’s qualified business unit (QBU) • De minimis rule for personal gains - $200 per transaction or less. Sec 988(e) • Principal repayments trigger foreign currency gain or loss under Sec 988 • Foreign currency bonds, mortgages Diagnosing the multi-national taxpayer - John Schachter EA - jschachter@johnschachter.com

  15. Overseas assignment for US person • If less than half a year in treaty country, might be able to avoid host country tax • certificates needed – must stay on US payroll • Ditto for local Social Security • must stay on US payroll • Foreign tax can be credited against US tax • Foreign earned income exclusion of Sec 911 lets you exclude from 2018 US income tax first $103,900 of foreign earned income. Form 2555. • Only earned income • In high-cost areas cap might be higher • Form 1116 might be a better deal • If you revoke you are out for five years Diagnosing the multi-national taxpayer - John Schachter EA - jschachter@johnschachter.com

  16. Statute of limitations/Accuracy-related penalty • Statute of limitations tolled for failure to file: • PFICs, foreign trusts, CFCs, CFPs, FATCA • Statute doesn’t start to run on any of the return till disclosure made • Unless failure to disclose is due to reasonable cause, in which case SOL suspended only with respect to the omitted items • Six year statute if more than $5,000 of income attributable to specified foreign financial assets omitted and not adequately disclosed. Sec 6501(e) • Accuracy-related penalty • 20% accuracy-related penalty on the portion of an understatement of tax attributable to any transaction involving an undisclosed foreign financial asset. Sec 6662(j) Diagnosing the multi-national taxpayer - John Schachter EA - jschachter@johnschachter.com

  17. Fixing good faith mistakes • Quiet Disclosure • File amended returns and information returns and hope for the best • Streamlined Filing Compliance Procedures • Delinquent FBARs – no penalties • Delinquent international information returns – no penalties • Delinquent returns for expats/Amended returns for non-expats • Three years of returns, tax and interest only • 5% of undisclosed offshore assets for non-expats, 0% for expats • Must certify conduct was non-willful • Consider having attorney involved • https://www.irs.gov/individuals/international-taxpayers/streamlined-filing-compliance-procedures Diagnosing the multi-national taxpayer - John Schachter EA - jschachter@johnschachter.com

  18. Fixing bad faith mistakes • Voluntary Disclosure Practice • Long-standing practice of IRS to consider voluntary disclosure along with all other factors in determining whether criminal prosecution will be recommended. IRM 9.5.11.9 • OVDP program for resolving offshore issues is closed since Sep 30 2018 • Work with a lawyer • Kovel letter • New accountant/preparer Diagnosing the multi-national taxpayer - John Schachter EA - jschachter@johnschachter.com