Dormant Foreign Corporations

A Controlled Foreign Corporation (“CFC”) is, in general, a foreign corporation controlled by a U.S. person(s) through ownership of stock.  A U.S. person owning at least 10% of a CFC has a reporting requirement for an annual information return of Form 5471 Information Return of U.S. Persons with Respect to Certain Foreign Corporations.  Depending on how the U.S. person is affiliated with the foreign corporation determines which category filer they are as well as which schedules are required to be submitted with Form 5471.

If the foreign corporation is dormant, the filer may use summary filing procedures provided by IRS Revenue Procedure 92-70 (1992-2 C.B. 435).  For this procedure, the IRS determined that a foreign corporation is deemed to be a dormant foreign corporation if at all times during the foreign corporation’s annual accounting period (within the meaning of section 6038(e)(2)):

1. the foreign corporation conducted no business and owned no stock in any other corporation other than another dormant foreign corporation;
2. no shares of the foreign corporation (other than directors’ qualifying shares) were sold, exchanged redeemed, or otherwise transferred, nor was the foreign corporation a party to a reorganization;
3. no assets of the foreign corporation were sold, exchanged, or otherwise transferred, except for de minimis transfers described in (4) and (5) below;
4. the foreign corporation received or accrued no more than $5,000 of gross income or gross receipts;
5. the foreign corporation paid or accrued no more than $5,000 of expenses;
6. the value of the foreign corporation’s assets as determined pursuant to U.S. generally accepted accounting principles (but not reduced by any mortgages or other liabilities) did not exceed $100,000;
7. no distributions were made by the foreign corporation; and
8. the foreign corporation either had no current or accumulated earnings and profits or had only de minimis changes in its beginning and ending accumulated earnings and profits balances by reason of income or expenses specified in (4) or (5) above.

New York Utilizing Electronic Data Records for Tax Audits

Taxpayers claiming residency outside of New York while maintaining ties to New York, such as an apartment, room, or other ties in New York, may be exposing themselves to a New York tax audit.  In general, the taxpayer has the burden of demonstrating by clear and convincing evidence that the taxpayer was not present in New York for more than 183 days.

With today’s available technology electronic records are readily accessible to provide evidence which reflects the days the taxpayer is in New York.  Examples of the records the New York State Department of Taxation and Finance (“DTF”) requests includes credit card/bank statements, EZ pass toll invoices, travel itineraries, personal calendars, etc.  Even simply logging onto an employee computer terminal leaves evidence of your whereabouts.

The DTF regularly requests records directly from electronic data sources in an effort to refute days where the taxpayer has contended that s/he was not present in New York on a given day.  For example, the DTF may request cell phone records directly from the service provider; each outbound and inbound call requires a connection to a cell phone tower, which may be used to triangulate the taxpayer’s position on any given day.

The use of electronic data records to prove residency requires taxpayers to exercise due diligence to insure that they are aware of their days present in New York.

Many IRS Return Due Dates Changed for 2015 Reporting Season (including FBAR) and Change to IRS Audit Period

The Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 was signed into law on July 31, 2015.  This legislation changes the IRS return due dates going forward and the IRS audit period.

IRS Return Due Date Changes

Starting after December 31, 2015:

• Partnership tax returns are due March 15, NOT April.  If your partnership isn’t on a calendar year, the return is due on the 15th day of the third month following the close of your tax year.

• C corporation tax returns are     due April 15, NOT March 15. For non-calendar years, it is due on the 15th day of the fourth month following the close of the tax year.  For C corporations with tax years ending on June 30 will continue to have a due date of September 15 until 2025.  For years beginning after 2025, the due date for these returns will be October 15.

• S corporation tax returns remain unchanged—they are still due March 15, or the third month following the close of the taxable year

• FBARs filing deadline changes from June 30^th to April 15^th.  6 month extensions are now available.

Changes to IRS Audit Period

Prior to the IRS statute of limitations for audit was generally 3 years or 6 years  for substantial understatement of income (if you omitted more than 25% of your gross income).  The Supreme Court in  U.S. v. Home Concrete & Supply, LLC (2012) held that overstating your tax basis was not the same as omitting income.  The Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 over rules the Supreme Court’s 2012 decision.  Now, following this new legislation, the tax code says: “An understatement of gross income by reason of an overstatement of unrecovered cost or other basis is an omission from gross income.” The change applies to tax returns filed after July 31, 2015. It also applies to previously filed returns that are still open.  This means that overstating your tax basis is the same as omitting income for purposes of the IRS statute of limitations for audit.

For further information on this topic please contact Christopher J. Byrne at (212) 239-1931 or visit http://christopherbyrne.com/.

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What is FATCA?

The Foreign Account Tax Compliance Act (FATCA) is a United States federal law that requires US citizens living home or abroad to report all assets held in financial accounts outside of the United States. It further requires foreign banks to report the holdings of all US citizens to the Internal Revenue Service.

Congress passed FATCA in 2010 to make it harder for U.S. taxpayers to hide assets held in offshore accounts and shell corporations. Since 2010, FATCA has enabled the IRS to collect billions of dollars in taxes and fines on previously undeclared assets of US taxpayers.

How does FATCA affect High Net Worth Individuals?

Through FATCA, the US is successfully driving strict compliance from international banks. By threatening foreign banks with a 30% tax and exclusion from U.S. markets, over 80 nations and 77,000 financial institutions have agreed to the new law including all the big boys like Switzerland, Russia and China. U.S. account holders who aren’t compliant have limited time to get to the IRS. The IRS recently changed its programs, making its Offshore Voluntary Disclosure Program (ODVP) a little harsher. Yet for those not willing to pay the 27.5% penalty—which rose to 50% August 4, 2014 for some banks—the new IRS’s Streamlined Program may be a good option if you can qualify.

Note that despite the new laws, FBAR filings are still required. FBARs (Foreign Bank Account Reporting) predate FATCA, but this isn’t the first time the IRS has asked for duplicate reporting. FATCA piles on to the reporting including Form 8938, but it doesn’t replace FBARs. FBAR’S have been in the law since 1970 but have taken on huge importance since 2009. U.S. citizens with foreign bank accounts greater than $10,000 must file an FBAR each year by June 30.

These forms are serious, and so are the criminal and civil penalties. Failure to file FBAR can mean fines up to $500,000 and prison up to ten years. Even a non-willful civil FBAR penalty can mean a $10,000 fine. Willful FBAR violations can draw the greater of $100,000 or 50% of the account for each violation–and each year is separate. These kinds of numbers add up fast.

If you are a high wage earner with international holdings, now is the time to become compliant. Contact Christopher J. Byrne for expert advice and guidance for all international tax matters. Or see our website at http://www.christopherbyrne.com

Zurich Bank Under US Investigation for Tax Evasion

One of the oldest private banks in Zurich, Rahn & Bodmer Co., has been deemed by the U.S. Department of Justice a category-one Swiss bank, a part of the group of banks which is under U.S. investigation for failing to report the taxable assets of US taxpayers. Under FATCA legislation enacted in 2010 as part of the HIRE act, foreign banks are now required to report their American Clients to the IRS or risk substantial penalties and fines.

According to Rahn & Bodmer Co. partner, Christian Rahn, the bank stopped dealing with untaxed U.S. funds in 2008, and has advised American clients to take part in the U.S, offshore voluntary disclosure program (“OVDP”).

Other banks under investigation include some of the largest names in Swiss banking including Credit Suisse Group AG and Julius Baer Group.  Last year, Switzerland’s oldest bank, Wegelin & Co., was indicted and was forced to pay $57.8 million dollars in fines after admitting it had aided Americans in evading taxes.

In 2009, UBS, Switzerland’s largest bank, reached an agreement with the U.S. Department of Justice and paid a $780 million fine after admitting to aiding American’s to evade U.S. taxes.

Essentially FATCA puts both US citizens and foreign banks on the hook for the reporting of foreign accounts. While initially slow to comply, recent Justice Department enforcement actions have caused foreign banks to step up and generated literally billions of dollars of revenue for the IRS.

With the odds of being caught by foreign bank reporting rising every month, high net worth individuals with untaxed foreign holdings are now flocking to programs like the IRS’ OVDP (Offshore Voluntary Disclosure Program) to declare assets legally and pay greatly reduced back taxes and fines.

For individuals with large offshore asset profiles, the team at Christopher Byrne PLLC can bring you into compliance while protecting your assets to the maximum degree possible.

Call today to see how you can get on the road to compliance with the help of an experienced international tax accountant.

You can also visit our website at http://christopherbyrne.com/ for more information and helpful tips on tax amnesty.

Ty Warner Pleads Guilty To Tax Evasion

As an attorney working in international tax law, you see and hear many different stories about foreign tax returns. Recently one story has been making headlines about tax evasion. Ty Warner, the man behind Beanie Babies, plead guilty to tax evasion in U.S. District Court.  Warner owes the government $53.6M in failure to file penalties and offshore account penalties, the largest offshore-account penalty ever reported and now will face up to five years in prison.

Federal prosecutors have said that Warner failed to report $24.4 million in offshore accounts for over a decade. The indictment alleges that in 1996 Warner traveled to Zurich to open up an account with UBS with the intent to “evade and defeat” taxes on more than $3.1M in foreign income generated in this Swiss bank account.

Warner plead guilty to the failure to pay taxes on $3.2 M of earnings in 2002.  According to federal prosecutors, in 2002, Warner earned approximately $3.1M of gross income through investments held in a UBS account; Warner failed to tell his accountants about that income and failed to report that income or the existence of the UBS bank account in his 2002 tax return.  Warner continued to hide this account by failing to report this income on his amended 2002 tax return filed in 2007.

When working with international tax laws, you must understand the programs in place to avoid such events like Ty Warner found himself in. Now there are tax amnesty programs that are designed to help keep things up to date with offshore accounts. OVDI, also know as Offshore Voluntary Disclosure Initiative this program guides US citizens in how to properly disclose foreign asset information.  For more information on OVDI, see our OVDI FAQ page.

For more information on international tax laws or to speak with an attorney offering international tax services, contact us! You can also visit our website http://christopherbyrne.com for other helpful quick tips.

Christopher J. Byrnes your International Tax Attorney

Christopher J. Byrne is both an intentional tax attorney and international tax accountant that has been practicing for over 20 years and as an Attorney at Law for over 15 years.  He is also experienced in cross border estate planning as a Certified Public Accountant. This dual perspective on your unique situation gives our firm an insight and capability that few others can match.  We are trusted with high net worth individuals and their advisors to be discrete, thorough, and to offer them every legal option possible to avoid the unnecessary tax burden that comes with being an international citizen. 

international taxation and cross border estate planning as a Certified Public Accountant – See more at: http://christopherbyrne.com/about/#sthash.GpCPffdJ.dpuf

We offer assistance and support in the following areas:

•  Understanding the regulations surrounding your foreign bank and financial accounts is crucial, especially for citizens living aboard which is why at Christopher J. Byrnes PLLC we pay close attention to your case so you can stay in FBAR Compliance.

• Foreign Account Tax Compliance Act requires the knowledge of an experienced international tax CPA and attorney to help you enter into compliance all while making sure you have an advantageous outcome. Allow us to help you with FATCA Regulations.

• PFIC Reporting be be a daunting task when handled alone and meeting the requirements for Passive Foreign Investment Companies is what we do best.

• The formation of programs like OVDI/OVDP or offshore voluntary disclosure programs helps make meeting your FBAR compliance regulations obtainable. Our team knows which International Tax Amnesty Programs best suit your needs.

• The U.S. tax law comes with very strict deadlines with various state and federal returns due throughout the year. In order to stay in compliance, Christopher J. Byrnes pays attention to every small detail needed to work with Tax Shelters.

• We can assist the foreign investor in achieving the best result by utilizing a customized investment vehicle which minimizes the income tax consequences of the investment making foreign tax returns easy. 

As an experienced Certified Public Accountant, who is also engaged in the practice of law, Mr. Byrne is often called upon by other CPAs, attorneys and financial advisors to assist them and their clients with tax and estate planning matters. This “team approach” has proven to be very efficient, particularly on matters when attorney-client privilege is needed and often extends to other areas such as probate, estate administration and tax controversies.

If you are in need of an experienced international tax attorney visit our website at   www.christopherbyrne.com.  We are available to help you with any and all of your international tax needs.