International tax Compliance 101

Report
INTERNATIONAL TAX
COMPLIANCE 101
AN OVERVIEW OF THE FORMS, TROUBLESHOOTING
COMPLIANCE ISSUES, AND NAVIGATING THE TRICKS AND
TRAPS OF GREEN CARD AND VISA RESIDENTS
AUSTIN C. CARLSON, CPA, JD
GRAY REED & MCGRAW, P.C.
[email protected]
August 15th, 2014
Texas Association of CPAS
International Tax Categories –
What’s covered in this presentation
U.S. Issues
Compliance*
Inbound
X
Outbound
X
Planning
*Specifically U.S. Tax Information Reporting. Financial reporting is another sub-category.
I N T ER N AT I ON A L TA X C O MPL I A NC E 1 0 1 - A U S T I N C . C A R L S O N , C PA , J D, G R AY R E E D & M C G R AW, P.C .
Presentation Overview
Part 1: An Overview of the Most Common International Tax Forms
Part 2: Troubleshooting Offshore Account Compliance Issues – A Field Guide to
the OVDP including the July 2014 revisions (the “2014 OVDP”)
Part 3: Navigating the Tricks and Traps of Tax Issues of Green Card and Visa
Residents
I N T ER N AT I ON A L TA X C O MPL I A NC E 1 0 1 - A U S T I N C . C A R L S O N , C PA , J D, G R AY R E E D & M C G R AW, P.C .
Part 1: Overview of International Tax Information Returns
1.
FinCEN Form 114 – Foreign Bank Account Report
2.
Form 8938 – Statement of Specified Foreign Assets
3.
Form 8833 – Treaty Based Disclosure Position
4.
Form 2555 – Foreign Earned Income Exclusion
5.
Form 5471 - Information Return of U.S. Persons With Respect to Certain Foreign
Corporations
6.
Form 5472 - Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign
Corporation Engaged in a U.S. Trade or Business
7.
Form 8865 - Return of U.S. Persons With Respect to Certain Foreign Partnerships
8.
Form 8858 - Information Return of U.S. Persons With Respect To Foreign Disregarded Entities
9.
Form 3520 – Return for Foreign Trusts and Receipt of Certain Foreign Gifts
10. Form 3520-A - Annual Information Return of Foreign Trust With a U.S. Owner
I N T ER N AT I ON A L TA X C O MPL I A NC E 1 0 1 - A U S T I N C . C A R L S O N , C PA , J D, G R AY R E E D & M C G R AW, P.C .
FinCEN Form 114 –
Foreign Bank Account Report (“FBAR”)
Simplified History of the FBAR
Created in 1970 – Bank Secrecy Act
The Secretary of the Treasury shall require a resident or citizen of the United States or a person in, and doing business in, the
United States, to keep records, file reports, or keep records and file reports, when the resident, citizen, or person makes a
transaction or maintains a relation for any person with a foreign financial agency.
Amendments in 2004 – New Penalties for Non-Willful Violations, Stronger
Willful Penalties.
Amendments in 2011 – Some New Clarifications and Modifications of Terms.
June 30th, 2013 – Switch from Form TD F 90-22.1 to Mandatory Filing of FinCEN
Form 114
--Compliance Remains Low--
I N T ER N AT I ON A L TA X C O MPL I A NC E 1 0 1 - A U S T I N C . C A R L S O N , C PA , J D, G R AY R E E D & M C G R AW, P.C .
FBAR: Who Must File (Basic Definition)
A U.S. PERSON that has a FINANCIAL INTEREST or
SIGNATORY AUTHORITY over FOREIGN FINANCIAL
ACCOUNTS if the aggregate value of the foreign
financial accounts EXCEEDS $10,000 at any time
during the calendar year.
I N T ER N AT I ON A L TA X C O MPL I A NC E 1 0 1 - A U S T I N C . C A R L S O N , C PA , J D, G R AY R E E D & M C G R AW, P.C .
FBAR: Who Must File (U.S. Person)
 U.S. citizens;
 U.S. residents;
 U.S. entities, including but not limited to, corporations, partnerships, or limited
liability companies created or organized in the United States or under the laws of
the United States;
 Trusts or estates formed under the laws of the United States (note, this is a
complicated analysis).
 U.S. residents:
 Based on I.R.C. Sec. 7701 Residency Rules
 Green Card and Visa Residents may have to file. Will discuss further in Part 3
I N T ER N AT I ON A L TA X C O MPL I A NC E 1 0 1 - A U S T I N C . C A R L S O N , C PA , J D, G R AY R E E D & M C G R AW, P.C .
FBAR: Who Must File
(Financial Interest or Signatory Authority)
1. Owner of record or holder of legal title, regardless of whether the account is
maintained for the benefit of the United States person or for the benefit of
another person; or
2. Owner of record or holder of legal title which includes:
◦
◦
◦
◦
◦
Agent, Nominee, Person Acting on Behalf of U.S. Person
Owns directly or indirectly MORE THAN 50% of value or voting power of any entity
Partnership interest in 50% of profits or capital
Trust if trust grantor and has an ownership interest for tax purposes
Trust if beneficiary has MORE THAN 50% present beneficial interest (remaindermen do not
have interest)
I N T ER N AT I ON A L TA X C O MPL I A NC E 1 0 1 - A U S T I N C . C A R L S O N , C PA , J D, G R AY R E E D & M C G R AW, P.C .
FBAR: Who Must File (Foreign Financial Accounts)
1. Foreign: Outside the U.S.
i.
ii.
Foreign Branches of U.S. Banks = Foreign
U.S. Branches of Foreign Banks = Non-Foreign
2. Financial Accounts
i.
ii.
iii.
Checking, Deposit, Savings, Securities, Brokerage, Demand, Time Deposit
Commodity Futures or Options Account
Insurance Policy with Cash Value (whole life insurance)
a)
Note: a very complicated analysis, foreign countries have vastly different insurance arrangements.
b)
Foreign Insurance Excise Tax may Apply
iv.
v.
Annuity Policy with Cash Value
Shares in a Mutual Fund or Similar Pooled Fund
I N T ER N AT I ON A L TA X C O MPL I A NC E 1 0 1 - A U S T I N C . C A R L S O N , C PA , J D, G R AY R E E D & M C G R AW, P.C .
FBAR: Who Must File (Exceeds $10,000)
1. At any time during the year – Highest account balance
i. Can use “reasonable estimate”
ii. Must use year end rates published by the Treasury Department
2. $10,000: Add all accounts together. File if Aggregate balance
above $10,000
I N T ER N AT I ON A L TA X C O MPL I A NC E 1 0 1 - A U S T I N C . C A R L S O N , C PA , J D, G R AY R E E D & M C G R AW, P.C .
FBAR Filing Notes: Families
1. Spouses - One spouse can file on behalf of both spouses ONLY if
all of the accounts non-filing spouse owns are reported by filing
spouse.
2. Children – Must also file FBARs. Parents can sign on behalf of
children.
I N T ER N AT I ON A L TA X C O MPL I A NC E 1 0 1 - A U S T I N C . C A R L S O N , C PA , J D, G R AY R E E D & M C G R AW, P.C .
FBAR Filing Notes: The Parts
1. Part One – Personal Information. NOTE if over 25 accounts, do not
need to report information.
2. Part Two – Accounts Owned Separately.
3. Part Three - Accounts Owned Jointly.
4. Part Four – Nominee Accounts.
5. Part Five – Consolidated Return Accounts. An entity that is a United
States person that owns directly or indirectly a greater than 50 percent
interest in another entity that is required to file an FBAR is permitted to
file a consolidated FBAR on behalf of itself and such other entity
I N T ER N AT I ON A L TA X C O MPL I A NC E 1 0 1 - A U S T I N C . C A R L S O N , C PA , J D, G R AY R E E D & M C G R AW, P.C .
FBAR Filing Notes: Deadline and Penalties
1. Deadline – June 30th
i. Must be filed Electronically
ii. Not filed with a tax return
iii. Must be received by June 30th, Not postmark deadline.
2. Penalty Worst Case Scenario – Up to 50% of the Highest Account
Balance Each Year for Each Account. Criminal liability.
i.
Discussed Further in Part II of this Presentation.
I N T ER N AT I ON A L TA X C O MPL I A NC E 1 0 1 - A U S T I N C . C A R L S O N , C PA , J D, G R AY R E E D & M C G R AW, P.C .
Form 8938: Statement of Specified
Foreign Assets
Short History: Required for Tax Years starting after March 18, 2010 (2011
Tax Returns)
Basic Rule: A specified individual that has an interest in specified
foreign financial assets and the value of those assets is more than the
applicable reporting threshold.
I N T ER N AT I ON A L TA X C O MPL I A NC E 1 0 1 - A U S T I N C . C A R L S O N , C PA , J D, G R AY R E E D & M C G R AW, P.C .
Form 8938: Definitions (Specified Individual)
U.S. Citizen
U.S. Resident
 Green Card (“Lawful Permanent Resident”)
 Resident Alien
 Non-Resident Alien that makes election
 Treaty Tie-Break Non-Resident Alien (Described further in Section 3)
Does NOT Currently Apply to Domestic Entities – May in the future!
I N T ER N AT I ON A L TA X C O MPL I A NC E 1 0 1 - A U S T I N C . C A R L S O N , C PA , J D, G R AY R E E D & M C G R AW, P.C .
Form 8938: Definitions (Interest)
General Rule - Interest if any income, gains, losses, deductions, credits, gross proceeds,
or distributions from holding or disposing of the asset are or would be required to be
reported, included, or otherwise reflected on your income tax return.
Specific Rules
 Assets of disregarded entities - Report assets as if you own them directly.
 Jointly owned accounts – Each must report entire interest.
 Owner of Grantor Trusts – Report all assets.
 Interest in Foreign Estates and Trust – Must report.
 Foreign Pension Plans and Deferred Compensation Plans – Report interest in plan.
 Foreign Financial Interests in U.S. Accounts – Don’t report!
I N T ER N AT I ON A L TA X C O MPL I A NC E 1 0 1 - A U S T I N C . C A R L S O N , C PA , J D, G R AY R E E D & M C G R AW, P.C .
Form 8938: Definitions (Specified Foreign
Financial Asset)
Financial accounts maintained by a foreign financial institution (basically anything
on the FBAR)
Certain assets if held for investment and not in an account by a financial
institution:
 Foreign stock or securities
 Interest in a foreign entity
 Financial instrument or contract that has an issuer or counterparty that is foreign
 For example, loan between U.S. person and foreign family member
 Interest in foreign trust and estates
I N T ER N AT I ON A L TA X C O MPL I A NC E 1 0 1 - A U S T I N C . C A R L S O N , C PA , J D, G R AY R E E D & M C G R AW, P.C .
Form 8938: Definitions (Thresholds)
Living In the U.S.
Highest Balance
Year End Balance
Living OUTSIDE of the U.S.*
Highest Balance
Year End Balance
Unmarried OR
Married Filed
Separately
$75,000
$50,000
$300,000
$200,000
Married Filed
Jointly
$150,000
$100,000
$600,000
$400,000
*Satisfies living outside if tax home in a foreign country, AND either bona fide resident or present
in foreign country 330 full days. See Form 2555 discussion later.
I N T ER N AT I ON A L TA X C O MPL I A NC E 1 0 1 - A U S T I N C . C A R L S O N , C PA , J D, G R AY R E E D & M C G R AW, P.C .
Form 8938 Filing Notes: Duplicate Reporting
Do not have to report asset IF reported on one of the
following forms:
Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of
Certain Foreign Gifts.
Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign
Corporations.
Form 8621, Information Return by Shareholder of a Passive Foreign Investment
Company or Qualified Electing Fund.
Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships.
Form 8891, U.S. Information Return for Beneficiaries of Certain Canadian Registered
Retirement Plans.
Also, note that no Form 8938 is required if a tax return is not otherwise required to be
filed
I N T ER N AT I ON A L TA X C O MPL I A NC E 1 0 1 - A U S T I N C . C A R L S O N , C PA , J D, G R AY R E E D & M C G R AW, P.C .
Form 8938 Filing Notes: Deadline and Penalties
1. Deadline – With Personal Tax Return, Including Extensions
2. Penalty Worst Case Scenario – $10,000 initial penalty. $10,000 per 30
additional days up to $50,000
i.
Both spouses penalized, joint and several liability.
3. Statute of Limitations Extension – Indefinitely till filed.
I N T ER N AT I ON A L TA X C O MPL I A NC E 1 0 1 - A U S T I N C . C A R L S O N , C PA , J D, G R AY R E E D & M C G R AW, P.C .
Form 8833: Treaty Based Return Position
Who must file? Anybody taking a treaty based return position
Information on Tax Treaties
i.
ii.
iii.
iv.
What are the tax treaties?
Which countries does the U.S. have tax treaties with? (Currently 46)
What kind of benefits does they have?
What kind of client would use these?
i.
Dual Citizens/Resident Aliens
ii.
U.S. Persons Working Abroad (Also See Foreign Earned Income Exclusion)
iii.
U.S. Companies with Foreign Operations
v.
How do the treaties interact with the I.R.C.?
Form 8833: Filing Notes: Deadline and Penalties
1. Deadline – With Tax Return, Including Extensions
2. Penalty Worst Case Scenario – $1,000 for Individuals, $10,000 for
Corporations
i.
Doesn’t disallow the Treaty Benefit
3. Simple Form (See Next Slide)
I N T ER N AT I ON A L TA X C O MPL I A NC E 1 0 1 - A U S T I N C . C A R L S O N , C PA , J D, G R AY R E E D & M C G R AW, P.C .
Form 2555: Foreign Earned Income Exclusion
Who must file? U.S. Citizens or Resident Aliens MAY choose to exclude a certain
amount of foreign income from U.S. Taxation if they qualify for the exclusion.
Who Qualifies?
1. Must maintain tax home in the foreign country; and
2. Meet at least one of these requirements:
i.
ii.
Be a bona fide resident of a foreign country or countries for an uninterrupted period that
includes an entire tax year, or
Be physically present in a foreign country or countries for at least 330 full days during
any period of 12 consecutive months.
I N T ER N AT I ON A L TA X C O MPL I A NC E 1 0 1 - A U S T I N C . C A R L S O N , C PA , J D, G R AY R E E D & M C G R AW, P.C .
Form 2555: Definitions (Tax Home)
Regular Place of Business - A tax home is the taxpayer’s regular or principal place
of business, employment, or post of duty, regardless of where the taxpayer
maintains his family residence.
Exception for Home in U.S. - However, the taxpayer is not considered to have a
tax home in a foreign country for any period during which his abode is in the
United States.
I N T ER N AT I ON A L TA X C O MPL I A NC E 1 0 1 - A U S T I N C . C A R L S O N , C PA , J D, G R AY R E E D & M C G R AW, P.C .
Form 2555: Definitions (Bona Fide Resident)
Bona Fide Resident - A taxpayer is determined to be a bona fide resident of a
foreign country based on his intention about the length and nature of his stay.
Evidence of intention may be words and acts. If these conflict, acts carry more
weight than words.
Generally, if a taxpayer goes to a foreign country for a definite, temporary
purpose and return to the United States after heaccomplishes it, he is not a
bona fide resident of the foreign country. If accomplishing the purpose requires
an extended, indefinite stay, and he makes his home in the foreign country, the
taxpayer is a bona fide resident.
I N T ER N AT I ON A L TA X C O MPL I A NC E 1 0 1 - A U S T I N C . C A R L S O N , C PA , J D, G R AY R E E D & M C G R AW, P.C .
Form 2555: Filing Notes: Deadline and Penalties
1. Deadline – With Tax Return, Including Extensions
i. Automatic Two Month Extension INCLUDING for tax (but owe interest on
the two months)
ii. Must file with timely return, amended return, or late filed return within one
year.
iii. Can file even after one year IF YOU OWE NO TAX.
iv. IF YOU DO OWE tax, can file BEFORE the IRS contacts you- You must
type or legibly print at the top of the first page of Form 1040 "FILED
PURSUANT TO SECTION 1.911-7(a)(2)(i)(D)."
v. If YOU DO OWE tax AND the IRS CONTACTS YOU FIRST – You must
request a private letter ruling.
2.
Can File Form 2555-EZ If Meet Several Requirements
I N T ER N AT I ON A L TA X C O MPL I A NC E 1 0 1 - A U S T I N C . C A R L S O N , C PA , J D, G R AY R E E D & M C G R AW, P.C .
Form 5471: Information Return of U.S. Persons With
Respect to Certain Foreign Corporations
Who Must File (There are four categories of filers, but generally, same as FBAR)
◦ U.S. Persons: U.S. Citizens and Residents, U.S. Entities U.S. Trusts (Again Trust Rules are Complicated)
◦ That fall in one of the following categories:
◦ Category 1: Repealed
◦ Category 2: U.S. Citizen or Resident who is an officer or director of a foreign corporation where a U.S.
Person has initially acquires 10% or more of the stock of the foreign corporation, or acquires an
additional 10%
◦ Category 3: A U.S Person who acquires 10%, acquires an additional 10%, disposes of stock to reduce
interest to less than 10%
◦ Category 4: A U.S. Person has control of a foreign corporation for at least 30 days (Control: 50% of voting
power or value)
◦ Category 5: A U.S. person is a shareholder in a CFC for 30 days in the year and owned the stock on the last
day of the year.
I N T ER N AT I ON A L TA X C O MPL I A NC E 1 0 1 - A U S T I N C . C A R L S O N , C PA , J D, G R AY R E E D & M C G R AW, P.C .
Form 5471: Filing Notes – Additional Definitions
 CFC: Controlled Foreign Corporation
U.S. Shareholders (Only counts if U.S. Person owns 10% or
more of the shares)
Own more than 50% of the voting or value
Constructive Ownership Rules Apply
 The phrase “constructive ownership” means that one taxpayer is deemed to own the shares of
certain other related taxpayers - such as a spouse, child or parent
 The primary definition of constructive ownership and attribution of ownership is
provided in IRC Section 318
I N T ER N AT I ON A L TA X C O MPL I A NC E 1 0 1 - A U S T I N C . C A R L S O N , C PA , J D, G R AY R E E D & M C G R AW, P.C .
Form 5471: Filing Notes – Penalties and Deadline
1. Deadline – With Tax Return, Including Extensions
2. Penalty Worst Case Scenario - $10,000 initial penalty. $10,000 per 30
additional days up to $50,000
3. Statute of Limitations Extension – Indefinitely till filed.
I N T ER N AT I ON A L TA X C O MPL I A NC E 1 0 1 - A U S T I N C . C A R L S O N , C PA , J D, G R AY R E E D & M C G R AW, P.C .
Other Entity Reporting Forms
1. Form 5472 - Information Return of a 25% Foreign-Owned U.S.
Corporation or a Foreign Corporation Engaged in a U.S. Trade or
Business. Only required for reportable transactions with foreign
related parties.
2. Form 8865 - Return of U.S. Persons With Respect to Certain Foreign
Partnerships. Very Similar to Form 5471 but for Partnerships.
3. Form 8858 - Information Return of U.S. Persons With Respect To
Foreign Disregarded Entities. Similar to Form 5471 but for Foreign
Disregarded Entities.
I N T ER N AT I ON A L TA X C O MPL I A NC E 1 0 1 - A U S T I N C . C A R L S O N , C PA , J D, G R AY R E E D & M C G R AW, P.C .
Form 3520 - Return for Foreign Trusts
and Receipt of Certain Foreign Gifts
Who must file? U.S. Persons (similar definition to FBAR) with
1.
Certain transactions with foreign trusts,
2.
Ownership of foreign trusts
3.
Receipt of certain large gifts or bequests from certain foreign persons.
Brief Definition of Foreign Trust.
A foreign trust is a non-domestic trust. A trust is domestic if BOTH of the following apply:
1.
A court within the United States is able to exercise primary supervision over the
administration of the trust; and
2.
One or more U.S. persons have the authority to control all substantial decisions of the trust.
I N T ER N AT I ON A L TA X C O MPL I A NC E 1 0 1 - A U S T I N C . C A R L S O N , C PA , J D, G R AY R E E D & M C G R AW, P.C .
Form 3520 – Reporting Foreign Gifts
 A U.S. person must report on Form 3520 any gift from a foreign person if:
◦ The gift or bequest is valued at more than $100,000 from a nonresident alien
individual or foreign estate (including foreign persons related to that nonresident
alien individual or foreign estate); or
◦ The gift is valued at more than $15,102 (adjusted annually for inflation) from foreign
corporations or foreign partnerships (including foreign persons related to the foreign
corporations or foreign partnerships).
 Must aggregate gifts from related parties.
 Foreign “gifts” from corporations and partnerships can be reclassified just like
domestic gifts.
I N T ER N AT I ON A L TA X C O MPL I A NC E 1 0 1 - A U S T I N C . C A R L S O N , C PA , J D, G R AY R E E D & M C G R AW, P.C .
Form 3520 – Filing Notes: Deadlines and Penalties
1. Deadline – With Tax Return, Including Extensions.
i. BUT filed separately from U.S. Tax Return
2. Penalty Worst Case Scenario - Greater of $10,000 or 5% of the
amount of the gift for each month that the failure continues, up
to a maximum penalty of 25%.
I N T ER N AT I ON A L TA X C O MPL I A NC E 1 0 1 - A U S T I N C . C A R L S O N , C PA , J D, G R AY R E E D & M C G R AW, P.C .
Form 3520A - Annual Information Return of
Foreign Trust With a U.S. Owner
Who must file? Foreign Trust with U.S. Owner
Note, this is the foreign trust NOT the U.S. Owner. However the U.S. Owner can be held
financially responsible for non-filing.
Filing Deadline – March 15th… NOT APRIL 15th!
Typically Foreign Trust provides beneficiary with Foreign Trust Beneficiary Statement
Penalties – Same as 3520 - Greater of $10,000 or 5% of the amount of the trust for each month
that the failure continues, up to a maximum penalty of 25%.
I N T ER N AT I ON A L TA X C O MPL I A NC E 1 0 1 - A U S T I N C . C A R L S O N , C PA , J D, G R AY R E E D & M C G R AW, P.C .
Questions for Part One?
Austin C. Carlson, JD, CPA
Gray Reed & McGraw, P.C.
[email protected]
713-986-7213
Want more International Tax planning focused CPE?
State Bar of Texas, 17th Annual International Tax Symposium
International Tax Committee of the Tax Section
Houston: Thursday, November 6, 2014, 8am-3:30pm
Hess Club, 5430 Westheimer, Houston, TX
Plano: Friday, November 7, 2014, 8am-3:30pm
Center for American and International Law,
5201 Democracy Drive, Plano, TX
6.5 Hours of CPE Credit, 5.75 Hours of CLE Credit
Contact me for additional information and to get on the mailing list.
Austin Carlson, International Tax Committee Chair
[email protected]
713-986-7213
I N T ER N AT I ON A L TA X C O MPL I A NC E 1 0 1 - A U S T I N C . C A R L S O N , C PA , J D, G R AY R E E D & M C G R AW, P.C .

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