NEW OFFSHORE VOLUNTARY DISCLOSURE PROGRAM (OVDP) RULES GO INTO EFFECT

NEW OFFSHORE VOLUNTARY DISCLOSURE PROGRAM (OVDP) RULES GO INTO EFFECT We have been hearing rumors that the Treasury Department was going to be amending the OVDP program. Yesterday they did amend the program. Briefly, for people that have not yet filed for OVDP, the 27.5% penalty that is currently available will go up to 50% for filings on or after July 1 for offshore accounts at foreign financial institutions that have indicated that they will be complying. Thus anyone with accounts overseas should strongly consider acting quickly and in June. For people that have already filed, there are tweaks in the program that may make it beneficial to elect the new program. Thus, if you are currently in the program, it would behoove you to analyze whether such an election would prove beneficial to you. Here is the link to the new program: irs.gov/Individuals/International-Taxpayers/Offshore-Voluntary-Disclosure-Program-Frequently-Asked-Questions-and-Answers-2012-Revised

Commissioner of Internal Revenue Service talks of amending the Offshore Voluntary Disclosure Program (“OVDP”)

Commissioner of Internal Revenue Service talks of amending the Offshore Voluntary Disclosure Program (“OVDP”) IRS Commissioner John Koskinen has stated that the Internal Revenue Service "has also sought to encourage taxpayers to come into compliance voluntarily." Koskinen stated that the various OVDPs, ranging from the 2009 version and then the 2011 and now the current 2012 version have led to more than 43,000 voluntary disclosures from person paying over $6 billion in a combination of back taxes, interest, and penalties. Koskinen urged though that, while these three programs have been very successful, the IRS may amend the program "to accomplish even more." He said that the agency is "considering whether our voluntary programs have been too focused on those willfully evading their tax obligations and are not accommodating enough to others who don't necessarily need protection from criminal prosecution because their compliance failures have been of the non-willful variety." Those who have lived abroad for many years may be distinguished from U.S. resident taxpayers who were willfully hiding their investments overseas and stated that "[w]e expect we will have much more to say on these program enhancements in the very near future." The National Taxpayer Advocate has previously criticized the three OVDPs as prescribing a "one-size-fits-all" approach. The NTA states that the stiff penalty may be unfair since it fails to draw any distinction between those who willfully vs. inadvertently fail to report foreign accounts. Stay tuned for further developments when they occur.

Israel and U.S. Reach Substantive Agreement

Israel and U.S. Reach Substantive Agreement Today, May 1, 2014, the Treasury Department announced that the U.S. has reached an intergovernmental agreement (IGA) with Israel to implement the Foreign Account Tax Compliance Act (FATCA). A Treasury spokeswoman announced that Israel and the U.S. had reached a Model 1 IGA in substance. FATCA, which was enacted in 2010, requires foreign financial institutions (FFI) to report accounts owned by U.S. persons to the Internal Revenue Service or face a 30 percent withholding tax in certain cases on their U.S. source income. These IGAs permit FFIs to give information about these accounts to their own governments, which then would share the data with the IRS. Model 1 agreements call for reciprocal information exchanges between nations. For those U.S. persons who have not disclosed their assets in Israel (or any other foreign country for that matter) the window is closing to do so while still avoiding prosecution. I urge you to consider entering into the offshore voluntary disclosure program (OVDP).

Feuding brothers

When brothers feud, they can split up their corporation in two and go their separate ways in a tax free exchange.

In a recent private letter ruling (PLR 201411012), the IRS ruled that no gain or loss would be recognized on division of corporation by feuding siblings.  This is a carefully laid out plan needing to qualify under a plethora of carefully planned criteria to qualify the transaction for non-recognition treatment of the split off.  Under the scenario painted by the taxpayers to the Internal Revenue Service, each corporation will operate one of the two businesses currently being run by the existing company.

By way of background, the Code provides nonrecognition treatment for reorganizations listed in Code Sec. 368(a). Under Sec. 368(a)(1)(D), a so called type "D" reorganization, a transfer of all or part of the assets of one corporation to another corporation qualifies if: (i) immediately after the transfer, the transferor, or one or more of its shareholders (including persons who were shareholders immediately before the transfer), or any combination thereof, is in control of the transferee corporation; and (ii) stock or securities of the corporation to which the assets are transferred are, under the plan, distributed in a transaction which qualifies under Sec. 354, 355, or  356.

The IRS ruled that the split will qualify for tax-free treatment and specifically ruled that the transaction qualified as a “D” reorganization, neither corporation nor shareholder will recognize any gain, the basis in all assets of both corporations are maintained and the holding periods are tacked on from the prior corporation and the earnings and profits, if any, will be allocated between the two companies under Sec. 312(h) and Reg. §1.312-10(a).

Be aware that there are numerous pitfalls in trying a “D” reorganization.  Among other items, IRS expressed no opinion regarding whether the Split-Off: (i) satisfied the business purpose requirement of Reg. §1.355-2(b)); (ii) was used principally as a device for the distribution of the earnings and profits of either company; or (iii) was part of a plan (or a series of related transactions) pursuant to which one or more persons will acquire directly or indirectly stock representing a 50% or greater interest in either company under Code Sec. 355(e) and Reg. § 1.355-7 .

FBAR Filing

Today is April 16, 2014 and the 2013 filing season is now behind us.  Some of us filed on time and others are on extension until October 15.  So all of us have temporarily forgotten about our tax filings for a while.  But there is another filing deadline creeping up on June 30.  That is the deadline for reporting foreign accounts aggregating at least $10,000.  For many years, filing an information return to report foreign accounts was done on a paper return called a TD F 90-22.1.  This form no longer exists.  Now that form can only be filed electronically.  It is form 114 and it is filed with the Financial Crimes Enforcement Network (FinCEN) of the Treasury Department.  Get started at http://bsaefiling.fincen.treas.gov.  Happy filing.

Tax Court Rules on an IRA Prohibited Transactions Case

Tax Court Rules on an IRA Prohibited Transactions Case:

In Ellis v Comm., T.C. Memo. 2013-245 (T.C. Memo 2013), the United States Tax Court ruled that funding an IRA with the taxpayer’s used car business was a prohibited transaction.  The Court determined that by paying himself a salary and pay rent to an entity owned by his immediate family was prohibited under Section 4975 of the I.R.C.   The Court ruled that it was not a prohibited transaction when the taxpayer first caused the IRA to invest in the business since the business did not have owners at the time.  But when the taxpayer became a fiduciary by virtue of the IRA holding more than 50% of the ownership interest in the business, the Court ruled that the company then became a disqualified person.  When he paid himself salary, this was a prohibited transaction also.  Thus, the IRA was deemed to have distributed the entire account subjecting the whole to income tax and a 10% additional tax on early distributions.

Prior to ever having an IRA invest in any business, be sure to consult your tax advisor as disastrous results could result as evidenced by the Ellis case above.

U.S. and Canada sign Tax Avoidance Agreement

U.S. and Canada sign Tax Avoidance Agreement

The list of countries signing deals with the United States has grown to twenty-two (22) now that Canada and the United States have signed a tax-information sharing agreement to crack down on tax avoidance by U.S. taxpayers.

The intergovernmental agreement (“IGA”) prevents Canada from having to hand over information to the Internal Revenue Service under FATCA and instead, Revenue Canada collects information from Canada’s banks and share it with the IRS under an existing bilateral tax treaty.  FATCA  was signed in 2010 and was originally scheduled to take effect on January 1, 2013. But in 2011, the effective date was moved to January 1, 2014 and then moved forward again to July 1, 2014.

The IGA exempts some smaller financial institutions and certain Canadian registered savings plans.

While it is estimated that there

about 1,000,000 citizens of the U.S. residing in Canada, it is unclear how many U.S. Citizens would be affected by the IGA.

Banks are scheduled to commence collecting information in July and Revenue Canada will commence reporting to the IRS in 2015.