In recent years the IRS has focused more heavily on the transfer pricing of intangible property. Section 482 of the regulations provide guidelines so that these controlled transactions are conducted at an arm’s length when intangible property is owned by one company but used by another related company in another jurisdiction.
In this post, we'll summarize the different types of methods that are available to compare intercompany transactions of intangible property to uncontrolled transactions.
Intangible Property Can Come in Many Forms
Some of the most common intangible property that may be shared between related parties in separate jurisdictions are patents, know-how, trademarks and trade names. The available transfer pricing methods for pricing transfers of intangible property are as follows:
Comparable uncontrolled transaction transfer pricing method: Under this method you would be comparing the controlled transaction (intercompany/related party) to an uncontrolled transaction (unrelated/third-party). The intangible property must be used with similar products/processes in the same industry or market and have a similar profit potential.
An example of this would be if a company had a manufacturing process that it allowed its related company to use as well as an unrelated company in the same country with the same profit potential. For tax purposes, the company will need to prove that they are pricing the uncontrolled and controlled transactions the same. If there are different factors that need to be considered such as risk and an adjustment can be readily calculated, those need to be considered as well.
Comparable profits transfer pricing method: This method is based on profit level indicators. The goal of profit level indicators is to identify the amount of profit which would have been earned in an uncontrolled transaction of a similar taxpayer. Profit level indicators can be based on assets (operating profit / operating assets), sales (operating profit / sales), or expenses (gross profit / operating expenses). The reliability of these indicators can vary depending on size, industry, or relevant product lines, so it is important to understand the nature of the business and the uncontrolled taxpayer(s) with which you are comparing.
Profit split transfer pricing method: There are two ways the profit split method which can be used—the comparable profit split and the residual profit split. In practice, the comparable profit split method is rarely found as it’s based on profit from an uncontrolled transaction involved in similar transactions and activities. As this information is rarely available, the more commonly used is the residual profit split method.
Under the residual profit method, the first step is to allocate a portion of the income to each of the “routine” activities of the taxpayers. Next, the remaining residual profit is divided among the controlled taxpayers based on the value of the non-routine business activities in the process. Routine business activities are considered to be those directly related to the operating profit of the business. Non-routine activities would include the value of intangible property.
Unspecified methods: Used if a method other than those listed above is considered the best for the specific situation.
Avoid Penalties with Contemporaneous Transfer Pricing Documentation
While the implementation of the transfer pricing adjustments into your taxable income is very important, another critical aspect of transfer pricing is the documentation. Transfer pricing documentation on all intercompany transactions, including those on intangible property, must be contemporaneous. This means that it must be in place as of the time the tax return is filed. Without documentation there could be severe penalties of 20-40% of the underpaid tax due on the transfer pricing adjustments that the district director deems reasonable for the intercompany transactions.View full article
Does your company have intercompany transactions? Do the transactions cross over multiple foreign local jurisdictions?
If you answered yes to either of these questions, you may be at risk for a transfer pricing adjustment from the IRS, foreign jurisdiction, or even a state jurisdiction. In addition, with the current OECD base erosion and profit shifting (BEPS) action items coming into the spotlight, transfer pricing should be at the forefront of all companies. Each entity should be analyzing their intercompany transactions to ensure they can be supported as arm's length transactions. This analysis can provide support that the taxpayer is not intentionally shifting profits into a lower tax jurisdiction at a rate that is unreasonable, and also provide excellent tax planning opportunities.
Intercompany transactions cover many different types of transactions. Some examples are as follows:
- Tangible transactions from a manufacturer to a related-party distributor
- Intangible transactions of know-how from one related-party to another
- Fees for services of one related-party to another
- Management fees for centralized corporate offices for services such as admin, HR, and finance
The key phrase to all transfer pricing is “arm's length.” Arm's length means that the transaction should be executed as if it were being done with a third-party. There should be no advantage to the transaction due to the intercompany nature. According to the U.S. and many foreign jurisdictions regulations, each intercompany transaction must support that their transactions are at arm’s length and the company is not trying to erroneously shift profits to lower tax jurisdictions.
Do you have support that shows the intercompany transactions are at arm’s length? Do you have intercompany agreements in place that are followed for these intercompany transactions?
If you answered no to either of these questions, you may not have the adequate support that the IRS deems necessary according to the transfer pricing regulations in Section 482. These documents are meant to be contemporaneous in nature, which means that they should exist as the intercompany transactions exist. As part of the increasing scrutiny on transfer pricing, a company that faces an IRS audit will most likely be asked for their contemporaneous transfer pricing documentation.
The documentation required by the IRS is known as the following 10 principal documents:
1. Overview of your company’s business
2. Description of your company’s organizational structure
3. Any document explicitly required by the §482 regulations
4. Description of the method selected and the reason why the method was selected
5. Description of the alternative methods considered and rejected
6. Description of the controlled transactions and internal data used to analyze them
7. Description of the comparables used, how comparability was evaluated, and what adjustments were made
8. Explanation of the economic analysis and projections relied on
9. Summary of any relevant data that your company obtains after the end of the tax year and before filing a tax return
10. General index of the principal and background documents, and a description of your record-keeping system
While these are the documents the IRS requests, companies should continue to be cognizant of the level of risk in their intercompany transactions and whether or not an entire transfer pricing study is deemed necessary according to the company’s appropriate level of risk. A more practical approach may be available if the company decides that the risk level of their transactions is minor.
What Should Companies Do?
With transfer pricing being a hot topic in the tax world, companies should have documentation on the intercompany transactions that cross over multiple jurisdictions. Taxpayers should be able to support that their intercompany transactions are being transacted at an arm's length standard to the IRS if an audit were to occur. This documentation is important as protection for the company should an audit occur and could be used as a tax planning tool to be able to reasonably, within an arm's length standard, shift profits to a lower tax jurisdiction. For expert guidance in compiling and reviewing your documentation, please contact us.View full article
“Things as certain as death and taxes, can be more firmly believ’d.” - Daniel Defoe
Most U.S. nonresidents are aware these days that if you move to the United States or have U.S. investments, you may become subject to U.S. income tax laws. But what may not be as well known is that you may also be subject to U.S. estate tax, even if you don’t earn any income or file income tax returns.
The Internal Revenue Code is notoriously complex and this area is no exception. The Internal Revenue Code actually has two separate determinations for taxing a foreign person: residency for the income tax, and domicile for the estate tax. Even if you are not a resident for income tax, you can still be considered domiciled for the estate tax.
The IRS defines residency for income tax under a number of different tests, including whether the taxpayer holds a green card or if they’ve been in the country for a substantial portion of the year. You can also make the First-Year Election to declare your residency on the first U.S. income tax return you file.
When it comes to the estate tax, federal regulations determine a “domicile” as living somewhere for a period of time without any immediate plans of leaving. Domicile depends on both physical presence and intention to stay in the country. Simply put, if you intend to stay, you’re domiciled, but if you plan to leave, you need to actually leave.
If a person is deemed to be a U.S. resident for estate tax, their worldwide assets are subject to the estate tax. If someone is a nonresident, only assets with situs in the United States are subject to inclusion in his or her estate.
What Can You Do if You Are Subject to U.S. Estate Tax?
At this point, you may be thinking, “I have U.S. and foreign assets, so how can I reduce or avoid U.S. estate tax?”
The answer to that question largely depends on your current situation.
If you’re a nonresident alien who has a domicile in the United States, there’s a certain amount of preplanning you can do in anticipation of this tax, such as gifting intangible property before establishing a domicile in the U.S. There are other measures you can take, such as having U.S. real estate and equities owned by a foreign corporation, to make sure you are in the most advantageous position in the U.S. and the foreign country.
It’s also important to consider whether a nonresident’s country of citizenship has a tax treaty in force with the United States. The U.S. has active tax treaties with many countries, and depending on the country, a nonresident individual may be entitled to the full $5,495,000 estate exclusion or only a statutory $60,000 exclusion.
Expatriation might seem like a good way to avoid the U.S. estate tax—and this may be the case in certain situations—but Section 2107 of the Internal Revenue Code makes nonresident aliens subject to U.S. estate tax if they were domiciled in the United States for a period of five years or more. The window for being subject to this tax is ten years and you are taxed on any assets (tangible or intangible) that are situated in the United States.
If you are a foreign national living and owning property in the U.S. and have concerns that you may be subject to U.S. estate tax, we can help you sort out your options. We at Freed Maxick pride ourselves on our experience and expertise with these and other international tax matters. Please contact us if you have any questions.View full article
So you decided to invest in a foreign mutual fund. At first glance, the US income tax reporting requirements for income received from this investment appear simple: Just report dividends, interest income, and any capital gains on your form 1040 as if the income was received from a US mutual fund, right?
Unfortunately, the answer is not that simple.
Because the IRS classifies foreign mutual funds as passive foreign investment corporations, aka “PFICs,” there not only is additional reporting requirements for you the taxpayer, but any income received from these investments could be subject to a much higher tax rate and increase your overall tax liability significantly.
What is a Passive Foreign Investment Corporation?
The IRS defines a PFIC as any foreign corporation that meets either of the two requirements below:
- At least 75 percent of the gross income from the corporation for the taxable year is passive income (e.g., dividends, interest, capital gains, etc.), or
- The average percentage of assets held by the corporation that generates passive income is greater or equal to 50 percent.
Therefore, pooled investments registered outside the United States, such as foreign mutual funds and foreign hedge funds, will qualify as PFICs under the Internal Revenue Code.
PFIC Tax Implications
So now that we know a foreign mutual fund qualifies as a PFIC under US tax law, why is this significant?
For starters, your investment in the mutual fund must be reported separately on Form 8621 each year, regardless of whether or not you received income from the fund, provided that the value of the PFIC stock owned both directly and indirectly exceeds $25,000. While failure to file Form 8621 in this situation would not result in any penalties, it would leave the statute of limitations on all tax matters on the return open indefinitely, leaving you the taxpayer more vulnerable to potential IRS audits and additional tax assessments.
The biggest implication, however, is the additional tax and interest that might be owed on any passive income received from the fund during the year. While there are various elections you can make with regard to the recognition of income from the PFIC, let's assume that you did not know that the investment had to be specially reported and never made an election.
Instead of just picking up the income in the current year, income is subject to the “excess distribution” regime. As a result, any distributions classified as excess must be allocated among all tax years in your holding period and will then be taxed at the highest rate enacted by law in that year. In addition, since that tax was technically owed in prior years, you must also calculate interest owed. This amount of interest can add up quickly especially if you have held the investment for a long period of time and are now just reporting the income properly on Form 8621.
The IRS defines “excess distributions” that are subject to this additional tax as the following:
- Any gain from the sale of the PFIC, or
- Any distribution from the PFIC that exceeds 125% of the prior three year average of distributions previously received from this investment.
Suffice it to say, when it comes to reporting your foreign mutual fund investment on your tax return, the IRS requirements can be very confusing. Not only do you need to determine if you are required to file Form 8621, but you must also consider the various elections available to you (mark to market, qualified electing fund), what (if any) election to make, and how to properly report the income received and tax owed from these investments.
Stay tuned—another post on other types of PFIC investments is coming soon. If you have any investments in foreign mutual funds or are thinking about investing in some, please contact us for advice and potential planning opportunities.View full article
The Impact of the Foreign Account Tax Compliance Act (FATCA) of 2010
Breathes there the man with soul so dead, who never to himself hath said, “This is my own, my native land.” - Edward Everett Hale, “The Man Without a Country”
Poetic and patriotic words, but the reality of today is that many U.S. citizens don’t feel this way about their native land. In 2015, 4,279 U.S. persons relinquished or renounced their U.S. citizenship, a record-breaking amount. Many analysts project that the total number of renunciations or relinquishments in 2016 will exceed the 2015 mark. To put these numbers in perspective, less than 300 people renounced their U.S. citizenship in 2006.
Looking at statistics like these, you may ask yourself: “Why are so many people giving up U.S. citizenship?” And possibly, “Is this something I should consider?”
The Foreign Account Tax Compliance Act (FATCA) of 2010 and other U.S. tax reporting regulations may have something to do with why this is happening.
A simplified explanation of the FATCA legislation is as follows:
- It is primarily aimed at preventing tax evasion by U.S. taxpayers through the use of non-U.S. financial institutions and offshore investments.
- Foreign financial institutions are required to identify accounts held by U.S. persons and report account information to the IRS. Absent this information, they are required to withhold U.S. tax on U.S. source income paid and may decline account opening or terminate services.
Furthermore, the U.S. tax system is based on citizenship. A U.S. citizen pays tax on their worldwide income no matter what country they live in.
Beyond the tax compliance burden, the financial institution impact of the FATCA legislation has significantly impacted U.S. citizens living abroad. Rather than attempt to comply with FATCA reporting requirements, many foreign financial institutions are simply refusing to open or hold accounts for U.S. persons.
To alleviate the financial hardship and tax compliance burden, many U.S. citizens living abroad have decided not to maintain their U.S. citizenship. U.S. citizenship can be terminated through renunciation. A formal renunciation of U.S. citizenship must be made in a foreign state, generally at a U.S. consulate, and there are several State Department forms to file along with a processing fee.
In addition to the paperwork and fees, the exit tax under Internal Revenue Code Sec. 877A may apply. Generally speaking, in order to avoid the exit tax you must:
- be current with U.S. tax filings for the past 5 years,
- have had annual U.S. tax liabilities below $160,000 for those 5 years, and
- a net worth of less than $2,000,000.
If you find yourself in the situation where you are considering renunciation of your U.S. citizenship, there are planning opportunities and compliance requirements that must be considered. Contact Freed Maxick's International Expatriate Tax Services professionals to discuss your specific situation, or call to speak with an individual directly at 716.847.2651.View full article
Avoid potential tax ramifications in both the U.S. and Canada.
The United States has some mechanical rules for determining if one will be considered a resident for tax purposes.
Two Ways You Could Be a U.S. Resident
First, if you receive a Green Card, you will be granted the privilege of residing permanently in the U.S. as an immigrant. This will continue until either you surrender your Green Card or immigration authorities revoke it. As long as you hold a Green Card, you are required to file U.S. resident tax returns.
The second qualifying condition is if you meet the Substantial Presence Test. This is basically a 183-day of presence in the U.S. test—however, it's cumulative. You are considered a resident if you are physically present in the U.S. for at least 31 days in the current year, and the sum of the days in the current year plus 1/3 of the days physically present during the first preceding year, plus 1/6 of the days present in the second preceding year exceeds 183 days. (There are certain situations that allow an exemption of days for students, those in transit, commuters, and days spent for medical purposes.)
You must file a Form 8840 or Form 8843 and either attach it to your 1040NR or you may file it alone. These forms will exempt a non-U.S. citizen who meets the substantial presence test from being treated as a resident. They cannot be used by a Green Card holder.
There are also Treaty Tie Breaking Rules. Under Article IV of the U.S./Canada Treaty, there are several steps that you can follow to establish that even though you are present in the U.S. for over the required number of days, you actually have a closer connection to Canada. You must file a Form 8833 and disclose your position.
If it is determined that you are a resident of the U.S. for tax purposes, you will be taxed on Worldwide Income, regardless of where it is earned. You will also be required to file any of the Foreign Reporting Forms required of U.S. persons, such as FBARs, and Forms 8938, 5471, 8865, 8621, and 3520, to name a few.
If you are determined to be a non-resident, you are taxed on U.S. Source Income only. However, if you are taking a Treaty Position to be taxed as a non-resident, you are still required to file all of the reporting forms as named above.
Canada also has established consequences for being out of the country for too long. The Entry-Exit Initiative was due to be implemented June 30, 2014. This does not have a temporary stay at the moment. Under the Initiative, travelers will be required to swipe their passports upon entering and leaving each country. Canada and the US will share this information. Both countries remain dedicated to full implementation of the Initiative.
When fully implemented, this Initiative would allow both countries to be able to track, in real-time, the number of days actually spent in each country. All days are counted in this total, including days for work, vacation, and day trips for shopping or entertainment.
Once a Canadian resident loses his resident status, he is deemed to have disposed of his assets, which may generate a large tax bill. They may also risk the loss of the entitlement to Provincial Health Care. The time period out of the country depends on your Province of Residency.
In addition to being deemed a U.S. Resident for Income Tax purposes, a person's estate could also become liable to U.S. Estate tax.
A Word to the Wise
Use extreme caution on counting the number of days of presence in the U.S. Generally, snowbirds should not extend their time past 120 days per year. Under the cumulative test, 120 days consistently will bring you to 180 days over a three year period. You do not want to risk consequences from either country by exceeding this number.
Contact Freed Maxick's International Corporate Tax Services professionals to discuss your specific situation and avoid unexpected tax liabilities, or call to speak with an individual directly at 716.847.2651.View full article
What you need to know as a nonresident who sells U.S. real property interests
If you are selling a piece of U.S. real estate, you may have a tax withholding obligation to the purchaser. The FIRPTA rules require that buyers of U.S. real property know the residency status of whoever is selling the property for reasons explained below.
FIRPTA requires that a purchaser of U.S. real property withhold tax on the gross sale price if the seller is a non-U.S. person. Real property for these purposes is either a piece of real estate or a corporation that holds real estate. A non-U.S. person for this purpose includes all foreign persons and foreign entities selling or transferring property located in the U.S. Any withholding tax owed (including interest) that isn’t remitted becomes a liability of the purchaser.
FIRPTA Withholding Rate Increase
As of February 2016, the FIRPTA withholding tax rate has increased to 15% from the previous rate of 10%. The tax is calculated based on the gross sales price with no consideration for the actual gain or loss. As a result, even on a loss transaction, foreign real property sellers are looking at the potential of a 15% tax withholding from the gross proceeds.
As an example, assume (as a foreign person) you sold a piece of real estate on June 1st for $1,000,000. The purchaser would be obligated to withhold $150,000 of the sale price and remit this to the IRS. This is true regardless of what your basis in the property was at the time of the sale. However, it is possible to request a reduced rate of withholding in advance of the closing to reduce or possibly eliminate this withholding. This can save a substantial amount of money, as any tax that isn’t owed but is withheld would not be available for refund until the following year upon filing a tax return.
There is a process by which you can apply for an exemption from or reduction to this mandatory withholding. Form 8288-B can be filed on behalf of the seller. As long as this form is filed by the date of closing, the purchaser will not be required to remit the withholding tax until notified the form has been processed by the IRS.
- Any purchaser of a U.S. Real Property Interest (USRPI) should be aware of the seller’s U.S. residency status.
- If you are a foreign seller of USRPI, the purchaser will withhold and remit 15% at settlement unless you apply for a withholding exemption.
- There are exceptions from the withholding rules. For example, if the gross sales price is $300,000 or less and the purchaser intends to use the property as a residence, there is no withholding required.
- All of this is in an effort to reduce the amount of withholding up front prior to filing of the tax return by the seller.
We at Freed Maxick have vast experience with these and other international matters. Please contact us if you have any questions.View full article
Avoid Unintended Results from Complex New Rules for Intercorporate Debt
In April 2016, the Treasury Department and the IRS issued proposed regulations under Sec. 385. If the proposed regulations are finalized, they will change the way that corporate groups treat intercompany debt. Issued along with guidance on corporate inversions, the new proposed Sec. 385 regulations target transactions that increase debt between related parties where there is no new investment in the U.S.
Following a corporate inversion or a foreign takeover of a U.S. company, a U.S. subsidiary can issue debt to its foreign parent which in turn transfers the debt to a foreign affiliate located in a low-tax jurisdiction. The U.S. subsidiary will deduct the interest expense at a higher tax rate than the tax rate paid on the interest income received by the foreign affiliate. The foreign affiliate may even implement tax strategies to avoid paying any tax on the interest income.
The new proposed regulations will make it more difficult for companies to engage in transactions described above as well as impact the U.S. tax treatment of cross-border loans between affiliated members of a multi-national enterprise, loans between commonly controlled U.S. corporations not filing a consolidated tax return, and loans between members of brother-sister U.S. consolidated return groups. The new proposed regulations will not impact loans between members of a single consolidated return group.
The new proposed regulations will do the following:
- Impose new documentation and reporting requirements that must be complied with on a timely basis (defined in the new proposed regulations). If the requirements are not met, the purported debt instrument will be characterized as stock for U.S. tax purposes. A reasonable cause exception applies.
- Allow the IRS to treat a debt instrument issued between members of a modified expanded group as part debt and part stock to the extent dictated by the relevant facts and circumstances. A modified expanded group is based on the affiliated group principles of Sec. 1504(a) modified with a 50% ownership requirement with the common parent and includes domestic and foreign corporations, RICs, REITs, S corporations, partnerships, trusts and estates, and individuals that own at least 50% of the stock or interests in a modified expanded group member.
- Require recharacterization of certain debt instruments to equity. Debt instruments issued in the following situations will be recast as stock:
Debt issued by a corporation to a related corporate shareholder as a distribution
Debt issued in a two-step version of the corporate distribution where a U.S. subsidiary borrows cash from a related company and pays a cash dividend to its foreign parent
Debt issued by a corporation in exchange for stock of an affiliate, e.g. the repurchase of shares for a note or the purchase of affiliate shares for a note in what would otherwise be a Sec. 304 transaction
Certain debt issued as part of an internal asset reorganization if the instrument is received by a corporate transferor that is a modified expanded group member with respect to its transferor corporation stock. The definition of an expanded group member is derived from the affiliated group rules of Sec. 1504(a) and includes foreign and domestic corporations related by at least 80% (vote or value) direct or indirect common parent ownership. Note that an expanded group for these purposes is different than a modified expanded group mentioned above in the “part debt and part stock” rule.
Exceptions to the Rule
There are certain exceptions to the application of the new proposed regulations. The exceptions are provided for small companies that are not publicly traded, groups with less than $50 million of intercompany debt, and for routine distributions such as the distribution of current year earnings and profits.
The new proposed regulations apply to debt instruments issued or deemed issued after April 4, 2016. Intercompany debt instruments that are subject to recharacterization will continue to be treated as debt for 90 days after the issuance of final regulations. Thereafter, these debt instruments will be considered to be equity. Debt instruments issued before April 5, 2016 are grandfathered, but will be subject to the final regulations if they are significantly modified after April 4, 2016.
The new proposed regulations under Sec. 385 are complex and require careful analysis. Taxpayers should make sure they understand the impact of these new rules on all intercorporate debt transactions so that they don’t end up with unintended results. Contact us to discuss your specific situation.View full article
We see it happening more and more. U.S. companies are sending their employees into foreign (host) countries on temporary but at times lengthy business assignments. Employees are willingly accepting these offers, not realizing the tax exposure risks that these opportunities could present. In order to mitigate some of these risks, we see payroll departments turning to something known in the industry as “shadow payroll.”
So What is Shadow Payroll?
Shadow payroll is a mechanism used to assist with the reporting and tax withholding obligations in a host country for an employee who is remaining on his or her home country’s payroll system while on assignment in the host country. The payroll in the host country will “shadow” what is being reported in the home country, but the employee will not receive any compensation from the host country.
The purpose of the shadow payroll in the host country is to remain in compliance with jurisdictional payroll tax laws and remit any taxes or forms that need to be filed in the host country while allowing the employee to stay on the U.S. employer's retirement, stock option, and other benefit plans.
Typical example of when to use shadow payroll
A U.S. person travels on a long-term work assignment to Canada. Since the U.S. taxes income on a worldwide basis, the employee and employer must stay compliant in the U.S. while also taking into consideration any tax requirements in Canada. The employer will typically setup a shadow payroll for Canada for that U.S. person as if he or she were being compensated in Canada in order to calculate the payroll tax requirements for the wages earned in Canada. The employee will continue to be paid wages solely from the U.S. payroll system and all U.S. payroll tax requirements will also continue to be satisfied. To further complicate the matter, there may be additional state or provincial tax filing obligations that need to be considered.
While employers are concerned with keeping in compliance with all appropriate tax requirements when implementing a shadow payroll system, employees face the concern that they may be double taxed on their wages that are taxable in both the U.S. and host countries. It is important to mention that there may be foreign tax credits, exclusions, as well as tax treaties benefits available to the employees between the U.S. and certain other countries to help mediate the potential of double taxation.
If you are a U.S. company that is looking to send employees on a foreign assignment or an employee looking to avoid the risk of double taxation, please contact us.View full article
The FBAR filing due date will be different next year.
Hopefully you have already submitted your 2015 FBAR filing which is due by June 30th this year. If not, you still have a little time left to scramble to get those filings submitted timely. And now just when you may have gotten used to the idea that your FBAR filing is due June 30th, that is all going to change next year. Under the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, which was signed into law during 2015, the due date for the FBAR next year will be different.
FBAR filings due in 2017 (for the 2016 FBAR) will be due April 15th. There will now be an extension available in order to extend the due date for a maximum of 6 months until October 15th. The official guidance as to how the extension will actually be applied for has not yet been issued but it has been speculated that it will be extended with an extension for your income tax return.
Additionally, there will be a provision for an automatic two month extension for a taxpayer residing outside of the country similar to the rules for income tax returns, and there is supposed to be some penalty relief available for first-time filers who fail to timely request or file an extension.
Recap: Who Has to Report?
I’ve talked about it in a previous post, but here’s a quick reminder of who is required to file an FBAR.
If you are a United States person that has a financial interest in or signature authority over foreign financial accounts, you must file an FBAR if the aggregate maximum value of those foreign financial accounts exceeds $10,000 (U.S. dollars) at any point during a calendar year. Interestingly, this also includes accounts of your employer that you might have signing authority over.
Let’s break this down even further. A “U.S. person” includes all of the following…
- U.S. citizens
- U.S. Green Card holders or U.S. residents
- Foreign nationals or Individuals who spend a significant amount of time in the U.S.
Therefore, there are many times we see individuals who might live in another country, but spend time in the U.S., whether it be traveling for work or for vacations. Many of these individuals may unknowingly trip up a tax filing obligation based on the amount of time they spend in the U.S.
To meet the substantial presence test, you must be physically present in the U.S. on at least 31 days during the current year, and 183 days during the 3-year period that includes the current year and the 2 preceding years.
The test is calculated by counting the following:
- All of the days you were present during the current year,
- 1/3 of the days you were present in the first year before the current year, and
- 1/6 of the days you were present in the second year before the current year
If you meet the test described above you have an FBAR filing requirement.
What Should You Do If You Were Supposed to File an FBAR But Didn’t?
There are options available if you find that you should have filed an FBAR but didn’t. The IRS has made a few different programs available in order to file your delinquent FBAR filings such as the Delinquent FBAR Submission Procedures, the Offshore Voluntary Disclosure Program (OVDP), or one of two Streamlined Filing Compliance Procedures.
Which program you should use will depend on your specific facts and circumstances. Since the penalties for the failure to file an FBAR can be extremely severe, it’s important to consult with a professional who is experienced in this area. An experienced professional can help you to determine which path is right for you in order to get into compliance. Our international tax team here at Freed Maxick has a depth of experience in this area and we encourage you to contact us to assist in determining the best way to proceed with submitting your filings.View full article