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Foreign Tax Issues Chapter 13 pp. 445-476

Foreign Tax Issues Chapter 13 pp. 445-476. 2016 National Income Tax Workbook™. Foreign Tax Issues p. 445. Issue One: compliance w/reporting Issue Two: individual taxpayer ID number Issue Three: tax on nonresident aliens Issue Four: estate and gift tax

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Foreign Tax Issues Chapter 13 pp. 445-476

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  1. Foreign Tax IssuesChapter 13 pp. 445-476 2016 National Income Tax Workbook™

  2. Foreign Tax Issues p. 445 • Issue One: compliance w/reporting • Issue Two: individual taxpayer ID number • Issue Three: tax on nonresident aliens • Issue Four: estate and gift tax • Issue Five: Canadian tax returns • Appendix One: foreign issue checklist • Appending Two: financial institutions

  3. Issue One: Compliance p. 446with Reporting • Streamlined filing compliance procedures • Delinquent report of foreign bank accounts • Delinquent international information returns • Offshore Voluntary Disclosure Program

  4. Reporting – Foreign p. 446Account Tax Compliance Act • Foreign Account Tax Compliance Act (FATCA) • Report foreign financial assets • File Form 8938 • Foreign financial institutions must register and report

  5. Foreign Bank Account p. 447Report • Foreign Bank Account Report (FBAR) • Report foreign financial interests • File electronic FinCEN 114 • If aggregate value greater than 10K at any time during the tax year

  6. Penalties p.447 • FATCA - $10,000 penalty for failure to file (add’l penalty if fail to file within 90 days of notice) • FBAR - $10,000 penalty per non-willful violation (higher penalty for willful violation)

  7. Streamlined Filing pp. 448-449Compliance Procedures (SFCP) If failure to report foreign financial assets and pay tax is non-willful: • Streamlined procedure to file delinquent or amended returns • Special terms for resolving tax and penalties

  8. SFCP Requirements p. 448 • Not under civil exam or criminal investigation • Taxpayer is individual or estate • Reside in US (domestic procedure) or outside US (foreign procedure)

  9. SFCP Application p. 449 • 3 yrs complete/accurate returns • Write “streamlined domestic offshore” • Sign Form 14654 • Submit tax, interest, and penalty (if applicable)

  10. Non-Willfulness pp. 450-451 • Negligence • Inadvertence • Mistake • Good faith misunderstanding of law

  11. Explanation of non- p. 451Willfulness • Reasons for past failure • Source of foreign financial assets and accounts • Explanation of contacts • History of the account or asset • Reliance on professional advice

  12. Presumption p. 451 • If evidence that tax practitioner asked about foreign financial assets and taxpayer denied: • Presumption of willfulness • Can’t use the SFCP

  13. SFCP Penalties pp. 453-454 • No failure-to-file, failure-to-pay, information reporting, accuracy-related or FBAR penalties • 5% penalty for domestic • No 5% penalty for foreign

  14. Delinquent FBAR p. 454Submission • Use if: • Have not filed required FBAR • Not under exam or investigation • IRS has not contacted re FBAR • No penalty for failure to file if: • Reported and paid all tax

  15. Delinquent Internat’l p. 454Information Return • Use if: • Have not file required internat’l information return • Reasonable cause for not timely filing • Not under exam or investigation • IRS has not contacted re return • File delinquent return with reasonable cause statement – for each return

  16. Offshore Voluntary p. 455Disclosure Program • For taxpayers with: • Potential criminal liability • High civil liability due to willful failure • Benefits: • Protects from criminal liability • Terms to resolve tax and penalties

  17. OVDP FAQs pp. 455-457 • Eligibility for transitional treatment • Effect of transitional treatment • Process to apply • Evaluation of application See “OVDP Frequently Asked Questions and Answers 2014” at www.irs.gov

  18. Individual Taxpayer ID p. 458Number (ITIN) • 9-digit number for tax processing • Only for foreign persons who are not eligible for a SSN

  19. Obtaining an ITIN p. 458 • Form W-7 • Documentation of foreign status and identity • Supporting documentation • US tax return or documentation to show reason for ITIN

  20. Documentation p. 458 • Submit original documentation of foreign status and identity or: • Certified by issuing agency • Certified acceptance agent • New rules for dependents

  21. Expiring ITIN pp. 459-461 • ITINs expire if: • 3rd consecutive year of nonuse • Issued before 2013 • Use 9/2016 Form W-7 to renew

  22. Tax of Nonresident p. 461Aliens • Nonresident alien: • Not a US citizen or national • Not met green card test • Not met substantial presence test

  23. Nonresident Income p. 461Tax Returns • May have to file US return if: • Engaged in trade or business in US • US source income • Representative or agent • Fiduciary for foreign estate/trust • Fiduciary or other person with care of person or property of nonresident

  24. Income to Report p. 462 • Effectively connected with US trade or business (EFI) • US source income that is fixed, determinable, annual, or periodic (FDAP)

  25. Form 1040NR p. 462 • File Form 1040NR • April 15 or June 15 deadline • Form 4868 to request extension • Must file to claim deductions or credits

  26. Foreign Investment in p. 463Real Property Tax Act (FIRPTA) • Withholding on the sale of US real property by non-us taxpayer • Typically withhold 10% or 15% of gross sale proceeds • Includes certain entity dispositions • Primary obligation on the buyer

  27. FIRPTA Exceptions p. 464 • Common exceptions: • $300K or less and buyer uses as residence • Non-recognition provision applies (must file notice) • $0 realized on the sale

  28. Withholding Certificate pp. 464-465 • Apply for certificate to reduce or eliminate withholding • Commonly based on calculation of max tax liability • File Form 8288-B

  29. Reporting and Paying p. 465 • Withhold and remit to IRS by 20th day after day of transfer • File Forms 8288 and 8288-A • Transferor receives file-stamped 8288-A from IRS • File with US tax return

  30. Estate and Gift Tax p. 466 • $5,450,000 estate/gift exemption for US citizens and residents • $60,000 estate exemption for nonresident aliens • Special treaty rules apply

  31. Gift Tax for Nonresident p. 466Alien • Tax on transfers of real and tangible property in the US • Includes: • US real property • Tangible property in the US • Currency or cash held in the US

  32. Exclusions/Deductions p. 466 • Annual exclusion $14,000 • $148,000 for gift to noncitizen spouse • No gift splitting

  33. Estate Tax pp. 466-467Deductions • Unlimited marital deduction for property passing to US spouse • Unlimited marital deduction for property passing to resident (non-US citizen) spouse if transfer to qualified domestic trust (QDOT)

  34. Estate Tax pp. 466-467Exemptions • $60,000 estate tax exemption • US Canada Income Tax Treaty • Canadians receive a fraction of the US estate tax exemption • E.g. 1/3 of Canadian’s worldwide assets are US assets, receive 1/3 exemption

  35. Canadian Tax Returns p. 467 • Client may have to file in Canada if: • Canada employment income • Business in Canada • Disposition of Canadian property • Exercised Canadian stock option • Canadian grant, scholarship, or prize • Canadian resident • Recaptured capital cost allowance • Income interest in Can. trust or insurance

  36. Passive Income p. 468 • Generally no tax filing for: • Interest • Dividends • Rent • Pensions and annuities • Withholding requirements may apply

  37. Canadian Rentals pp. 468-469 • Section 216 election to report net tax on rental income at graduated rates • File by June 30 of year after rental income paid or credited • Form NR6 to avoid withholding

  38. Canadian Real pp. 469-470Estate Sales • Notify CRA • Request clearance certificate • If no certificate received before sale, withholding required • Canadian tax return for year of disposal

  39. Canadian Pensions pp. 470-471 • Canada Old Age Security System, Canada Pension Plan, or Quebec Pension Plan • Treat the same as US social security payments • Combine with US social security

  40. Canada Estates p. 471and Gifts • Deemed disposition regime • Deemed disposal at FMV on date of death • Deemed disposition when donor makes gift • Exceptions for transfer to spouse

  41. US Resident pp.471-472Decedent • Disposition of Canadian real estate by nonresident • Sale rules apply • Registered retirement accounts deemed liquidated

  42. Appendix One Questions to ask every client: • Lived in foreign country? • Worked in foreign country? • Real estate in foreign country? • Interest in foreign companies? • Beneficiary of foreign trust/estate? • Gift from foreign source? • Foreign investments, bank accounts, pension, life insurance, or powers of attorney?

  43. Appendix One pp. 472-474Continued • If answer to any initial question is “yes” may have to ask supplemental questions • Verify answers on an annual basis

  44. Appendix Two pp. 474-476 • Foreign Financial Institutions • Under investigation or cooperating with gov’t investigation • If taxpayer has accounts with any of these institutions likely will not qualify for streamlined filing compliance procedures

  45. Questions?

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