International Tax

The Facts:IRS discrimination
a) The 2016 IRS budget keeps the IRS funded at fiscal 2015 levels.
b) The 10.6 billion in funding is 1.7 billion less than the President’s budget.
c) Since 2010, IRS funding has been reduced by 18%.  

What this means to US taxpayers:
13,000 fewer IRS employees, 10,000 fewer enforcement staff, the lowest individual and business audit levels in 10 years, and an average wait time of 23 minutes to receive assistance via phone when calling  into the IRS.

In direct relation, the IRS now resorts to indirect, ancillary methods to assist with the assessment and collection of tax due.  This article explores three such methods identified recently by the National Taxpayer Advocate.


Third Party Contacts

What is third party contact (TPC)? Internal Revenue Code 6103 prohibits the IRS from disclosing taxpayer information unnecessarily.  There is an exception to the rule if the disclosure is necessary for the IRS employee to execute their job duties.  The IRS is generally required to give taxpayers reasonable advanced notice before making a TPC.  Additionally, if a TPC occurs, then upon request by the taxpayer the IRS must provide post-contact reports.

What is the process for providing TPC notice? Example (under the perfect IRS scenario): Taxpayer owns a business.  Taxpayer fails to remit payroll taxes to the Federal Government.  IRS assesses a balance due and begins collection activity.  Taxpayer fails to provide the IRS with the information needed to determine collection potential.  IRS gives advanced notice to the taxpayer of third party contact request.  Taxpayer fails to provide information.  IRS discloses taxpayer’s confidential information to business vendors in an effort to collect information from the vendors.  This is a third party contact.

What are the ramifications to the taxpayer of third party contact?

Senate Committee on Finance that wrote this law explains the ramifications as follows:

“Taxpayers should be notified before the IRS contacts third parties regarding examination or collection activities with respect to the taxpayer.  Such contacts may have a chilling effect on the taxpayer’s business and could damage the taxpayer’s reputation in the community.”

What is the best strategy for a taxpayer dealing with this type of situation?

Third party contact notices normally occur with businesses or self-employed individuals, i.e., sole proprietorships.  The general information requested by the IRS manifests on either IRS Form 433-A or more likely 433-B.

The proverbial fork in the road can categorize the danger with both of these forms:
-What does the IRS consider mandatory information versus discretionary information?
-Secondarily, there are statutory rules that the IRS must follow when issuing TPC notices and conducting a TPC.  

It is important to hold IRS employees accountable to the law.

The best strategy for dealing with a TPC is as follows:

  1. Look Internal
    • If you are a business, how have you been doing your bookkeeping?
      • Do you use QuickBooks? Are your books in order?  
      • Are there any foundational items that need to be corrected?
    • If you are an individual,what does your personal record-keeping look like?
  2. Look External
    • Once you understand your situation internally, obtain representation such as a Tax Attorney or Federally licensed Enrolled Agent.  
    • The right practitioner should be able to act as a strong buffer between you and the IRS.
  3. Discovery with the IRS
    • If third party contacts have been made, then request a detailed breakdown of contacts. 
    • If no contacts have been made, then arrange to produce the requested information based on a reasonable timeline. Your practitioner should also request that the IRS agent or examiner produce their workpapers, i.e. 6103 disclosure.

      You have the legal right to this information.

       

  4. Financial Analysis
    • Conduct a financial analysis review with your practitioner – The discovery phase only gets halfway.
    • The financial analysis of income and assets sets the final strategy for success.
  5. ImplementationThis is always the hard part 
    • The final strategy culminates into a submission to the IRS that takes your “position.”
    • You should always review the submission and have your practitioner explain how it falls within the guidelines of the Internal Revenue Manual (IRM), similar fact scenario tax court cases, private letter rulings or chief counsel advice.
  6. Revise and review  until you are fully comfortable with the end product.

No matter the situation, empower yourself to seize opportunities and take back control from the IRS.

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On January 7, 2016, the IRS made two updates to the Streamline Filing Compliance Procedures.

First, the IRS added Frequently Asked Questions 13, 14, and 15 to the Streamline Filing Compliance Procedures (Domestic).  Correspondingly, the IRS added those same questions to the Streamline Filing Compliance Procedures (Foreign) – questions 6, 7, and 8.

These questions and answers detail the following:

  • What facts taxpayers need to provide in their non-willful certification statement
  • What to do if a joint spouse refuses to sign off on the amended returns and certification needed for a Streamline Filing
  • Whom to call if there are questions about the forms

The most interesting out of these three are the facts or issues that taxpayers need to address in their non-willful statements.  The IRS indicates the following topics are most germane:

  • “Specific reasons, whether favorable or unfavorable…that are relevant to the failure to report all income, pay tax and submit FBARs”
  • Source of funds
  • Account contact
  • Schedule B check the box facts
  • Foreign entity disclosure
  • Reliance on a professional advisor
  • If married, then provide individual reasons for each spouse

In regards to the first topic, as a practitioner I can say that from the IRS point of view what they do not want is for taxpayers to raise facts that are only favorable to their position.  The IRS wants a full accounting of the facts and circumstances.  This is in alignment with the history and policy under IRS Voluntary Disclosure Practice.  Taxpayers may argue that this violates the Fifth Amendment right against self-incrimination.  The typical IRS response to this argument is that if you are worried about self-incrimination the taxpayer should probably utilize the Offshore Voluntary Disclosure Program (OVDP) instead of the Streamline Filing Compliance Procedures.  As a practitioner, I would advise that any taxpayer who wants to use the Streamline Filing Compliance Procedures should have a tax attorney familiar with both IRS Voluntary Disclosure Practice and international tax issues draft the factual non-willful certification statement or at a minimum review the certification for potential liability.  Finally, please note that the topics addressed above are not an exhaustive list.  As a practitioner, I generally utilize 27 factors when determining whether a taxpayer is willful or non-willful.  Additionally, I address each taxpayer’s facts separately during a joint disclosure.  I also address each individual tax year for both income (when applicable) and FBAR issues.

The second change comes in the Form 14563 used for Streamline Filing Compliance Procedures (Foreign).  The revised form now includes two new sections:

  • Taxpayer is a U.S. Citizen or Lawful Permanent Resident (Green Card Holder)
  • Taxpayer is not U.S. Citizen or Lawful Permanent Resident (Green Card Holder)

The taxpayer must now choose one of these two sections and complete the required information.  If the taxpayer is a citizen or green card holder, then the taxpayer must list each tax year filed in the income tax disclosure period.  Follow that, the taxpayer must indicate whether or not they qualify for the physical presence test by checking “yes” or “no” next to each tax year.

If the taxpayer is not a citizen or green card holder, then the taxpayer must attach a computation sheet for the income tax disclosure period showing that the taxpayer does not meet the substantial presence test.

Failure to abide by these procedures will lead to a rejection of the Streamline Filing due to incompleteness.  Taxpayers should tread carefully when providing this information and take caution to make sure that this information matches the information disclosed on their tax return.

As with all things tax, you should not rely on this article as tax advice.  Please conduct your own personal due diligence and when in doubt, consult with a Federally Authorized Tax Practitioner about your particular facts and circumstances.

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Anne Liebgott, CEO of Where Americans are Welcome

On July 14th, 2015, I had the pleasure to interview Anne Liebgott, CEO of Where Americans are Welcome.  Anne is a Swiss-Danish national born in Canada and raised in the United States.  Anne moved from the United States to Switzerland when she was just a senior in high school.  Anne’s father worked for All-State Insurance and found opportunity at that time with the insurance expansion into Europe.  Anne has twenty years of experience with the financial industry. 

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offshore tax - DOJ summer news

High-Level Compliance Overview for Undisclosed Foreign Accounts

This article does a great job at giving a high level overview of the IRS programs for coming back into compliance with undisclosed foreign financial accounts, unreported foreign income and potentially unidentified foreign corporations or trusts.  The author gives pro and cons for Ovdp versus streamline and details the crux of the streamline program as the certification of non-willfulness. 

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uncooperative taxpayer

An uncooperative taxpayer in the eyes of the IRS is simply one who is non-compliant. Non-compliance can mean many different things such as failing to file tax returns, failing to file informational returns or reports, and/or filing a tax return with a balance due and failing to make payment or payment arrangements.

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France withholding tax 2018

France will implement the automatic withholding of tax from employee paychecks in 2018 as reported on TaxFoundation.org.  France is the latest country to employ this method as the industrialized world moves towards a global system of taxation.  US citizens living in France will likely see an increased exchange of information between France and the United States as these procedures are implemented. 

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globally fighting tax evasion

Two New Swiss Banks Reach Justice Agreement

On June 19th, 2015, the Department of Justice (DOJ) came to an agreement under the Swiss Bank Program with two new Swiss banks, Bank Linth LLB AG and Bank Sparhafen Zurich AG.

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June 30 Fbar tax deadline

A US federal tax deadline for expats is upon us.  FinCEN Form 114, Report of Foreign Bank and Financial Accounts, commonly known as the Fbar, must be e-filed by June 30th by all US persons who have an interest in any foreign financial account meeting the reporting threshold. This deadline cannot be extended.

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IRS International Taxpayer Help VideoNew IRS Fbar Guidance

For taxpayers seeking relief under Streamline Filing Compliance Procedures, recent IRS changes provide some welcome news. The new guidance puts additional burdens on the examiners for Fbar penalties and the determination of willfulness vs. non-willfulness.

Important to note though is that taxpayers need to be wary of issuing blanket statements when determining willfulness. There needs to be a thorough analysis of each year for the failure to file Fbar reports as well as a separate analysis (under a different legal standard than Fbar) for failure to report foreign income.

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classic FBAR cases

In almost every client interaction I have in regards to an undisclosed offshore bank accounts and FBAR compliance, I get a series of questions regarding the current interpretation of the law around willfulness: “What is the law in this area and how does it apply to my facts and circumstances?” 

Many times clients will have conducted research online and performed their own non-attorney legal analysis of their perceived issues. While I applaud any and all efforts to self-educate and improve the knowledge base on this topic, as the common saying goes, a person who is her/his own lawyer has a fool for a client. 

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