Tag Archives: international tax accountant

International Tax Evasion – IRS Eases Up on Foreign Bank Accounts Reporting Penalty

The words “international tax evasion”  have a fearful tone.  Rightly so, for those that keep hiding but not for those that come forward.

The IRS have a new regulation that limits the penalty to $100,000.  The penalty is still one half of the highest foreign bank account balance but with a maximum of $100,000.

The IRS streamlined initiative is the best method if you can qualify.  To qualify you need to give the IRS some type of proof or explanation that you were not willful.  For example, a non-resident parent has your name on an bank account to transfer the account to you when they pass away.

You will want to discuss this with an attorney  that has been either with the IRS or the Department of Justice.

International tax evasion is different.

It does not mean that you were a mobster.  For example, you opened a foreign account owned by you or a foreign company.  You did not report the income earned on the account.  Another example is you have a foreign business or investment property.  You did not report the income.

For this the IRS has the voluntary disclosure initiative.  Under this program, the IRS does not prosecute international tax evasion.  However, besides paying the income tax for the last six to eight years, the IRS charges a penalty of 27.5% of the highest value of all of your foreign assets.

International Tax Planning with the Voluntary Disclosure Initiative.

The 27.5% penalty can never exceed the penalties that you would pay for the failure to file the FBAR and other international tax returns (such as Form 5471).

As I stated above a new IRS regulation has a cap on the FBAR penalty of $100,000 per year. And there are more tax savings that only an international tax accountant can help you with (by the way you need both a criminal attorney and a international tax accountant).

For example, here is just one of the many international tax strategies.  The IRS allows you to dissolve all of your foreign corporation without incurring additional tax.  This saves taxes because eventually you or your heirs will want to take the assets out of the foreign corporation.

Dissolving any corporation (domestic or foreign) is a taxable event except under this the IRS program.

Here is another example.  You own foreign investment funds.  Usually, the income tax on these funds is huge (this law is called “passive foreign investment company” with the nickname of ‘PFIC).  Under this IRS program, you are allowed two special tax laws.  You pick the law that is best for you.

One of these laws taxes the PFIC profit at only 20% without the Obama Care 3.8% excise tax on investment income.

Well, this is enough for this blog.  My firm is an international tax CPA firm.  If you would like us to help you and your attorney, then just give me (Brian Dooley,  CPA, MBT) a call at 949-939-3414.

Why You Will Always Pay too Much in Taxes

Nothing is more complex than income tax. Yet, most small business owners meet with their CPA at year end with the fantasy that this will save taxes. At best, it reduces this year's taxes by increasing next year's taxes.

Einstein stated that “The hardest thing to understand in the World is the income tax.”  Yet, most small business owners meet with their CPA at year end with the fantasy that this will save taxes. At best, it reduces this year’s taxes by increasing next year’s taxes.

  Let’s face it; the income tax law is complex. Think of 1,000,000 pages written over 100 years by different people with different agendas.  Great Depression tax laws apply to international businesses.  World War II tax laws apply to small (and big) business.

Starting  50 years ago (1967), our Government began using  “patches” to get the Tax Code to make social changes (this is known as socialism).

Now, don’t blame anyone party.  Both sides jumped on patch bandwagon.  The result is 1,000,000 of pages of conflicting laws.

Most small business owners budget an hour or so of their CPA’s time for “year-end” tax planning.   Meanwhile, the news reports that firms like General Electric have 2.3% tax rate over the last decade.     GE’s tax department is larger than all of the IRS’s international tax department.

Great firms invest in their tax structure.   Tax planning fees are tax deductible. Here, in my lovely state of California, $10,000 in tax planning fees is only $4,700 of after-tax dollars (our marginal highest tax rate is  53%).

Conflicting laws are very complex.  They also created 1,000s of tax strategies.   Here are a few that your CPA may not have told you:
1.  Cash advance payments can be tax-free for decades (more on this link).
2.  Small business owners over age 57 have huge tax savings with private pension plans
3.  Importers can use the Bush administration contract manufacturing laws to avoid taxes (more on this link) legitimately.
4. The IRS has designed a new type of trust to help you avoid state income taxes and protect your assets (more on this link).
5.  President Reagan’s privately owned insurance company tax law allow you to have your insurance company.  You can self-insure and pay your domestic insurance corporation up to $1.2 million a year tax-free.  This is known as a captive insurance company (more on this link).
6.  Defer taxes (like Disneyland) with gift cards and other private money (more on this link).

Thousands of other tax strategies.  Your CPA does not have a book of these.  Your CPA must spend time with you and learn the details of your business.  Your tax loophole maybe your inventory method, your e-commerce website, your multi-state transactions, your business insurance (or the items that you are not insuring) and the list goes on.

For example, Bob has a successful web based business.   He has a few part-time employees and independent contractors assisting him.   He wants to be a tax haven. Yes, Bob, himself wants to be a tax haven.  He learned about the new solo 401-K tax law.  Bob can be the sole trustee, sign on the bank account, buy real estate that is financed, buy stocks, bonds, and stock funds.

He started the fund in November.  By January he placed more than $100,000 tax deductible dollars into the plan.  This saved him $50,000 in taxes.  Of course, the investment profits will be tax-free.  He hired a law firm to establish the plan and maintain the plan.  The cost over two years is $10,000 deductible dollars (so after tax $5,000).    $5,000  saves $50,000.

Bob also used a 1954 tax law on medical reimbursement plan.   He paid $15,000 to his attorney to draft the plan.  This plan does not have to file a tax return, so there is no annual cost.  The plan pays for all the supplements required by his doctor, his co-pay, and therapies not covered by insurance.   He saves $10,000 a year in taxes for a $5,000 one-time deductible ($2,500 after-tax) cost.  $2,500 saves $10,000 year after year.

If you would like to discuss your tax concerns, ,then call me Brian Dooley, CPA, MBT at 949-939-3414.  Telephone calls are free.

Saving Taxes When a Foreign Holding Company (a CFC) owns Foreign Investment Funds (PFIC) using Form 8621

Seems almost impossible when two anti-taxpayers international tax laws can save you taxes. This is what happens with the Congress does not understand basic accounting.    For every debit (which in accounting is a plus “+”) there is a credit (which is minus “-“),

This axiom is the foundation of all income tax loopholes because this tax is a tax on accounting income.

When a holding company owns investment funds,  U.S. tax law collapses.  A few years ago, Congress could leave well enough alone.  Instead, they enacted a vague law requiring the income under the passive foreign investment company (“PFIC”) tax law to be reported by the U.S. shareholder of a foreign holding company.

The most popular foreign investment funds have been the Vanguard Investment funds managed from Dublin, Ireland.   These funds fit the definition of a PFIC.

From “reporting” the tax law vaguely implies that the shareholder pays tax on the PFIC’s income (if any and this if any has it’s on tax planning on this link).

The U.S. shareholder has to IRS Forms to file.  They are Form 5471 and Form 8621.  These two forms don’t integrate with each other.

I talked to the IRS International attorney in charge of form 8621 and PFIC taxation regarding this.  He knew of the problem but had no plans to fix this.   And why?  My guess is that it can’t be fixed because the two tax laws do not integrate.

Thus, your international tax accountant has many options in your tax planning when he prepares your Form 5471 and Form 8621.  Too many for me to fit them all into a blog.  One option allows you to convert ordinary income (called Subpart F income) into long term capital gain income.

However, a video will help your the tax preparer of your Form 8621.  I used this video for my international tax class for the California Society of CPAs.  This means that unless you are an international tax  CPA, you will find it boring and while debit and credits are boring. they are the focal point of tax loopholes.

If you need help in preparing your Form 5471 or Form 8621, then call me Brian Dooley, CPA, MBT at 949-939-3414.

Form 1120-F (U.S. Income Tax Return of a Foreign Corporation) covers three different taxes. Saving International Taxes Requires an International Tax Accountant.

Table of Contents

1. This blog tells you how to protect yourself from the U.S. courts and the IRS.
2. his blog is primarily about U.S.  international income taxation and the branch profits tax.
3. Two important international tax laws to watch.
4. Tax Planning for your Balance Sheet and the Branch Profits Tax.
5. Liability Of Corporate Agent in the USA.

6. You Must Timely File  Form 1120F to Claim Deductions or Credits.
7, Protective Filing of Form 1120F:  Smart International Tax Accounting.
8. What if only part of your U.S. income is U.S. business income?

This just might be the most important blog on international tax that you will ever read. Here is the problem for U.K., EU, Australian, New Zealand, and Canadian corporations with U.S. income.

The internet is full of stories of how the tax treaty permanent establishment article prevents the USA from taxing you.  What the stories don’t tell is that the U.S. Tax Court does not care about your tax treaty.

The U.S. Tax Court is part of the Government.  The Government wants your money.  It is that simple.  Okay, it’s not fair.  But they really  do not care.  This link discusses a few of these anti-tax treaty court cases.

This blog tells you how to protect yourself from the U.S. courts and the IRS.

Foreign corporations have income from U.S. sources are always required to file U.S. tax returns.
Three different taxes are on the form as follows:

  1. Foreign corporations must pay a 30 percent tax on income from U.S. sources not connected with a U.S. trade or business.
  2. Foreign corporations engaged in trade or business within the United States is subject to income tax, alternative minimum tax, and other taxes applicable to corporations on their taxable income.
  3. Foreign corps engaged in business within the U.S. must pay the branch profits tax.

This blog is primarily about U.S.  international income taxation and the branch profits tax.

A foreign corporation with a business in the United States at any time during the tax year or that has income from United States sources must file a return on Form 1120-F.  A foreign corporation with U.S. business income must file (I will explain why later in this blog) even though:

(1) It has no business income (that is income effectively connected with the conduct of a trade or business) in the United States,

(2) It has no income from U.S. sources  or

(3) Its revenues are exempt from income tax under a tax convention or any provision of the tax law.

Two important international tax laws to watch.

  1. If the foreign corporation has no gross income for the year, it is not required to complete the return. However, it must file a Form 1120F and attach a statement (I will explain why later in this blog) to the return indicating the nature of any tax treaty exclusions claimed and the amount of such exclusions to the extent these amounts are readily determinable.[1]  For example, if you believe that you have avoided having a permanent establishment, you need to explain why.  Here is more on court cases on permanent establishment).
  1. To claim tax deductions and credits,  the corporation must file an accurate tax return on time. If the return is not timely file, all of the expenses and costs of goods sold can never be deducted.  If the U.S. income of a foreign corporation includes income that is subject to a lower rate of tax under a treaty, it must attach a statement to its return explaining this and showing:

(a) The income and amounts of tax withheld,

(b) The names and post office addresses of withholding agents, and

(3) any other information required by the return form or its instructions.[2]

Tax Planning for your Balance Sheet and the Branch Profits Tax.

The foreign corporation may elect to limit the balance sheets and reconciliation of income to the U.S. business use assets, liability and equity and its other income from U.S. sources.[3]   The branch profits tax traces the U.S. business equity and debts.  Thus, the balance sheet is the IRS’s primary audit tool.   Reporting your worldwide assets is providing the IRS information that has little or no value.

TAX TIP: A foreign corporation that is not engaged in a trade or business in the United States it is not required to file a return when the U.S. withholding of tax at the source of its payments covers the taxes owed.   A matter of fact, the goal of U.S. withholding tax is eliminated U.S. tax compliance for the foreign person.

Liability Of Corporate Agent in the USA

A representative or agent of a foreign corporation must file a return for and pay the tax on the income coming within his control as representative.   The agent can include a related corporation or an individual.

You Must Timely File  Form 1120F to Claim Deductions or Credits

I can not say this too often. A foreign corporation must its return on time to take deductions and credits against its U.S. business income.[4]

However, the following deductions and credits are allowed even if such a return is not filed:

(1) the charitable deduction;

(2) the foreign tax credit passed through from mutual funds;

(3) the fuels tax credit; and

(4) The credit for income tax withheld.[5]  

Timely filed means the Form 1120-F is filed no later than 18 months after the due date of the current year’s return.  

But it is more complicated, and you must read this:  I know this next section is tricky.  So, please be patient.  However, if you need help, then just give me, Brian Dooley, CPA, MBT a call at 949-939-3414. 

When the return for  the prior year was not filed, the return for the current year must have been filed no later than the earlier:

  1. of the date which is 18 months after the deadline for filing the current year’s return, or
  2. the date, the IRS mails a letter to the foreign corporation advising it that the current year return has not been filed and no deductions may be claimed it.[6]

The IRS may waive these deadlines when the foreign corporation proves that:

  1. It acted “reasonably and in good faith”  in failing to file a U.S. income tax return (including a protective return), and
  2. cooperates in determining its income tax liability for the year for that the return was not filed.[7]  

 Protective Filing of Form 1120F:  Smart International Tax Accounting 

This is the smartest thing you can do as a foreign corporation.   The chances of an audit are low and the tax protection is high.  I have the rules below. 

A foreign corporation with limited activities in the United States that it believes does  not give rise to U.S. gross business income should file a protective return.  

A timely filed protective return preserves the right to receive the tax savings  of the deductions and credits if it is later determined that the foreign corporation did have a U.S. business.  

Here is the very good news:  On that timely filed protective return, the foreign corporation is not required to report any gross income taxable income and thus pays no net income tax or branch profits tax.  

However, do not forget to attached a statement indicating that the return is being filed as a protective return and to check the box on the Form 1120F.  Also, you must include your tax treaty disclosure IRS form. Be sure to attach the IRS tax treaty disclosure Form 8823, on this link.  

What if only part of your U.S. income is U.S. business income? 

If the foreign corporation determines that part of the activities is U.S. business gross income that U.S. business income and part are not, then the foreign corporation must timely file a return reporting the U.S. business gross income and deducting the related costs and expenses.  

Important: Also, the foreign corporation must attach a statement that the return is a protective return about the other activities.   The protective election ensures that it can deduct the related expenses if the IRS should disagree.  

The same procedure is available if the foreign corporation when if they initially believe that it has no U.S. tax liability due to a tax treaty.[8]  Be sure to attach the IRS tax treaty disclosure Form 8823, on this link

As discussed above, many foreign corporations believe that their home country tax treaty “permanent establishment” provisions protect them since they do not have an office in the U.S.  However, the U.S. courts treat almost any office (even an office owned by an agent or a related person) as a permanent establishment.  

Lastly, U.S. Department of the Treasury will guide you and provide you with a tax guarantee.  This is known as a private letter ruling.  Here is more information.

FOOTNOTES

  1. Section 1.6012-2(g)(1)(i).

If the foreign corporation with a place of business in the United States, the return must be filed by the 15th day of the third month after the end of the tax year.

[2] Reg. Section 1.6012-2(g)(1)(ii).

[3] Reg. Section 1.6012-2(g)(1)(iii).

[4] Code Section 882(c)(2).

[5] Reg. Section 1.882-4(a).

[6] Reg. Section 1.882-4(a)(2).

[7] Reg. Section 1.882- 4(a)(3).

[8] . Reg. Section 1.882-4(a)(3)(iv).

International Tax CPA PLanning for Citizens of UK, Sweden, Belgium, Canada, Luxembourg & Austria

Here are the magic Tax Treaty words for your tax CPA for these lucky citizens of The UK, Sweden, Belgium, Canada, Luxembourg, Austria, Thailand and Tunisia:

“An individual who is a United States citizen or an alien admitted to the United States  for permanent residence (a “green card” holder) is a resident of the United States only if the  individual has a substantial presence, permanent home or habitual abode in the United States and if that individual is not a resident of a State other than the name for other country for the purposes  of a double taxation convention between that State and the name for other country.”

Tax Treaties with these words allow U.S. resident aliens to legally not pay U.S. income taxes on their foreign income.   For example,  Mr. Bond, a U.K. citizen has a substantial presence in the U.S.  He does not have a green card.  He is in the U.S. on an investor visa. Mr. Bond only pays U.S. income tax on his U.S. income.  The income from his U.K. business and all other foreign companies or investments is U.S.

Mr. Bond only pays U.S. income tax on his U.S. income.  The income from his U.K. business and all other foreign companies or investments is U.S. tax free.

IRS Publication 519 “states that the U.S. domestic rules that determine if a non-U.S. citizen is a U.S. resident do not override tax treaty definitions of residency.”

Below is our e-book of IRS Publication 519 explaining international tax planning for Sam, a U.K. citizen living in the U.S.

The example applies to citizens of other countries with a tax treaty containing these magic words.  If you have overpaid your American taxes or just need help, then call me, Brian Dooley, CPA, MBT at 949-939-3414.