Category: FBAR

IRS Softens Its Stance For Some Taxpayers With Undeclared Offshore Accounts

June 19, 2014 | By: Robert A. Green, CPA

IRS pressure and new Foreign Account Tax Compliance Act (FATCA) rules taking effect July 1, 2014 are intimidating Swiss banks into breaking their sworn legal promise of bank secrecy. Foreign banks are forcing American clients to turn themselves in to the IRS before the bank does so. Turning yourself in on time can lead to lower (but still very significant) penalties and no jail time.

After too many horror stories (see “Expatriate Americans Break Up With Uncle Sam to Escape Tax Rules”) about normal middle-class Americans getting caught up in this tax dragnet, the IRS changed its rules to catch and release the smaller fish. See the IRS news release “IRS Changing Offshore Programs to Ease Burdens, Increase Compliance” (IR-2014-73). Here’s the new IRS program.

“IRS Eases Up on Accidental Tax Cheats” says “The Internal Revenue Service is sharply increasing the penalties on U.S. taxpayers who hide assets abroad, while lowering or eliminating fines on taxpayers if their failure to disclose offshore accounts was unintentional, the agency said Wednesday.”

If you want to learn more about these IRS programs, consider a consultation with our tax attorney who is an expert in this area and has handled many cases successfully. Attorney-client privilege will apply.

Update about OVDI: Under transition rules, a taxpayer who entered OVDP before July 1 is entitled to use Streamlined even without opting out of OVDP. On or after July 1, a taxpayer must choose between Streamlined and OVDP and cannot opt out of one into the other. Therefore, a taxpayer who is unsure whether he would be considered negligent or willful should weigh entering OVDP before July 1. Non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.

Bitcoin is not reported on 2013 FBARs

June 6, 2014 | By: Robert A. Green, CPA

Bitcoin investors store bitcoin on foreign exchanges in countries like Estonia, Russia and elsewhere. Do they have to file bitcoin holdings outside the U.S. on 2013 FBARs due June 30? The IRS just said no.

The following are excerpts from Thomson Reuters/Tax & Accounting’s “IRS official: taxpayers don’t have to report virtual currency on 2013 FBARs”:

“During a recent webinar, an IRS official stated that for purposes of the current filing season, taxpayers aren’t required to report virtual currencies on a Report of Foreign Bank and Financial Accounts (FBAR) with the U.S. Treasury. However, although this previously disputed matter is settled for the present, he stated that this position may well be subject to change.”

“Virtual currency isn’t subject to FBAR reporting … for now. During a recent IRS webinar titled “Reporting of Foreign Financial Accounts on the Electronic FBAR,” Rod Lundquist, Senior Program Analyst in IRS’s Small Business/Self Employed (SB/SE) division, stated that for purposes of the current filing season (i.e., for 2013 FBARs due later this month), taxpayers aren’t required to report Bitcoin on an FBAR. However, he cautioned that IRS is continuing to analyze virtual currency and that this policy could very well change going forward.

The issue of whether Bitcoin is subject to FBAR reporting has been widely debated among the financial and tax online community. One view is that, unless a taxpayer can prove that their bitcoins are within the U.S. (a potentially tricky proposition), then their owner would be required to file an FBAR if his holdings exceed $10,000. However, others question whether a Bitcoin account is truly a “financial account” with a “financial institution” for purposes of the FBAR rules-and, despite the IRS official’s recent pronouncement, these questions are still unanswered.”

FBAR deadline & foreign financial asset reporting update

June 12, 2012 | By: Robert A. Green, CPA

The IRS provides additional guidance on FBAR versus new form 8938. See these helpful links.

Basic Questions and Answers on Form 8938

U.S. tax residents, don’t miss the FBAR (TDF 90-22.1) filing deadline of June 29, 2012 for 2011 FBAR reports TDF90-22.1. Otherwise, you may be subject to very large penalties. Non-resident aliens are not subject to these filing requirements if they do not have a green card.

There’s also another foreign tax form for 2011 tax returns, Form 8938 Statement of Foreign Financial Assets.

In prior years, many taxpayers overlooked or conveniently did not report their foreign financial accounts. Unfortunately, the IRS lumps all taxpayers into the category of tax cheat, assuming they are hiding money in offshore bank accounts. The IRS famously busted several Swiss banks and extended the busts to banking by Americans in India, Israel, Asia, and many tax havens throughout the world. In our opinion, IRS penalties should be designed for penalizing blatant tax cheats and not taxpayers who inadvertently overlooked quirky filings and did report their foreign income. The law differentiates between negligence and reasonable cause. Inadvertent overlooking is unfortunately usually subject to negligence penalties.

That’s where our top tax attorney Mark Feldman provides value. He can try to qualify you for a lower or full penalty abatement. The worst thing to do is to ignore this matter and wait for the IRS to bust you and then lower the boom with full penalties and perhaps even criminal charges.

Speak with us soon and you can work with our tax attorney with attorney-client privilege. Our CPAs can handle all your tax filings in association with your tax attorney, thereby preserving attorney-client privilege on our CPA services, too.

Side note. Per the IRS website, “If you are a U.S. citizen or resident alien residing overseas, or are in the military on duty outside the U.S., on the regular due date of your return, you are allowed an automatic two-month extension to file your return and pay any amount due without requesting an extension. For a calendar year return, the automatic two-month extension is to June 15.” Like other taxpayers, you can request an automatic extension until October 15 (see our Mar 29 blog).

An email message from the AICPA to it’s members:

The U.S. government has become increasingly concerned about, and focused on, offshore tax evasion. One tool the government has to combat such tax evasion is the Report of Foreign Bank Accounts (TDF 90-22.1) or FBAR.

The FBAR is required to be filed by two categories of U.S. filers:

1. Owners of foreign accounts

2. Those with signature of authority over foreign accounts, but no financial interest in the accounts.
The threshold for filing an FBAR is only $10,000 in aggregate for all foreign accounts. The amount per account is measured at the highest point during the year. The $10,000 threshold has not been indexed for inflation by Treasury since the early 1970s.

Note that the potential civil and criminal penalties for failure to timely file an FBAR are severe. The FBAR is required by the US Bank Secrecy Act of 1970 (“BSA”). The BSA is a law enforcement statute and is not part of the tax code. Instead, the BSA is part of the general Treasury Department Regulations. Because of this, the Departments of Treasury and Justice have the ability to impose both monetary civil as well as criminal penalties for the failure to timely file an FBAR.

The FBAR rules are highly complex. Accordingly, if there is any chance you own a foreign account or have signature of authority over a foreign account please contact your assigned CPA with Green NFH immediately.

If you have any questions about FBAR and Form 8938, as well as any foreign tax matters, contact us for help. We have CPAs and tax attorneys highly experienced in international tax matters for Americans abroad and non-resident aliens conducting investing or business in the U.S.

Cost-Basis Reporting on IRS Form 8949 Is a Nightmare and FATCA Makes the IRS a FATCAT (plus Form 8938 for foreign assets)

February 2, 2012 | By: Robert A. Green, CPA

See our Cost-Basis Reporting area in our Trader Tax Center for more content, blogs, Webinars, Video and our Petition to Congress.

Green’s Forbes blog version: Beware The Long (Global) Arm Of The IRS.

In an attempt to balance the budget and close the “tax gap,” Congress, the Obama administration and the IRS are on a mission to intimidate Americans into reporting all of their income, onshore and offshore. What’s new on 2011 tax returns? Beefed-up reporting for securities traders with a problematic new tax form 8949, which deals with the IRS’s new cost-basis 1099-B reporting rules. And, reporting of foreign assets over certain thresholds with new tax form 8938.

Before Congress and the President upset their political bases when they try to balance the budget by cutting entitlement or defense spending or passing new tax hikes, they want to close the tax gap (busting tax cheats), close special-interest tax loopholes, broaden the tax base and maybe lower tax rates, too (as suggested by the Bowles Simpson Deficit Commission).

The world is now the IRS’s oyster, and by using new sophisticated technology and productivity – just like the rest of us – the IRS is on a mission to catch tax cheats and taxpayers who conveniently overlook income and asset reporting.

Big changes on 2011 tax returns.
There are two new bombshells for our trader clients to deal with on their 2011 tax returns – the all new forms 8949 (Sales and Other Dispositions of Capital Assets) and 8938 (Statement of Foreign Financial Assets).

Securities traders will be shocked by the new tax-filing compliance headaches, red flags and problems caused by the IRS’s new Cost-Basis Reporting rules, which are all a part of its new tax form 8949.

Futures traders can count their lucky stars — they are free from this mess. With mark-to-market (economic reporting) in Section 1256, futures traders receive a one-page Form 1099 with their realized and unrealized gains and losses for the year. Simply enter that one simple number for “aggregate profit and loss” to Form 6781 and you also benefit from lower tax rates with 60/40 tax treatment. It may not be as easy if you trade instruments like ETF options. Brokers may treat those as securities, but you will want to treat them as Section 1256 contracts instead per our content.

Active securities traders and their accountants face a nightmare in filling out Form 8949 and reconciling their own trade accounting records — like TradeLog — with beefed-up broker-provided Form 1099-Bs.

First, these 1099-Bs are coming very late this year, as brokerage firms are struggling with the new rules. We expect most brokers will revise their 1099-Bs several times. This makes it almost impossible to file a full tax return by the April 17 deadline. You should get a good handle on your securities trade accounting with TradeLog and send that information to your tax preparer as soon as possible. Plan to file an extension, and be sure it’s valid by paying at least 90% of your tax liability by April 17 with the extension filing. Handle the difficult Form 8949 reconciliations and explanations required on your tax return after the extension and before the final due date of Oct. 15. Brokers may send revised 1099-Bs after April 15, too.

What’s the fuss with Form 8949?
You can’t enter information directly to Schedule D anymore, as you must use Form 8949 for all line-by-line reporting, received from the brokerage firm. This form has three types of situations (Parts A, B and C) for each short-term and long-term holding period (12 months) — potentially six different Form 8949s to deal with.

Part A — the good part — is used for cost basis that matches your 1099-B. As the instructions say “transactions reported on Form 1099-B with basis reported to the IRS.” For the 2011 tax return, this includes corporate stock purchased and sold in 2011.

These rules are being phased in, so many cost-basis items are not covered on 1099-Bs until 2012 and 2013. That’s where column B is used, as the instructions say for “transactions reported on Form 1099-B but basis not reported to the IRS.” This could include stock purchased prior to 2011 and other non-covered securities in 2011 like options, mutual funds and bonds. Form 8949 instructions also state, “If there are wash sales for items, reported on Part I-A, then you enter that adjustment in column (g) and with W code in (b).”

Caution: Taxpayers often disagree with brokers on reporting wash sales, and this can be a challenge to report on Form 8949. Tax software often only allows wash sales reported in this new column if there is a taxable loss. That can be a problem when summary reporting refers to a separate TradeLog report showing a net gain. Expect wash sale adjustments in situations where one broker doesn’t recognize a wash sale, which TradeLog may correctly recognize between a second brokerage account and an IRA.

Finally, Part C is for transactions where no Form 1099-B has been issued. This could be the case for a sale of personal assets or a home. We also may use this part for our transfers to Schedule C to allow home-office deductions.

Prior to this tax season, you could just leave the heavy lifting to TradeLog, and simply enter the 1099-B amount to Schedule D to satisfy the IRS. It’s a whole different ball game this year — you must do the heavy lifting. TradeLog is working feverishly to issue an update that makes it easier for you, too. Good trade accounting software continues to be a must for active securities traders.

Is it easier for Section 475 MTM traders?
GreenTraderTax has always recommended Section 475 MTM for securities business traders so they could be exempt from wash sales – which represent many of these difficult adjustments to be reported. Some traders have always incorrectly assumed that with Section 475 MTM, they could use summary reporting on Form 4797, stating “details available on request.” They are very wrong — Form 4797 requires line-by-line reporting too.

Plus, leading tax publisher RIA and PPC recommend that Section 475 MTM traders report total proceeds on Form 8949, and then back it out with an adjustment in Part C. While Section 475 MTM traders may be free from the mess of reconciliations on Form 8949, they still should fill out the form to avoid trouble. Its likely IRS computers will work in overdrive to match every individual’s Form 1099-B with their individual tax return and a Form 8949. We expect a huge increase in computer tax notices and headache and cost for taxpayers to deal with those notices. Get it right the first time to avoid getting a tax notice.

For more information and examples of dealing with Form 8949, watch our Webinar recording from Feb. 2, 2012.

Form a trading entity for 2012 to skip these problems.
After facing this nightmare once for tax year 2011, you will want to form an entity for your trading business in 2012 to skip these tax problems and unlock plenty of other tax savings. Entities currently aren’t required to file a form 8949; hopefully that continues to be the case for 2012 and subsequent tax years. Like with an individual Schedule C, the IRS turns up the heat on individual taxpayers, thinking they are less sophisticated and more prone to errors, whether inadvertent or purposeful.

Our important transfer strategy for sole proprietor business traders of moving some Schedule D trading gains to Schedule C to unlock home-office deductions and 100% Section 179 depreciation is even more of a red flag in 2011. It must be in that dreaded “Other” column on Form 8949. That’s okay, since we explained this transfer in our footnotes in the past anyway — but this year the IRS computers may choke on that more and send a tax notice.

This is not a problem with an entity return. The IRS is also beefing up audits of Schedule Cs and asked many traders to document and justify their trading expenses, too. The IRS audits entities much less. Our entity formation service is excellent and the price is right, so check with us soon.

In the past, we suggested entities for business traders only, since the AGI-deductions (retirement plan and health-insurance premiums) are beneficial with trader tax status. This year, investors may want to consider an entity as well, just to avoid the dreaded Form 8949 accounting and reconciliation mess that individuals face.

The IRS insists on knowing about material foreign accounts and transactions.
Over the past decade, it’s become increasingly easy for traders and investors to tap into foreign markets including emerging markets, tax havens and offshore funds. Plus, Americans move around the world for business or personal opportunities and they wind up with foreign accounts and transactions. Plenty of non-resident aliens marry Americans, or move to America becoming greencard holders and U.S. residents, too. Now, the IRS considers this all their business, too!

The Foreign Account Taxpayer Compliance Act (FATCA) is not just about tax reporting by Americans. It’s also to pressure foreign banks into divulging their American client information so the IRS can bust both the taxpayer and these foreign banks. Congress has gone on a similar extra-territorial path with Dodd-Frank and new CFTC restrictions for retail American forex trading accounts. The EU is reciprocating and also complaining about FATCA; perhaps a new Congress in 2013 will backtrack, or even this Congress in 2012. Stay tuned.

Oddly, another way to avoid Form 8949 headaches is to use a foreign broker, as they are not subject to these new complex cost-basis reporting rules for U.S. brokers only. But, then you trade in one set of tax compliance headaches for another, the foreign reporting ones which can be more onerous.

More details on FATCA, FBAR and the new Form 8938.
We wrote several blogs last year about Report of Foreign Bank and Financial Accounts (FBAR) on Form TD F 90-22.1. We also wrote about the IRS OVDI and OVDP programs, which the IRS recently reopened again (see details below). I blogged about Gov. Romney’s tax return — almost half of his 500+ tax forms had to do with foreign reporting. It must have cost him a fortune in tax preparation fees.

Another blogger did a nice job on this topic — see his blog here. He covers Form 8938 in full.

Update: The IRS issued new guidance saying “a personal residence or a rental property does not have to be reported” on Form 8938, unless it’s held by a partnership, LLC, corporation or trust. See the IRS’ “Basic Questions and Answers on Form 8938 (posted 2-29-12)” athttp://www.irs.gov/businesses/corporations/article/0,,id=255061,00.html

IRS announces third offshore voluntary disclosure program.
The IRS recently reopened an offshore voluntary disclosure program (OVDP) to allow taxpayers with offshore financial accounts (including brokerage accounts, mutual funds, pension plans and life insurance) or assets to comply with their U.S. federal income tax obligations and foreign account reporting requirements. Because the FATCA will force foreign banks to divulge information regarding their U.S. clients, U.S. taxpayers have a strong incentive to enter the OVDP rather than risk detection by the IRS. Once the IRS has begun an audit of a taxpayer, the taxpayer is no longer eligible to participate in the OVDP.

The new OVDP will be open for an indefinite period, but the IRS could choose to end it at any time.

The new program has no deadline to apply. However, the IRS emphasized that the terms of the new program could change in the future. The IRS stated that, for example, at any time the penalties under the program could be increased.

Bottom line
If you are going to be snagged with Form 8949 adjustments, and or reporting of foreign tax matters, make sure to get a handle on your tax preparation plan sooner rather than later. Don’t spring this on your tax preparer at the last minute and it’s a huge mistake to hide anything foreign.

Important IRS Voluntary Disclosure Initiative Updates

June 6, 2011 | By: Robert A. Green, CPA

Forbes

IRS Goes Kinder And Gentler In Disclosure Initiative, Still Has Fangs

Updates include 90-day extension, lower penalties for smaller problems, and opt-out opportunities.

The IRS updated its offshore voluntary disclosure initiative FAQ page on June 2, 2011.

The IRS seems to be pulling out the stops to encourage more taxpayers to come clean and join its 2011 offshore voluntary disclosure initiative by the Aug. 31, 2011 deadline. (See our original blog detailing the program.)These filings are very complex and have many unintended consequences. For some, joining the program means accepting huge tax bills — a hard thing to swallow. As the clock ticks, many taxpayers might not have sufficient time to get their affairs and filings in order to meet this deadline. Gathering years of offshore information isn’t an easy task. Rather than scare these taxpayers away, the IRS made these important changes to make its initiative more attractive to join. First, the IRS will grant a 90-day extension providing the taxpayer makes a good faith attempt to file on time. Second, penalties for various less problematic scenarios have been lowered, including smaller accounts, inadvertent omissions, and inherited foreign accounts. Last, it provides various ways to opt out of the initiative if the taxpayer could do better with other filing options. 

90-day extension: According to the IRS, “A taxpayer may request an extension of the deadline to complete his or her submission if the taxpayer can demonstrate a good faith attempt to fully comply with FAQ 25 on or before Aug. 31, 2011. The good faith attempt to fully comply must include the properly completed and signed agreements to extend the period of time to assess tax (including tax penalties) and to assess FBAR penalties. Requests for up to a 90-day extension must include a statement of those items that are missing, the reasons why they are not included, and the steps taken to secure them.”

Lower penalties under certain conditions: New FAQ 52 & 53 state, “Taxpayers making voluntary disclosures who fall into one of the three categories … will qualify for 5-percent or 12-percent offshore penalties, respectively.” Read these sections to see if you qualify for the lower penalties. 

Consequences of opting out: New FAQ 51 shows why some taxpayers may want to opt out of the initiative and how they can do so. These escape hatches are helpful to many who are weighing their options to join the program in the first place. Rather than dither and miss the deadline, the IRS encourages you to join and allows you to opt out later. For example, suppose you join the program and realize you actually would not owe any income tax due to foreign tax credits or losses. The update states: “Electing to opt out might subject the taxpayer to a much smaller FBAR penalty than the penalty that would be due under the 2011 OVDI (or possibly no penalty at all, if the taxpayer’s violation was due to reasonable cause).”

This offshore disclosure full-court press is a nightmare for many, but the IRS seems to be improving its customer service with the extension, opt out, and lower penalty regime. The IRS motto may be “join first and opt out later.” The lower penalties are a good incentive for those who qualify to come clean. Why should they risk the same major problems as the purposeful tax cheats do? Skipping the program entirely might be the costliest and more problematic option, especially when you consider the possibility of criminal charges.

Update on June 22, 2011:
Information reporting suspended for foreign financial asset holders & PFIC shareholders. Notice 2011-55 http://www.irs.gov/pub/irs-drop/n-11-55.pdf

Per RIA, “A new Notice suspends information reporting required under the Hiring Incentives to Restore Employment Act (HIRE Act, P.L. 111-147 ), for certain individuals with an interest in a “specified foreign financial asset,” as well as for shareholders of a passive foreign investment company (PFIC). The information reporting is suspended until IRS issues the forms necessary to report the requisite information.”

Mark Feldman tax attorney contributed to this blog post.