NZ US Tax Specialists Blog

International collaboration to combat tax evasion

NZ US Tax Specialists — 2013-05-09T18:05:31-07:00

Today the IRS disclosed that the revenue authorities of Australia, the United Kingdom and the United States are sharing 'a substantial amount of data' obtained on tax cheats from sources that the agency would not fully disclose.

Assets hidden in Singapore, the British Virgin Islands, the Cayman Islands and the Cook Islands were advised as being the targeted locations, and the individuals include not only the tax evaders but their advisors.

The three countries are likely to be invoking the Tax Information Exchange Agreements (TIEAs) that are in effect between the countries. These are typically bilateral agreements based on the OECD model agreement, developed to promote international co-operation in tax matters through exchange of information.

The United States has signed agreements with 91 countries, Australia with 79 countries, and the United Kingdom with 146 countries. New Zealand has 60 agreements in place, including bilateral agreements with the three above-mentioned countries, contained within the income tax treaties between the respective countries.

The IRS advises that the revenue authorities of other countries whose' citizens who have been found to be hiding assets will be also be notified, to enable those countries to prosecute.

IRS Individual Taxpayer Identification Numbers

NZ US Tax Specialists — 2013-05-06T19:51:52-07:00

Taxpayers applying for Individual Taxpayer Identification Numbers are running into many problems with rejection of Form W-7. The latest has been that the IRS has rejected appropriately filed applications right down to correctly certified copies of the passport. Individuals applying on their own accord are able to call the ITIN hotline on +1 512 433 5966 for assistance. NZ US Tax Specialists is a Certifying Acceptance Agent for individuals wishing to obtain an ITIN. We put a Power of Attorney in place at the time that the application is made, which enables us to discuss the application directly with the IRS. Tip: ensure that the latest version of Form W-7 is used, being January 2013, as the IRS seem to have the spotlight on which version of forms are being submitted, and will frequently reject obsolete forms filed.

Penalties

NZ US Tax Specialists — 2013-05-01T21:45:33-07:00

Whilst not all IRS notices are bad news, receiving a notice advising of a penalty is not pleasant.

We may be able to be of assistance with removal of a penalty such as a late filing penalty in certain circumstances. We indeed had a successful outcome today with reversal of a significant penalty for a late filed 2011 partnership return. The penalty was $195 per partner per month for up to 12 months.

It is advisable to check before paying the penalty as to whether there may be some relief available. No guarantees, however we'll do our best.

Notices

NZ US Tax Specialists — 2013-05-01T21:37:26-07:00

Now that the first and major filing deadline for 2012 of 15 April has passed, taxpayers may be receiving notices from the IRS.

In contrast to the New Zealand system, through which taxpayers receive a Return Acknowledgement upon filing tax returns, the IRS does not send paper confirmations of returns filed.

Electronic confirmations are sent however for returns which are electronically filed, which is extremely useful for tracking returns. We now file most returns electronically through IRS e-file.

Notices can be issued for a multitude of reasons. These come in a standard format, for example, Notice CP05 We're Reviewing Your Tax Return.

We are able to assist with handling and responding to a notice for a taxpayer upon receipt of a signed Power of Attorney, which enables us to act as a taxpayer's representative.

File your FBAR online

NZ US Tax Specialists — 2013-04-16T12:35:54-07:00

Whilst the first filing deadline for individual United States income tax returns has now passed, the Report of Foreign Bank Accounts (FBAR) is due for filing by 30 June and can now be filed online.

The report, Form TD F 90-22.1, (Form) is filed separately to Form 1040 and is required to be submitted to the Department of the Treasury in Detroit by 30 June.

Filers need to ensure they use the correct version of the Form (January 2012) if paper filing. Electronically filed income tax returns via the IRS e-file system do not result in submission of the Form to the Treasury Department.

Electronic filers using the website obviously don't risk rejection of the Form, which gets updated approximately every three years by the Financial Crimes Enforcement Network (FinCEN).

1040 Filers - Forms that can be filed starting late February or March 2013

NZ US Tax Specialists — 2013-02-12T15:03:33-08:00

The IRS have started processing Forms 4562 Depreciation and Amortization, and Form 8863 Education Credits slightly ahead of the previously advised late February time frame.

Form 4562 is being accepted now and Form 8863 from February 14.

Other forms, for which a delay in filing was created by the late enactment of the American Taxpayer Relief Act in January, will be accepted by the IRS from the first week of March.

The list is on an earlier blog entry this year.

On the list which is of relevance particularly to US citizens and residents with foreign (NZ) companies is Form 5471 Information Return of U.S. Persons With Respect to Certain Foreign Corporations.

Form 5471s filed prior to March will probably be rejected by the IRS. There are delays being encountered currently with many areas of the IRS and so it may be some time before taxpayers are notified of a rejection - something to be mindful of.

American Taxpayer Relief Act of 2012 Inflation Adjustments

NZ US Tax Specialists — 2013-01-27T17:29:01-08:00

Changes to tax rates, exemptions, credits and deductions recently occurred in the newly-enacted American Taxpayer Relief Act of 2012. Some of these are indexed for inflation. Of note, one of these being the recently topical exemption for Alternative Minimum Tax otherwise known as the 'patch'.

Some of the changes are as follows and are for individual filers with joint filers' equivalent amounts bracketed.

1. Tax rate increase to 39.6% on income over US $400,000 (US $450,000) effective from 1 January 2013.

2. Increased standard deduction of US $6,100 (US $12,200) for 2012.

3. Limitation on itemized deductions for incomes of US $250,000 ($300,000) or more for the 2013 tax year.

4. Personal exemption increase to US $3,900 per person for 2013 subject to phase-out starting at Adjusted Gross Income of US $150,000 (US $300,000) and completing at US $211,250 ($422,500).

5. Exemption amount for Alternative Minimum Tax ('the patch') is US$51,900 (US$80,800) for 2013.

6. Maximum Earned Income Credit for 2012 is US $6,044 joint filers with three or more qualifying children.

7. The exclusion for estates of decedents who die in 2013 is US $5,250,000, up $130,000 from US $5,120,000 in 2012.

8. The amount of employer-provided funding for transit passes and transportation to/from work which can be excluded by an employee is US $245 for 2013 and US $240 for 2012, the 2012 amount was increased from US $125.

FATCA update - Information Reporting by Domestic Entities with Respect to Specified Foreign Financial Assets

NZ US Tax Specialists — 2013-01-23T15:48:15-08:00

Today the Internal Revenue Service issued advice that reporting by specified domestic United States entities of specified foreign financial assets will not be required for taxable years beginning any earlier than 31 December 2012.

A 'specified domestic entity' is a defined term under Proposed Regulation 1.6038D.

FATCA provisions with respect to reporting foreign financial assets were introduced in section 6038D of the Internal Revenue Code in 2010 under the Hiring Incentives to Restore Employment (HIRE) Act .

ITIN applications

NZ US Tax Specialists — 2013-01-23T14:51:46-08:00

Individuals doing business with the United States requiring an ITIN (Individual Taxpayer Identification Number) should be aware that it can be several months before the Internal Revenue Service (IRS) will respond to their application.

It is therefore important to ensure that the application Form W-7 is correctly prepared, because the IRS will reject an incorrectly prepared application for the smallest discrepancy.

This is particularly with respect to ITINs which are being applied for in order to obtain a treaty benefit.

Once an application has been sent to the IRS one cannot re-apply due to non-response by the IRS.

The ITIN program is currently undergoing change and documentation requirements vary depending on the purpose of the application for an ITIN.

It is therefore advisable to seek professional assistance with the application.

FATCA update - Treasury and the IRS released the Final Regulations today

NZ US Tax Specialists — 2013-01-17T16:38:07-08:00

In a significant move today the US Department of the Treasury and the Internal Revenue Service have set down the final regulations for the Foreign Account Tax Compliance Act (FATCA).

The proposed regulations were issued in February 2012 and after almost a year of extensive consultation with affected parties, notably governments, the final regulations have now been laid down.

The final regulations phase in the due diligence, reporting and withholding timelines which were originally under a much tighter time frame and which were hotly contested by stakeholders, of note, foreign financial institutions.

Other variations to the proposed regulations include clarification around the treatment of some governmental entities, and retirement funds.

The United States government has now negotiated agreements (referred to as the inter-governmental agreements) with seven countries. Those countries are Norway, United Kingdom, Mexico, Denmark, Ireland, Switzerland and Spain.

Note that there is no agreement as yet with Australia. New Zealand, like Australia currently is underway with this negotiation process. As of March 2012 only five intergovernmental agreements were in place. Ten months later there are only seven , showing that this appears to be a slow process.

FATCA was enacted in 2010 as a move to combat international tax evasion.

1040 Filers - Forms that can be filed starting late February or March 2013

NZ US Tax Specialists — 2013-01-16T13:23:25-08:00

IRS have published the list of forms affected by the early January changes to tax legislation. One of the forms is Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations which is one of the most common forms filed for United States expatriates.

The remainder of the forms which cannot be filed until February or March relate mainly to domestic credits and deductions, including energy and motor vehicle credits.

Here is a list of the forms as published by the IRS on 8 January :

Form 3800 General Business Credit
Form 4136 Credit for Federal Tax Paid on Fuels
Form 4562 Depreciation and Amortization
Form 5074 Allocation of Individual Income Tax to Guam or the Commonwealth of the Northern Mariana Islands
Form 5471 Information Return of U.S. Persons With Respect to Certain Foreign Corporations
Form 5695 Residential Energy Credits
Form 5735 American Samoa Economic Development Credit
Form 5884 Work Opportunity Credit
Form 6478 Credit for Alcohol Used as Fuel
Form 6765 Credit for Increasing Research Activities
Form 8396 Mortgage Interest Credit
Form 8582 Passive Activity Loss Limitations
Form 8820 Orphan Drug Credit
Form 8834 Qualified Plug-in Electric and Electric Vehicle Credit
Form 8839 Qualified Adoption Expenses
Form 8844 Empowerment Zone and Renewal Community Employment Credit
Form 8845 Indian Employment Credit
Form 8859 District of Columbia First-Time Homebuyer Credit
Form 8865 Biodiesel and Renewable Diesel Fuels Credit
Form 8874 New Markets Credits
Form 8900 Qualified Railroad Track Maintenance Credit
Form 8903 Domestic Production Activities Deduction
Form 8908 Energy Efficient Home Credit
Form 8909 Energy Efficient Appliance Credit
Form 8910 Alternative Motor Vehicle Credit
Form 8911 Alternative Fuel Vehicle Refueling Property Credit
Form 8912 Credit to Holders of Tax Credit Bonds
Form 8923 Mine Rescue Team Training Credit
Form 8932 Credit for Employer Differential Wage Payments
Form 8936 Qualified plug-in Electric Drive Motor Vehicle Credit

Expatriates often also file Form 4562 Depreciation and Amortization and Form 8582 Passive Activity Loss Limitations.

National Taxpayer Advocate Annual Report

NZ US Tax Specialists — 2013-01-15T17:30:10-08:00

On the subject of taxpayer advocacy, the National Taxpayer Advocate delivered it's annual report to Congress last week. Which actually turns out to be quite an eye-opener for a number of reasons.

The report's number one recommendation was the need for tax reform in tax administration.

Additionally the lack of resources for the IRS was raised in terms of the agency's inability to both serve taxpayers and effectively collect revenue to the detriment of the fisc. The extent of the inadequacy was termed to be chronic by the Advocate Nina E Olsen.

Significant in the report was the complexity of the Internal Revenue Code and the report urges Congress to simplify it.

"The existing tax code makes compliance difficult, requiring taxpayers to devote excessive time to preparing and filing their returns... it obscures comprehension, leaving many taxpayers unaware how their taxes are computed and what rate of tax they pay; it facilitates tax avoidance by enabling sophisticated taxpayers to reduce their tax liabilities ..." Ms Olson cited in the report.

The citation voices many dynamics going on in United States taxation including the fiscal cliff, FATCA and the GFC.

Some interesting stats came out of the report including the following:

- almost 5,000 changes to the tax code since 2001
- almost 60% of taxpayers hire paid preparers
- another 30% rely on commercial software
- individuals and businesses spend about 6.1 billion hours a year complying with filing requirements
- tax rates could be cut by 44% if the system were simplified by the removal of deductions, credits, exemptions (tax expenditures).

Other key issues addressed in the report include failure to compensate taxpayers whom fall victim to preparer fraud, a high audit rate of taxpayers claiming the adoption tax credit, and....

the voluntary disclosure programs and the IRS' failure to distinguish between tax evasion and inadvertent failure to file.

The report refers to 'bad actors' and 'benign actors'.

Now this is quite fascinating personally to read as I had always thought that was the case!

The OVDI and OVDP programs never distinguished or had separate provisions to encourage taxpayers who inadvertently failed to file to come forwards under the program. All were tarred with the same brush as far as penalties and interest go, up to 75% of the value of undisclosed financial accounts.

The report refers to undue burden and fear among taxpayers whom had reasonable cause for not filing the FBAR, Form TD F 90-22.1.

There have been three rounds of voluntary disclosure since 2009 under different programs.

Further information is available on the Annual Report.

Federal tax payments

NZ US Tax Specialists — 2013-01-15T17:10:15-08:00

Any taxpayer with Federal tax to pay can pay the IRS by electronic transfer of funds upon obtaining a PIN number.

Although we are still three months off the due date for 2012 taxes, a PIN needs to be obtained in advance and in time for the due date of 15 April and so it would pay to make the application now in order to have the PIN in time for the payment deadline if it is 2012 tax that might be due.

Taxpayer Advocate Service

NZ US Tax Specialists — 2013-01-15T17:00:18-08:00

The IRS runs a Taxpayer Advocate Service which is available for problem resolution when the normal channels don't effectively resolve the problem.

Such problems may involve, but are not limited to, a delay in resolving a tax account problem which may be created by a systemic or procedural failure by the IRS.

An example may be where the IRS issues a refund check to a taxpayer with the payee details blank, and does this twice - a situation I've been contacted about recently by a client. Yes, this did happen, a blank check received with the amount but no payee. Not once - but two times over. I have contacted the Taxpayer Advocacy Service as the authorized representative to have this problem addressed and remedied.

Post script - preparers are strictly prohibited from receiving refund checks for clients. Those whom are authorized to practice before the IRS can be disbarred from practice for such an offense.

IRS Announces Simplified Option for Claiming Home Office Deduction

NZ US Tax Specialists — 2013-01-15T16:06:43-08:00

Today the Internal Revenue Service announced a new, simplified option for taxpayers claiming a home office deduction. This is effective for the 2013 tax year onwards.

Up to US $1,500 home office can be deducted by qualifying taxpayers based on $5 per square foot up to 300 square feet.

This option will save taxpayers time in calculating this deduction, which is available for home-based businesses and some home-based workers. To date many calculations and pro-rations have been required, together with adequate record-keeping to support the deduction. Under the new method no pro-ration between business use and personal use is required, with home mortgage interest, real estate taxes and casualty losses related to the home fully claimable on Schedule A as itemized deductions.

Depreciation on the portion of the home used in the business may not be claimed under the new option.

Note that the new method is not available as yet for 2012 returns, and will only be claimable for 2013 returns prepared in 2014.

More detailed information is contained in a Revenue Procedure published today.

IRS Changes to Forms

NZ US Tax Specialists — 2013-01-08T14:30:01-08:00

In addition to the forms that are being updated for new legislation, IRS has revised many forms for corrections and modifications.

The IRS will reject a form which has been filed which has been superseded by a later version, and so it pays to check that the form being filed is the current version.

IRS Announces 2013 Filing Season Opening 30 January

NZ US Tax Specialists — 2013-01-08T14:11:20-08:00

Today the Internal Revenue Service announced that it plans to begin processing individual income tax returns on 30 January.

2012 returns will only be accepted from 30 January to allow time for systems changes as a result of tax law changes under the American Taxpayer Relief Act enacted on 2 January.

Most individual taxpayers should be able to file from 30 January. However some taxpayers will at this stage need to wait until February or March due to changes to residential energy credits, depreciation of property and general business credits. Key forms affected include Form 5695 (Residential Energy Credits), Form 4562 (Depreciation and Amortization) and Form 3800 (General Business Credit).

These changes are unlikely to affect US citizens and residents filing individual expat returns. The IRS will be releasing a full listing of forms that the Service will not accept until after 30 January. Information regarding which other forms are affected will be posted as it comes to hand.

The late Alternative Minimum Tax (AMT) patch allows taxpayers who would otherwise be affected by the absence of a patch to file from 30 January also.

Social Security Tax Break Ending

NZ US Tax Specialists — 2012-12-31T13:08:42-08:00

No sweetener to the current fiscal cliff crisis, the Social Security Tax temporary reduction of 6.2 % to 4.2 % ends today. This tax cut, being a cut in United States payroll taxes, was applicable for two years, 2011 and 2012 in an effort to stimulate the economy.

The tax cut ends 31 December 2012., and unlike the uncertainty around income tax rate hikes through the fiscal cliff this tax break is likely to end regardless. Some 160 million Americans face less take-home pay from 1 January 2013.

Social Security tax is collected together with Medicare tax as FICA taxes for employees. Social Security tax is capped at US $113,700 of annual earnings (adjusted annually for inflation), and Medicare tax is uncapped.

These taxes are collected by way of withholding from employees' paychecks (5.65% under the current tax cuts reverting back to 7.65%), and matched by employers (7.65%) representing a rate of 13.3% reverting back to 15.3%.

FICA taxes are usually not collectible by the US government on earnings by citizens and residents employed by foreign employers and working outside the United States, however some exceptions apply.

Social security and Medicare taxes are mirrored for self-employed individuals with the same rates applicable.

Alternative Minimum Tax and The Fiscal Cliff

NZ US Tax Specialists — 2012-12-29T23:51:15-08:00

The current situation with Alternative Minimum Tax (AMT) is that potentially 100 million US taxpayers may experience a delay in being able to file their 2012 return.

The problem is that there is a delay in issuing a fix, or a patch, to increase the exemptions under which no AMT applies. AMT is nick-named a wealth tax and usually hits high income tax earners, with an exemption adjusted for inflation effective by way of the patch. Up until now Congress has enacted a patch to adjust the exemption levels for inflation below which AMT does not apply.

As a symptom of the fiscal cliff there has been no patch yet for 2012. If and when this occurs the Internal Revenue Service will need to change its systems which is why there is a potential delay in filing returns estimated to be as late as March. In addition up to 30 million additional taxpayers face an AMT liability for 2012 in the absence of a patch, caused by AMT hitting lower income earners than what it is intended to.

Fiscal Cliff Crisis

NZ US Tax Specialists — 2012-12-29T22:45:40-08:00

While most of New Zealand is on holiday this week, the last thing most here are probably watching with baited breath is the unfolding developments with the fiscal cliff. That is, unless they are US expats with substantial income or investments, residing or holidaying here.

The corollary of the fiscal cliff is that in 2012 end of year tax planning became a whole lot more important for US taxpayers.

US tax practitioners will be busy making last minute contingency plans for recommendations to their clients as the lack of progress brings America to the brink of the cliff. Inevitably they are now preparing for the worst case outcome in this nail-biter situation, which will include an across- the-board hike in tax rates and a lift in the estate tax.

Should the US go over the cliff, tax implications extend beyond tax hikes. It is predicted there will be a delay in the processing of US returns by the Internal Revenue Service due to fewer resources available to cope with the aftermath of the fiscal cliff, and a delay in refunds issued by the Treasury. Additionally, the Internal Revenue Service has warned lawmakers that if increased Alternative Minimum Tax for middle income taxpayers is not deal with as many as 100 million taxpayers may not be able to file their returns until late March 2013.

No doubt worldwide stock markets are, putting it mildly, nervously watching developments unfold with the threat of the dumping of stocks on the last business day of the US tax year, 31 December. This is predicted should the long term capital gains rate for stocks increase from 15% to 20%, and dividends from a maximum rate of 15% to ordinary income tax rates.

The extent to which the outcome of the fiscal cliff crisis will affect US expats will vary. If tax rates go up many US expats will probably experience no effect on their back pocket. Irrespective of having to file a US tax return annually, many US expats have their entire tax liability zeroed out by use of techniques such as the foreign earned income exclusion, to wipe out US taxable income and thus any US tax liability. It is timely to mention that use of this method does not eliminate the need to file.

However US expats will be affected by the government cuts in respect of their tax returns, by way of the Internal Revenue Service's additional workload dealing with the fiscal cliff fallout.

The Internal Revenue Service offers tips for year-end planning, the majority of which unfortunately do not apply to US expats. In any case limitations apply to most if not all deductions and credits making this appear to be a band-aid on a broken leg should any of these tax planning tips be successfully employed. Donations may qualify for a tax break if they are made to qualified charitable organizations which must be organized under the laws of the United States. One more relevant example is to consider divesting of non-performing stocks to take advantage of the long term capital gains top tax rate that may expire on 31 December of 15%.

Another consideration which applies to US expats is the child tax credit. Six criteria apply for a child to be a qualifying child for the child tax credit, two of which include that the child needs to have a Social Security Number and be under the age of 17 at the end of the year. The nice thing is that the child tax credit is refundable to qualifying taxpayers both inside and outside the US, unlike other refundable tax credits.

Should the US go over the cliff and hit most Americans with tax hikes it seems there will be a common denominator with FATCA � Americans with increased motivation to relinquish their citizenship or rather firstly, re-domicile to another country if they haven�t already done so and then expatriate.

Already some countries are predicting that the number of Americans expatriating will rise as a result of FATCA, with an international tax conference in Tel Aviv this month covering the predicted increase in the expatriation of US citizens whom live in Israel.

The �gotcha� mechanisms of FATCA are galvanized with new laws requiring US citizens to be in compliance with their Federal income tax filing obligations in order to renew their passports.