Streamlined Filing Compliance Procedures - PowerPoint PPT Presentation

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Streamlined Filing Compliance Procedures

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Numerous US individuals own overseas assets or have an interest in them. The IRS may penalize these taxpayers if they fail to report these assets on their tax filings. Consequently, the streamlined filing compliance procedure exists to assist these individuals with: – A streamlined process to file delinquent or amended tax returns; – Resolving tax and penalty procedures for filing delinquent or amended returns; and – Resolving penalty and tax obligations This webinar will guide you through the complexities of Streamlined Filing Compliance Procedures and make your US Tax Journey Exponentially easier! – PowerPoint PPT presentation

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Title: Streamlined Filing Compliance Procedures


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(No Transcript)
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Webinar Overview
much more!
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Who is a U.S. Taxpayer?
  • U.S. Citizens
  • Lawful permanent residents Green Card holder
  • Those satisfying the substantial presence test of
    IRC section 7701(b)(3).
  • To meet this test, a person must be physically
    present in the United States on at least
  • 1. 31days during the current year, and2. 183
    days during the 3-year period that includes the
    current year and the 2 years immediately before
    that, considering
  • All the days a person was present in the current
    year, and
  • One -Third (1/3) of the days a person was present
    in the first year before the current year, and
  • One - Sixth (1/6) of the days a person in the
    second year before the current year.

4
Responsibility of US Citizen and Residents
  • File income tax returns reporting worldwide
    income (Form 1040)
  • File required US international informational tax
    returns
  • File FBARs on FinCen Form 114

5
Foreign Assets Disclosure and Reporting
  • Form 3520 Annual Return to report transactions
    with foreign trust and receipt of certain foreign
    gift
  • Form 926 Return by a U.S Transferor of property
    to a foreign corporation
  • Form 5471 Information Return of U.S. persons with
    respect to certain foreign corporations
  • Form 8865 Return of U.S. person with respect to
    certain foreign partnerships
  • Form 8621 PFICs
  • FBAR
  • Form 8938 Foreign Financial Assets

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Form 3520
Annual Return to Report Transactions With Foreign
Trusts and Receipt of Certain Foreign Gifts
  • Under IRC 6048, taxpayers must report various
    transactions involving foreign trusts, including
    the creation of a foreign trust by a United
    States person, transfers of property from a
    United States person to a foreign trust, and
    receipt of distributions from foreign trusts.
  • This return also reports the receipt of gifts
    from foreign entities under IRC 6093F.
  • The penalty for returns reporting gifts is five
    percent of the gift per month, up to a maximum
    penalty of 25 percent of the gift.

7
Form 926
Return by a U.S. Transferor of Property to a
Foreign Corporation
  • Under IRC 6038B, taxpayers must report transfers
    of property to foreign corporations and other
    information.
  • The penalty for failing to file each one of these
    information returns is ten percent of the value
    of the property transferred, up to a maximum of
    100,000 per return, with no limit if the failure
    to report the transfer was intentional.

8
Form 5471
Information Return of U.S. Persons with Respect
to Certain Foreign Corporations
  • Under IRC 6035, 6038 and 6046, certain United
    States persons who are officers, directors or
    shareholders in certain foreign corporations
    (including International Business Corporations)
    must report information.
  • The penalty for failing to file each one of these
    information returns is 10,000, with an
    additional 10,000 added for each month the
    failure continues beginning 90 days after the
    taxpayer is notified of the delinquency, up to a
    maximum of 50,000 per return.

9
Form 8865
Return of U.S. Persons with Respect to Certain
Foreign Partnerships
  • Under IRC 6038, 6038B, and 6046A, United States
    persons with certain interests in foreign
    partnerships must report interests in and
    transactions of these foreign partnerships,
    transfers of property to these foreign
    partnerships, and acquisitions, dispositions and
    changes in foreign partnership interests.
  • Penalties include 10,000 for failure to file
    each return, with an additional 10,000 added for
    each month the failure continues beginning 90
    days after the taxpayer is notified of the
    delinquency.
  • The penalty is capped at 50,000 per return, and
    ten percent of the value of any transferred
    property that is not reported, subject to a
    100,000 limit.

10
FBAR
Who Must Report?
  • Individuals Must Must File FBARs if they Have
  • Financial Interest in, Signatory Authority or
    Other Authority Over One or More Accounts (Bank
    Accounts, Brokerage Accounts, Mutual Fund
    Accounts) in a Foreign Country

Penalty
A person who willfully fails to file an FBAR or
files an incomplete or incorrect FBAR, may be
subject to a civil monetary penalty of 100,000
or 50 of the balance in the account at the time
of the violation, whichever is greater. Willful
violations may also be subject to criminal
penalties.
11
Form 8938
A specified foreign financial asset (SFFA) is
  • Any financial account maintained by a foreign
    financial institution

Foreign bank accounts Foreign mutual funds
Foreign hedge funds Foreign private equity
funds Certain foreign insurance products
Penalty
  • In general, Form 8938 penalties will be 10,000
    per year.

12
Efforts by IRS
  • IRSs latest efforts is to promote tax compliance
    and to crack down on offshore tax evasion
  • These program will ease the financial and legal
    pain for expatriate Americans who live and work
    abroad
  • They relax the penalties that a taxpayer with an
    overseas account might otherwise face for failing
    to disclose a foreign account

What Does the IRS Know?
  • Never Underestimate What Information The IRS Can
    Find Out on its Own
  • Tax Return Preparer Must Forewarn Clients About
    the Increasing Breadth of Information That Can Be
    Gathered by IRS, and Department of Justice (DOJ)
    on Noncompliant Taxpayers Through Social Media
  • Foreign Bankers Are Often meticulous in Keeping
    Notes of Prior Phone Calls and Meetings with
    Clients or Advisors
  • No Such Thing as a Secret Account
  • Taxpayer Must be prepared to Credibly Explain to
    IRS Why They Failed to Disclose Foreign Accounts
    and Why They Did Not Make a Voluntary Disclosure?

13
Streamlined Programs Remediation Eligibility
  • Streamlined Programs Initiated in 2012
  • Technically Two Programs
  • Streamlined Domestic Offshore Procedures
  • Streamlined Foreign Offshore Procedures
  • Common Theme of Both Programs is Requirement That
    Taxpayer Certify Under Penalty of Perjury That
    His Conduct Was Not Willful Conduct was due to
    negligence, or mistake or conduct that is the
    result of good faith misunderstanding of the
    requirements of the law, accidental failure to
    report
  • IRS does not explicitly define non-willful.
    They review each case on an individual basis
  • Only available to Individual and Estate (Not
    entities)
  • Always include a certification narrative
    (reasonable cause statement) and attach Form
    14654 or 14653
  • Failed to report foreign financial assets and pay
    taxes

14
Streamlined Domestic Offshore Procedures
  • IRS extended streamline procedure to American
    Living in the U.S. with undisclosed foreign
    accounts who previously were ineligible from
    participating in the streamlined procedure
  • Such person who come forward now will owe back
    taxes, interest, and a reduce miscellaneous
    offshore penalty equal to five percent of their
    undisclosed foreign financial assets.
  • Taxpayers Residing In US Requires Taxpayer to
    Have Filed Prior US Tax Returns for Most Recent 3
    Years AND
  • Limited to Filing Amended Returns (No Original
    Returns Permitted if None Originally Filed), AND
  • Carries a Potential 5 Miscellaneous Penalty for
    Unreported Account/Assets

15
Getting to Know Streamlined Domestic
What must I submit?
  • For each of the most recent three years for which
    the U.S. tax return due date or extended due
    date - has passed (the "covered tax return
    period"), file amended tax returns, together with
    all required information returns (e.g., Forms
    3520, 3520-A, 5471, 5472, 8938, 926, and 8621)
  • For each of the most recent six years for which
    the FBAR due date has passed (the "covered FBAR
    period"), file any delinquent FBARS and
  • Pay a miscellaneous offshore penalty. The full
    amount of the tax, interest, and miscellaneous
    offshore penalty should be submitted with the
    amended tax returns.

16
Miscellaneous Offshore Penalty for Streamlined
Domestic
1. How is the miscellaneous offshore penalty
calculated? It is equal to 5 percent of the
highest aggregate balance of the taxpayers
foreign financial assets that are subject to the
penalty during the years in the covered tax
return period and the covered FBAR period. 2.
How is the highest aggregate balance
determined? By tallying the year-end account
balances and year-end asset values of all the
foreign financial assets subject to the penalty
for each year in the covered tax return period
and the covered FBAR period and selecting the
highest aggregate balance from among those years.
17
Streamlined Foreign Offshore Procedures
  • U.S. taxpayers must satisfy the following
    requirements
  • The applicable non-residency requirement (for
    joint return filers, both spouses must satisfy
    the non-residency requirement) and
  • Have failed to file an FBAR with respect to a
    foreign financial account OR foreign investment
    related informational forms, and
  • The failure to file an FBAR/Foreign investment
    related forms must have resulted from non willful
    conduct.
  • U.S. Taxpayer living abroad who disclose their
    foreign accounts and settle their tax bills under
    Streamlined Foreign Offshore Procedure wont be
    charged any penalties. Instead, they will simply
    owe back taxes and interest.
  • File 3 years of delinquent or amended tax or
    information return and pay tax and interest
  • File 6 years of delinquent FBARs


18
Getting to know Streamlined Foreign
The non-residency requirement has two strands
  • First, the taxpayer must have a non-U.S. abode.
  • Second, the taxpayer must have lived outside of
    the U.S. for 330 full days or more in at least
    one of the most recent three years for which the
    U.S. tax return due date (or properly applied for
    extended due date) has passed.

A helpful formula that illustrates the extreme
scenario
19
Getting to Know Streamlined Foreign
Example 2
  • A taxpayer who spends 36 days in the U.S. in
    year one, 36 days in the U.S. in year two, and 36
    days in the U.S. in year three fails the
    nonresidency requirement.
  • Why? Because there are 365 days in a year and in
    no year could he have spent at least 330 days
    outside of the United States. Instead, the
    maximum number of days that he spent outside of
    the U.S. in each year was 329 days, one day shy
    of the 330-day threshold.
  • As you can see, the rigid requirements of the
    nonresidency requirement can play the role of
    spoiler to well intentioned taxpayers wanting
    to "get right with the IRS.

20
Getting to Know Streamlined Foreign
Interesting question to ponder
  • Is the taxpayer in example 2 who is deemed
    ineligible for streamlined foreign, eligible for
    streamlined domestic?
  • Only if he has filed his U.S. tax returns for
    each of the most recent three years for which the
    U.S. tax return due date - or extended due date -
    has passed (a key requirement for streamlined
    domestic)
  • If the taxpayer in example 2 filed U.S. tax
    returns in two of the most recent three years for
    which the U.S. tax return due date has passed,
    but neglected to do so in just one year, not only
    would he be ineligible for streamlined foreign
    but he would also be ineligible for streamlined
    domestic!

21
Getting to Know Streamlined Foreign
Remaining Requirements
  • U.S. taxpayer must file delinquent or amended tax
    returns, together with all required information
    returns (e.g, Forms 3520, 5471, and 8938) for
    each of the most recent three years for which the
    U.S. tax return due date or extended due date
    has passed and
  • File any delinquent FBARs for each of the most
    recent six years for which the FBAR due date has
    passed.

22
Polling Question
How Many years of delinquent FBAR needs to be
filed in Streamline Compliance Procedure?
A. 3 Years B. 6 Years
23
Streamlined Assets
  • Streamlined Assets refers to the assets which are
    reportable either on FBAR or Form 8938.
  • Some assets like personal real estate investment
    in foreign country are not included
  • Other assets such as Canadian RRSP (Registered
    Retirement Saving Plan) is included on the FBAR
    and Form 8938 but NOT computed as part of the
    penalty. (Elect income deferral on retirement
    plans permitted by Treaty)

24
IRS Audit and Verification
  • Returns submitted under either the foreign or
    domestic offshore procedures are not
    automatically selected for audit. Instead, they
    are subject to verification.
  • Through verification, the examining agent can
    request account statements and other relevant
    documents to verify the information reported.
  • However, this does not mean that an examination
    is impossible. On the contrary, such returns may
    be selected for audit under the existing audit
    selection processes applicable to any U.S. tax
    return
  • Taxpayers who are eligible to use the streamlined
    procedures and who follow all of the instructions
    are not subject to failure-to-file and
    failure-to-pay penalties, accuracy-related
    penalties, information return penalties, or FBAR
    penalties, even if their returns are subsequently
    selected for audit.
  • First, any previously assessed penalties relating
    to the years that are selected for audit will not
    be abated.
  • Second, to the extent that the IRS determines an
    additional tax deficiency for a return submitted
    under these procedures, it can assert additional
    tax and penalties relating to that additional
    deficiency.
  • Finally, the IRS will unleash the full arsenal of
    penalties if it determines that the original tax
    noncompliance was due to fraud and/or that the
    FBAR violation was willful.

25
IRS Audit and Verification
  • Tax returns will be processed no different than
    any other returns submitted to the IRS. Reading
    between the lines, what the IRS seems to suggest
    is not to expect confirmation for receipt of the
    returns.
  • Assuming a taxpayer's streamlined submission is
    rejected, the only remaining option for coming
    into compliance with one's U.S. tax obligations
    is to file amended 1040s and delinquent
    international returns in what is known as a
    quiet disclosure.
  • With respect to the Streamlined Domestic Offshore
    Procedures, the five-percent miscellaneous
    penalty is imposed on a broader base of foreign
    assets - not just those relating to FBAR
    reporting.

26
Who Is Ineligible?
  • Those taxpayers who cannot certify that their
    failure to report all income, pay all tax, and
    submit all required information returns was due
    to nonwillful conduct.
  • Those taxpayers who are under criminal
    investigation by IRS Criminal Investigation.
  • Those taxpayers who are undergoing a civil
    examination, regardless of whether that
    examination relates to unreported foreign assets.

27
Polling Question
Is late filing and late payment penalties
applicable for tax returns filed under
Streamlined Filing Procedures?
A. Yes B. No
28
Do You Have Any Questions?
An Informative Session On STREAMLINED FILING
PROCEDURES
DO LET US KNOW YOUR QUERIES )
29
NEXT STEPS
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