Ways for U.S. Taxpayers with Undisclosed Foreign Financial Assets to get back to Tax Compliance

Recent major modifications by IRS give an opportunity to taxpayers to get back to tax compliance with substantially reduced or no penalties.

By BALJEET SINGH

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In an effort to encourage the reporting of offshore assets, Internal Revenue Services (IRS) recently announced major modifications to the terms of its existing offshore voluntary disclosure programs. The new procedure offered by IRS gives an easy opportunity to the taxpayers, depending on individual circumstances, to fix the previous errors and get back to tax compliance with substantially reduced or no penalties. The taxpayer must not be under a civil examination or a criminal investigation by the IRS, and have not already been contacted by the IRS about the non-compliance to avail benefit of any of the options. Currently the following are the various options offered by the IRS:

2014 Offshore Voluntary Disclosure Program

The Offshore Voluntary Disclosure Program (OVDP) is a voluntary disclosure program specifically designed for taxpayers with exposure to potential criminal liability and/or substantial civil penalties due to a willful failure to report foreign financial assets and pay all tax due in respect of those assets.  OVDP provides taxpayers with such exposure a protection from criminal liability and terms for resolving their civil tax and penalty obligations. Under this program, the base penalty is 27.5 percent of the highest aggregate value of the foreign bank accounts or assets during the period covered by the disclosure. The penalty will be increased to 50 percent for any foreign financial accounts that were held at a bank that has been publicly identified as being under investigation or as cooperating with a government investigation.

Streamlined Filing Compliance Procedures

The streamlined filing compliance procedures are available to taxpayers whose failure to report foreign financial assets and pay all tax due in respect of those assets did not result from willful conduct on their part.  The procedures are designed to provide to taxpayers in such situations a streamlined procedure for filing amended or delinquent returns and terms for resolving their tax and penalty obligations.

The modified streamlined filing compliance procedures are designed for only individual taxpayers, including estates of individual taxpayers.  The procedures are available to both U.S. individual taxpayers residing outside the United States and U.S. individual taxpayers residing in the United States. Taxpayers using the Procedures will be required to certify that the failure to report all income, pay all tax, and submit all required information returns, including FBARs (FinCEN Form 114, previously Form TD F 90-22.1), was due to non-willful conduct.

Tax returns submitted under the streamlined procedures may be subject to IRS examination, additional civil penalties, and even criminal liability, if appropriate. Taxpayers who are concerned that their failure to report income, pay tax, and submit required information returns was due to willful conduct and who therefore seek assurances that they will not be subject to criminal liability and/or substantial monetary penalties should consider participating in the Offshore Voluntary Disclosure Program (OVDP) and should consult with their professional tax or legal advisers.

Eligible US taxpayers who resided outside the US in any one of the most recent three years for which US tax returns due date (including extension) has passed, will not pay any penalties. Eligible US taxpayers who resided in the US during this period will pay a penalty of 5% of the highest aggregate balance/value of taxpayers’ foreign financial account during the three years period covered by the tax return or six years covered by the FBAR.  The IRS will not impose accuracy related penalty, information return penalties, or FBAR penalties.

The taxpayers who are currently participating under Offshore Voluntary Disclosure Program may be eligible for reduced penalties under the new streamlined filing procedures. A taxpayer seeking such treatment does not need to opt out of OVDP, but will be required to certify, in accordance with the instructions, that the failure to report all income, pay all tax, and submit all required information returns, including FBARs, was due to non-willful conduct

Delinquent FBAR Submission/Information Return Procedures

These procedures allow taxpayers to file delinquent Report of Foreign Bank and Financial Accounts (FBAR) (FinCEN Form 114, previously Form TD F 90-22.1) and/or information returns along with a statement of reasonable cause for late filing. No penalty will be imposed by the IRS for the failure to file the delinquent FBARs or information return if the taxpayer properly reported on U.S. tax returns, and paid all tax on, the income from the foreign financial accounts reported.

Given the ongoing efforts of the IRS to ensure tax compliance with regards to foreign financial assets, pressure on foreign bank to disclose US account holder information and recently announced cooperation among the governments around the world, it is highly recommended that US taxpayers having undeclared accounts review their individual situation with their CPA’s and/or legal counsel and opt for the best course of action.

Write to Baljeet Singh at baljeet.singh@chugh.com.

IMPORTANT NOTICE:

Thank You for visiting this blog!

The tax blog has been moved to new domain  http://baljeetsinghcpa.com/ effective 2018.  The writing style, and blogs by the author are being presented in a complete different way from what was being presented on this blog. All prior written blogs, except two, have been removed from this website to maintain consistency in authors blog from 2018 on-wards. The two blogs “Tax Tips for H1B Visa Holder” and “Ways for U.S. Taxpayers with Undisclosed Foreign Financial Assets to get back to Tax Compliance” have been kept on this site due to overwhelming response from readers, and their utility for the category of taxpayers till these two topics are covered on the new active blog by the author.

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Tax Tips for H1B Visa Holders

H1B Visa

If you are on H1B in the U.S., here are a few simple, yet important, tax tips that you should consider:

  • As most of us know, tax return preparation starts with basic document called “Form W-2”.  W2 is a document that details your payroll for the year and the taxes withheld from that payroll. At the end of the year, be sure to obtain your W2 from your employer. If you worked for different employers during the year, get a W2 from all of them because you are most likely to get an IRS notice for not reporting W2 income on your tax returns. There are other different forms of interest from the payer of income depending on income type like form 1099 for interest income from U.S. banks, 1099-B for stock sales etc. Be sure to gather these documents at one place so when you have to file the taxes, you have them all handy.
  • If you worked for multiple employers in different states during the tax year, then you need to file state income tax returns in all those states in addition to the federal return in form 1040/1040NR as the case may be, depending on your residential status. Most of the times, you get refund of the state taxes withheld from your payroll by merely filing the state income tax returns.
  • If you are on H1B visa and a resident of U.S. as per the U.S. tax laws, which most of the people are, then you generally are subject to U.S. Income taxes on your worldwide income. This includes, but is not limited to, any interest income from bank accounts in a foreign country, income from rental property, and dividend income.
  • One very important and often overlooked provision applicable to U.S. tax residents is that if they have financial interest in or possess signature authority over a foreign financial account, including a bank account, brokerage account, mutual fund, trust or other type of financial account, he/she is required to file Form TD F 90-22.1 with the IRS by June 30 each year if aggregate value of the financial account(s) exceeds $10,000 at any time during the year. Remember, there is no extension to file this form and penalty for noncompliance is $10,000 per year.
  • If you had some income in a foreign country and there were some taxes withheld in foreign country on that income, then you could claim the credit of those taxes paid on your U.S. tax returns.
  • The spouse of a person on H1B visa can be treated as resident for tax purposes by filing a declaration along with the tax returns even though he/she might not admitted to the United States. The advantage of doing so is that you are able to claim additional spousal exemption on the tax returns which directly could result in tax savings.
  • Dependents of U.S. resident, despite not being admitted to the United States, can be claimed as dependents on U.S. tax returns if the rules that apply to U.S. citizens are met. There are specific rules for qualifying child/qualifying relative for claiming as a dependent.
  • For the purposes of claiming the exemption for spouse or dependents, ITIN (income tax identification number) needs to be applied along with the tax return. This can be done by filing a simple form “Form W-7” along with the tax returns.
  • If for half of the year you were on OPT and half of the year on H1B, then there should not be any withholding for social security and medicare out of your payroll for the period you were on OPT. If your employer has withheld money for these, you can ask refund for withholding of social security and medicare for the OPT period. The exemption from social security and medicare taxes for services performed in U.S. is available as long as such services are allowed by the USCIS, and are performed to carry out the purposes for which the student visa was issued.
  •  An important possible tax deduction could be moving expenses for people who came to U.S. during the year from a foreign country or moved from one U.S. location to another during the year for employment. You may be able to deduct moving expenses on your tax returns if you meet a specified distance and time test. You can deduct the cost of packing, crating, and transporting your household goods and personal effects and those of the members of your household from your former home to your new home. For the purposes of moving expenses, the term “personal effects” includes, but is not limited to, movable personal property that the taxpayer owns and frequently uses.
  • Few things that you could consider to save or defer your taxes.
    • Make investments in retirement accounts to defer the taxes like 401K, traditional IRA.
    • If you invest in security, plan to hold it for at least one year to make the gain/loss long term which is tax favorable.
    • Consider buying a home because you could deduct mortgage interest deduction, & real estate tax deduction. If you already have home, pay your mortgage payment of next year’s first month early. (E.g. instead of 1 Jan, pay 31st Dec). This way you can get deduction in current year. Also pay real estate taxes early.
    • Be generous, donate your clothing and household items to charity.
    • If your employer has flexible spending account benefits for any medical or dental or dependent care cost, consider using that.
    • You can deduct Medical expenses only if it exceeds 7.5% of your adjusted gross income (AGI). So keep track of your dental and medical expenses from start of the year to get this deduction.

Write to Baljeet Singh at baljeet.singh@chugh.com.

IMPORTANT NOTICE:

Thank You for visiting this blog!

The tax blog has been moved to new domain  http://baljeetsinghcpa.com/ effective 2018.  The writing style, and blogs by the author are being presented in a complete different way from what was being presented on this blog. All prior written blogs, except two, have been removed from this website to maintain consistency in authors blog from 2018 onwards. The two blogs “Tax Tips for H1B Visa Holder” and “Ways for U.S. Taxpayers with Undisclosed Foreign Financial Assets to get back to Tax Compliance” have been kept on this site due to overwhelming response from readers, and their utility for the category of taxpayers till these two topics are covered on the new active blog by the author.

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