Tuesday, July 31, 2018

Interesting Cases: Courts Hold FBAR Penalties Cannot Exceed Reg Cap

Mars, the Red Planet. Pic Courtesy; www.pixabay.com

I believe the planet Mars is at its closest to us since 2003, it will not be not be this close to us again until 2035. I have been trying to locate Mars every night this past weekend but the skies have been cloudy unfortunately. This event is called "opposition" when the Sun and Mars are on either side of our planet Earth. 

Most US citizens with foreign bank accounts and the US government are in similar opposition (cheesy analogy, I know) most of the time. Maintaining and reporting of these accounts are time consuming and arduous. If you are regular readers of my blog, you know the requirements to file and declare your foreign bank accounts. If you need a brief refresher, please read this post

The penalties for non-disclosure of your foreign bank accounts are significant. Civil penalties for non-willful violation are up to $10,000 per violation and willful violation can range up to greater of $100,000 or 50% of the account balance at the time of violation. 

These penalties are after a law change that happened in 2004 which increased the maximum penalties for willful failures. Before the law change, the maximum penalty that could be assessed was $100,000. These regs have now been renumbered and amended to index for inflation. (31 C.F.R 1010.820(g))

There were 2 Court cases, one in May 2018 {U.S. v. Colliot, (DC TX 05/16/2018) 121 AFTR 2d 2018-775} and another recently in July 2018 {Waldhan, (DC CO 07/18/2018) 122 AFTR 2d 2018-5060} where the Court held that the INternal Revenue Service lacks the authority to impose a penalty in excess of $100,000 as prescribed by 31 C.F.R. 1010.820. 

In each of the cases, the taxpayers had failed to file or filed inaccurate FBARs for tax years before 2010. The IRS had imposed total penalties in excess of $100,000 in each case. 

The taxpayers argued that the assessments were improper because the IRS' authority was limited by 31 C.F.R. 1010.820(g). 

The Courts after delving on the differences in the penalty caps in the statute and the regs, said that the Secretary limited the penalties that the IRS could impose to $100,000 in exercise of statutory discretion. They said that it cannot be assumed that the Secretary could have simply overlooked these differences (between the statute and the regs) for 14 years. Therefore the Secretary elected to continue to limit IRS' authority to impose penalties to $100,000 as specified in 31 C.F.R. 1010.820 even though penalties are avialable under 31 U.S.C. 5321(a)(5)(C)

The Court concluded that "although IRS believes that it is empowered by 31 U.S.C. 5321 to act, it is not. It is empowered by the Secretary who has discretion to determine what penalties are imposed. 1010.820 remains in effect until amended or repealed."

Note: The Supreme Court, on the other hand, has recently declined to hear a Ninth Circuit decision upholding a more than $1 million FBAR penalty based on a $2.4 million unreported account.

Consult with a tax professional for your unique needs and make sure your questions are answered. Please read my disclaimer here. If you have any more questions regarding this or other tax matters, all of my contact information is on my website, www.mntaxbiz.com.   

Wednesday, June 6, 2018

Cryptocurrency: The Saga Continues!

PC: pixabay.com Plitvice Lakes, Croatia
Cryptocurrency discussions are every where these days cropping up like the ubiquitous dandelions. There is a lot of information out there and it can be quite over-whelming to say the least. Some of the information is downright inaccurate and one needs to be careful about the sources that dish it out. We talked about Cryptocurrency briefly in our blog-post here. Not much has changed since then. 

What has changed however is that an increasing number of tax professionals are asking the Internal Revenue Service for guidance surrounding taxation of Cryptocurrency. In fact the American Institute of Certified Public Accountants {AICPA} recently wrote to the Internal Revenue Service recommending that the IRS address certain issues with Cryptocurrency by way of guidance or FAQ's. 

Some of the major recommended areas the AICPA asked for comments/ guidance from the Internal Revenue Service on were: Expenses of obtaining the currency; Acceptable valuation and documentation; Computations for gains and losses; Virtual currency events, and held and used by dealers; Treatment under Sections 1031 and 453; Holding Virtual currency in Retirement Accounts; Foreign Reporting Requirements. 

One of the recommended topics that I personally thought was most relevant was that the Cryptocurrency Miners/ Users be allowed to make a De Minimis Election for cryptocurrency transactions. At this time every payment in Cryptocurrency is deemed a sale of the currency and hence each of those events needs to be kept track of and reported as a Capital Gain/ Loss on the tax return. Tracking these transactions can be onerous, hence the recommendation for a de minimis exclusion. 

If cryptocurrencies are traded on exchanges located outside the United States and if accounts are held within these exchanges, there is currently no guidance whether the FATCA regulations apply and if these balances in the exchanges have to be reported on an FBAR. 

A Like-Kind-Exchange via Section 1031 has been effectively removed for Cryptocurrencies by the Tax Reform Act. After Tax Year 2017, this will no longer be available as a tax strategy for cryptocurrencies.

The loss of this deduction may not help those who had exchanged one type of cryptocurrency for another within an exchange.  

This past tax season was an eye-opener for me to see how many younger clients came to their appointments with questions regarding cryptocurrency or that they had bought and sold some of it for a neat profit. I will tell you what I told them, be wary, stay informed and make sure you take your tax professional into confidence. 

If this is the first time you are reading up on cryptocurrency and most/ all of the above seemed like Greek to you, first of all let me welcome you to the "Fourth Industrial Revolution" and then provide you with a link to a really good write up on Mining of Cryptocurrency here

Bibliography: AICPA Comment Letter Dated May 30th, 2018; Notice 2014-21

As always, read my disclaimer here. Please consult a qualified tax professional for your unique tax needs. More of my contact information is on my website, www.mntaxbiz.com.  

Tuesday, May 29, 2018

A Death Knell On the Offshore Voluntary Disclosure Program? What To Expect?

Picture Courtesy: www.pixabay.com, Italy. 
Hello everyone, I am back! The 2018 Tax Season was definitely one for the books, a series of challenges with Tax Reform and retroactive changes affecting 2017 taxes; and trying the impossible-tax planning for 2018 without guidance from the Internal Revenue Service! Guidance has been trickling in since but most of us are still waiting! 

In the midst of all the chaos that was, the Internal Revenue Service put an end to the Offshore Voluntary Disclosure Program or OVDP for short, via IR-2018-52. If you remember, the OVDP was first introduced in 2009, then there were more modified versions put forth in 2011, 2012 and 2014. I wrote in detail about the OVDP in 2013, we can go back and look at it here

Closure of the OVDP in 2018: The 2014 OVDP is going to close effective September 28th, 2018. If you would like to take part in the OVDP program, your submission should be received or post-marked by September 28th, 2018 and must be complete. The submissions may not be partial/ incomplete/ or serve as place-holders. 

The Internal Revenue Service replies "No" in answer to the question, "Does the closing of the 2014 OVDP signal a change in IRS priorities towards offshore tax noncompliance?" A growing network of inter-governmental agreements with many countries, automatic compliance by financial companies under FATCA or the Foreign Account and Tax Compliance Act, the DOJ's Swiss Bank program etc has ensured that it is getting more and more difficult to evade taxation by stashing money off-shore. 

The Streamlined Filing Compliance Procedures will continue to remain open after September 28th, 2018. Those who can declare under penalties of perjury that their conduct was non-willful can participate in the Streamlined Filing Procedure. This procedure is available to both citizens living within the USA and abroad although the filing thresholds may vary.

All other Delinquent FBAR Filing Procedures are still available to eligible taxpayers even after September 28th, 2018. More about this process is in my blog post here

If you have undeclared foreign bank accounts and will qualify to be a candidate, you still have time (around four months from the time this article is published) to contact a tax professional with the expertise to help you through the program. 

If you would like to give your feed-back or have suggestions about a future voluntary disclosure program to the Internal Revenue Service, I believe their email address is lbi.practice.unit.public.feedback@irs.gov. Make sure your subject line reads “Suggestion for voluntary disclosure practice after OVDP closes.”


As always, read my disclaimer here. Please consult a qualified tax professional for your unique tax needs. More of my contact information is on my website, www.mntaxbiz.com

Thursday, February 8, 2018

The TCJA: Changes For American Expats OR Not?

Tokyo, Japan
Many American citizens who live outside the US have for years raised concerns about the United States' Citizen-Based-Taxation System. They may have been hopeful when tax reform was being proposed but have been disappointed that their concerns have been ignored. 

The new tax reform bill, Tax Cuts and Jobs Act called TCJA (pronounced tick-jah) has brought about massive changes in the way individuals are going to be taxed but not much has changed for American Expats. 

As most of my readers know, if you are a US Citizen, you are required to file a US tax return annually. The information needed to be filed along with your tax return via Form 8938, Form 3520, Form 5471, Form 8865 remains in place. So does the requirement to file Form 114 AKA the FBAR. Not only does non-compliance with these rules and regulations come with stiff penalties, they also make banking in the countries of residence burdensome for expats. Most foreign banks do not want US citizens for customers as they have to comply with FATCA requirements. 

The Net Investment Income Tax has also remained in place, therefore high earning expats with passive income may find themselves subject to this tax.  

On the good side, the Foreign Earned Income Exclusion {FEIE} and the Foreign Tax Credit {FTC} have not been repealed. If you want to read in detail about what this is, my post is here and also here. An expat can exclude up to $104,100. And for those who go over the limit, they can take the tax paid in the country of residence as a credit. The United States has tax treaties with many countries so most expats can avoid double taxation. 

New Points To Look Out For under TCJA:

There has been a major shake-up in the tax brackets, deductions and exemptions. The Standard Deduction has increased substantially. You may now find yourself in a lower tax bracket than you were in earlier. 

If you are planning to move in to the United States, the Moving Expense deduction is no longer available for moves made after January 1st, 2017. 

The Affordable Care Act mandate has been eliminated. 

The big and most onerous change that US Expats will find is with their ownership in foreign corporations. Under the TCJA, U.S. shareholders owning at least 10% of a foreign subsidiary may end up paying a one-time "expatriation tax" on profits earned abroad that have not been taxed previouslySome US shareholders will have this change impact their 2017 tax returns. 

This is a very short and simplistic analysis of the tax change for owners of foreign corporations among other aspects affecting expats. Please consult your tax professional if this applies to you and get guidance. 

Most tax professionals are working with and trying to understand the new law. We await more guidance from the Internal Revenue Service. As always look out for more coming through this space from me. 

Bibliography: Tax Reform and Jobs Act


As always, read my disclaimer here. Please consult a qualified tax professional for your unique tax needs. More of my contact information is on my website, www.mntaxbiz.com

Sunday, December 24, 2017

Tax Reform Changes How You Itemize

St. Nicholas Church, Old Town, Prague
The media is abuzz with Tax Reform news, here to allay your confusion regarding the cut to some deductions and tax rates is my latest blog post. 

The tax rates change has been the most publicized but there are many deductions on the chopping block that will drastically change how you prepare your taxes and/ or your bottom line. 

Most taxpayers who itemized on Schedule A had substantial medical expenses (deductible over 10% of their AGI), state & local income taxes, real & personal property taxes, home mortgage interest, home equity loan interest, charitable contributions, and other miscellaneous deductions over 2% of their AGI. If the total of such itemized deductions went over the standard deduction based on your filing status below*, one would itemize. 

*The standard deduction rates for filing your 2017 tax returns are as follows: 

                     Filing Status                                         Standard Deduction Allowed
                        Single                                                           $6,350
  Married Filing Jointly & Surviving Spouse                            $12,700
            Married Filing Separately                                           $6,350
                Head of Household                                                $9,350

The personal exemption amount, a deduction available for yourself, spouse and your dependents for 2017 is $4,050 each.

If you did not have enough expenses to file the Schedule A, then your total deduction was the standard deduction plus the $4,050 times the number of dependents you claimed including yourself on your tax return. 

What Has Changed After Tax Reform?: 

1. The standard deductions rates are now as follows:

                   Filing Status                                         Standard Deduction Allowed
                        Single                                                           $12,000
  Married Filing Jointly & Surviving Spouse                              $24,000
            Married Filing Separately                                           $12,000
                Head of Household                                                $18,000

The personal exemption amounts are no longer available. 

2. Medical & Dental Expenses: 

Going line-by-line on Schedule A, the first deduction for medical & dental expense is in place for 2017 & 2018 with a threshold of 7.5% of your AGI(adjusted gross income). This threshold is lower now than the 10% of your AGI that had been in place for 2016. 

Since this provision is retroactive, it affects your current tax return if you have had high medical bills for 2017. 

3. State & Local Taxes {SALT}: 

State, local sales taxes, income taxes and property taxes remain in place under the tax reform package. However, the deduction is capped at $10,000 (discussed below). Foreign real property taxes cannot be deducted under the new provision. 

What Are SALT Caps?:

The deduction for SALT remains, however there is a $10,000 cap on this deduction. This means that the total of state & local sales, income taxes, and property taxes cannot exceed $10,000 ($5,000 for those filing married separately). If these taxes including foreign real property taxes are being deducted on a Schedule C, Schedule E or Schedule F, then there is no cap on the total. 

Also, amounts paid in advance in 2017 for state or local income tax imposed for 2018 will be treated as paid in 2018. There is no restriction on property taxes under this rule.

4. Home Mortgage Interest: 

Home Mortgage or "acquired indebtedness" has been defined under the new law as "indebtedness that is incurred in acquiring, constructing, or substantially improving a qualified residence of the taxpayer and which secures the residence".  Please note that a home equity indebtedness is not considered acquisition indebtedness. 

Hence any home equity interest deductions that were available to you on your residence or vacation home is not available any more. 

There is also a limit on acquisition debt post December 15th, 2017 of $750,000 ($375,000 for married filing separate status). Before December 15th, 2017 limits stand at $1,000,000. 

5. Charitable Contributions: 

There is not much change on this one. The major change here is that payments made to a college athletic board in exchange for tickets in a stadium are no longer deductible. 

6. Casualty & Theft Losses: 

Only losses incurred in federal disaster areas are deductible, other than that this deduction is repealed for years 2018 to 2025. 

7. Job Expenses & Miscellaneous Deductions Subject to 2% of AGI: 

All miscellaneous deductions that were subject to the 2% of the AGI limit will now be repealed until 2025. These are unreimbursed job/ employee expenses including travel & mileage and the home office deduction.  

8. Limit On Itemized Deductions: 

For all it is worth, there is no limit on itemized deductions for years 2018 to 2025. 

If you would like to check how you will fare under the new tax provisions, here are the new tax rates from the bill: 


The Internal Revenue Service has to issue regulations in order for all the above changes to be implemented and that will come out sometime in 2018. The above information is complicated to say the least, now would be a good time for you to talk to an Enrolled Agent to see how the changes affect you and make decisions based on their expert advice. 

As always, read my disclaimer here. Please consult a qualified tax professional for your unique tax needs. More of my contact information is on my website, www.mntaxbiz.com

Tuesday, November 14, 2017

When Can A Non-Resident Spouse Be Treated As A Resident

PIC Courtesy: pixabay.com Arc De Triomphe, Paris, France

As the tax reform debate rages on currently, I do not see much in the proposals changing for US citizens living abroad. As this story unfolds, I think it is a good thing that US citizens/ resident aliens living abroad are not affected. We shall wait and watch. For all the latest news-stay tuned! 

As it happens many times for those US citizens who have moved abroad and married someone who is a citizen of their resident country, when times comes to file a tax return, they have to use the "Married Filing Separately" or the "Head of Household" filing status. Both of these may not be as advantageous as the "Married Filing Jointly" filing status tax-wise. 

This can also apply for those who have just become US citizens/ residents at the end of the year but the spouse has not yet/ chosen not to become a US resident/ citizen at the same time. 

One can get around this by making an election to treat the non-resident/ non-US citizen spouse as a resident/ US citizen, file jointly and perhaps reduce one's tax burden.

If this election is made, the following rules will apply: 

  • For all years the election remains in effect, the couple is treated as residents for federal tax purposes. The election is effective for the entire tax year, both for purposes of the federal tax return & taxes to be withheld from wages. 
  • The couple must file a joint tax return for the year/s the election remains in effect. 
  • The couple must report their "world-wide income" on their US tax return. 
  • Generally, tax treaty benefits cannot be claimed. Details of the savings clause of treaties must be examined in detail. 

How is the Election to be made:

The election is made by attaching a statement to the joint tax return, signed by both the spouses in the first tax year in which this applies. The statement should have the following information: 

1. A declaration that one spouse is a resident alien/ US citizen and the other spouse is a non-resident alien on the last day of the tax year. And that they chose to be both treated as resident aliens/ US citizens for the entire tax year. 

2. The name, address and identification number for each spouse. 

Other Notable Points: 

  • The election can be made on an amended tax return or on an originally filed tax return. If amending a tax return to make such an election, it should be filed with the Internal Revenue Service within 3 years of originally filing or 2 years from the date the tax was paid, whichever is later. 
  • The non-resident spouse needs to have a Social Security number or a Tax Identification number in order to be able to make the election. 
  • The election will be suspended for any later tax year if one of the couple is not a US citizen or resident alien at any time during a later tax year. 
  • The election is ended if it is revoked by either spouse; death of either spouse; the couple get legally separated; or have inadequate records to prove they are married. 
  • If one of the spouses is a resident of American Samoa or Puerto Rico, they can be treated as a resident without having to make an election. 
If the above situation applies to you and you would like to make such an election to claim a non-resident spouse as a resident & file a joint return, please contact us. 


As always, read my disclaimer here. Please consult a qualified tax professional for your unique tax needs. More of my contact information is on my website, www.mntaxbiz.com.

Monday, October 30, 2017

Foreign Freelance Income & What Does Maradona Have To Do With That?

Diego Maradona. PC: totalposters.com
Just when I was planning on publishing my post on foreign free lance income & tax consequences- the big news headline of 2017 dropped! Today special prosecutor, Robert Mueller brought charges against Manafort & Gates for money laundering & foreign bank accounts among any other things. While those fire-works continue and you think that you may not be in the same league as them, let me assure you that many U.S. citizens who live abroad and have free lance income do not understand its tax implications. 

You may already be aware that US Citizens and Green Card holders are taxed in the United States on their worldwide income, regardless of where they live. Freelance income is reported on Schedule C, Profit or Loss from Business (Sole Proprietorship). "Ordinary & necessary" expenses related to this work can be deducted on the same Schedule C. The net income, that is gross minus the allowable expenses is then subject to tax. 

You may be able to avoid some or all of the U.S. Income Tax on this income, either through foreign tax credits (taxes paid to your resident country on this same income) or the foreign-earned income exclusion (by satisfying one of two residency tests). Operating as a “business” one's net income from this source may be subject to U.S. Self Employment tax. The Self Employment tax is rate is currently set at 15.3%.  The rate consists of two parts, 12.4% for Social Security and 2.9% for Medicare.

What is Self Employment Tax?: 
When one operates as a freelancer, or is self-employed, one is effectively both employer and employee.  So, the responsibility for the Self Employment tax {Calculated on net income on Schedule C} falls on one-self.  Foreign tax credit and/ or the foreign-earned income exclusion cannot be used to offset U.S. Self Employment tax due.  

The only way to exclude the self-employed income of a U.S. citizen or Green Card holder from U.S. Self Employment tax is through the application of a totalization agreement, if available.

What is a Totalization Agreement?:
The United States has entered into totalization agreements with several countries. If such an agreement exists between the U.S. and your country of residence, your business net income may not be subject to US Social Security taxes. 

To avail of this exemption from U.S. Self Employment tax, you may need to be registered as self-employed in your resident country.  You also will likely need to obtain a certificate of coverage from the tax authority in your resident country. This may take some time and effort in the country of residence in, hence you should give yourself time to file by either filing an extension or sending in some preemptive taxes/ estimated taxes. If there is no totalization agreement in place between the US and your resident country, then you will owe U.S. Self Employment tax on your Schedule C net income.

Here is a link to the list of countries that the US has Totalization Agreements with. 

It is funny that the idea for this post came about when an old college friend and I connected through social media after a couple of decades. She needed help with her foreign free lance income & was trying to understand how it would effect her US taxes. Soon we started to talk of other (less mundane things) and how we met for the first time in college in the Principal's office since we both needed a pass for being late after a heart stopping 1986 FIFA World Cup which in India (where we were at that time) was broadcast live in the middle of the night! Diego Maradona's performance in that FIFA World Cup is unforgettable to say the least, the principal joined us in gushing over him & we believe we got off lightly! 

Today also happens to be Diego Maradona's 57th birthday. So Happy Birthday Diego! Thanks to you I made a friend in college whose love of soccer kept me forever entertained in sleepy Commercial Geography lectures! And oh yeah... if you, dear reader want to talk about that some more or have foreign free lance income, do contact us. 

As always, read my disclaimer here. Please consult a qualified tax professional for your unique tax needs. More of my contact information is on my website, www.mntaxbiz.com.