Thursday, December 31, 2015

Hee-Haw! It's All Serious Business At The 2015 FATCA Roundup!!

A lot has been written about the Foreign Account Tax Compliance Act {FATCA} in the past year. As this year comes to a close and I write up my 89th post, I wanted to give you all, my dear readers a synopsis at your finger-tips, a round-up, if you will of some major FATCA events for 2015: 

1. FBAR Deadlines Changed:

On July 31, 2015 President Obama signed the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 into law, which modified the due date of several key forms for Americans with foreign income and Americans living abroad. That includes the Report of Foreign Bank and Financial Accounts, or Form 114, colloquially known as the FBAR

Any U.S. person with a financial interest in, or signatory authority over, foreign financial accounts must file the FBAR, if at any time, the aggregate value of their relevant foreign account or accounts exceeds $10,000. An account over which a person has signature authority but no ownership interest is included in this computation.

The new due date for the FBAR will be April 15th with a maximum 6-month extension till October 15th. For US citizens living abroad the deadline will be June 15th. The new deadlines are effective starting for the 2016 tax returns due in 2017. 

More details on the new FBAR deadline in my blog post here.

2. More countries entered into IGAs with the USA:

More than 50 countries have entered into Inter-Government Agreements (IGAs) with the US since FATCA came into existence. 

Countries that sign the FATCA Agreement or Inter Governmental Agreement (IGA) are considered tax compliant. This means the banks/ foreign financial institutions (FFI) in these countries send information as demanded by the IRS to their own tax authorities which is then shared with the IRS. This is "Model 1". 

Other countries, like Switzerland, for example, leave it up to the banks/ financial institutions to come to an agreement with the IRS, this is a "Model 2" agreement. 

The consequence of these IGAs have been varied and wide-spread, the harshest being many banks in these countries do not want to do business with US citizens any more. 

More on this in my blog post here.

3. New Rules on Gifts & Inheritances from Expats to any US person Proposed by the IRS:

Under the proposed regulations, if an expatriate meets the covered expatriate definition in Sec. 877A, he or she is considered a covered expatriate for Sec. 2801 purposes at all times after the expatriation date, except during any period beginning after that date during which he or she is subject to U.S. estate or gift tax as a U.S. citizen or resident. 

This new component { Prop. Reg. 28.2801-1} says that US taxpayers who receive gifts & inheritances from people who had previously expatriated are subject to  gift and/or estate taxes on the receipt of such gift or bequest. This tax is imposed on US Citizens who receive, directly or indirectly, "covered" gifts or "covered" bequests from a "covered" expatriate. 

More on this on my blog post here.

4. Offshore Compliance Programs-OVDP/ Streamlined Procedures/Swiss Bank Programs:

These disclosure programs are not new to 2015 but the Internal Revenue Service has been increasingly coming up with new rules and penalties through these programs. More banks signing agreements with the USA have resulted in increased penalties for those with accounts in such banks going into the OVDP. 

I wrote in detail about these programs earlier this year in this post here.

5. Final Regulations on Form 8938:

A release from the Internal Revenue Service on the 10th of March, 2015 incorporated into the Form 8938 instructions for reporting requirements made under the Final Regulations for § 6038D of the Internal Revenue Code. It also contains additional information not included in the published 2014 Instructions for Form 8938.

More about the final regulations in my blog post here

6. You Owe Taxes? Your Passport Could Be Confiscated!:

December 4th, 2015, President Obama signed into law the "FAST Act". FAST stands for Fixing America's Surface Transport, tucked away in this Act, is a provision that the Dept. of State  can deny a passport/ deny renewal/ revoke passport previously issued ti a seriously delinquent tax payer. 

The "seriously delinquent taxpayer" is defined as one who has a tax debt greater than $50,000, including interest and penalties, this debt should have been assessed and a notice of lien or notice of levy should have been filed. 

Although this does not strictly fall under the FATCA rules, a large number of US citizens who live abroad are concerned about this. One of the primary reasons being that the IRS still does not have the means to process foreign addresses which are in a different format than US addresses and due to this many times IRS notices/ letters to such citizens living abroad are returned undelivered. 

7. Case Filed Against Imposition of FATCA by Rand Paul Et Al:

A case was filed against the enforcement of FATCA by Senator Rand Paul and other opponents of this Act. It suffered an initial set-back when Judge Thomas Rose of the United States District Court refused to grant preliminary injunctive relief in October 2015. 

The latest news on this case is that a plaintiff's memorandum was filed by James Bopp, Jr from The Bopp Law Firm of Indiana. Mr. Bopp has argued that the plaintiffs should be granted relief requested based on their claims for four reasons: the IGAs are unconstitutional sole executive agreements, reporting requirements violate equal protection for Americans living abroad, the challenged penalties violate the Excessive Fines Clause, and reporting requirements violate the Fourth Amendment.

We will have to wait and watch what Judge Rose's ruling will be on this matter. 

Entire document here. 

Dear Readers: Thank you all so much for your following on Google Plus, Tax connections and LinkedIn. Wish you all a fantastic and "compliant" 2016! 

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,  

Tuesday, December 1, 2015

Foreign Trust Protection for Foreign Assets: A Myth Busted!

It is not uncommon anymore that a US Citizen has parents and elders living in foreign countries who may have set up trusts in those countries under (obviously) its laws. There are also US Citizens who have expatriated to/ now live in foreign countries and set up trusts for their children there. 

Today's post was prompted by questions from several clients about an urban legend that seems to be perpetuating itself out there: "You do not have any US tax reporting requirements if you are a US citizen/ permanent resident and your foreign assets and/ investments are in a foreign trust." 

If you have believed this to be true and set up a trust in a foreign country or are thinking of taking this step or are just plain curious about foreign trusts, then you need to read this blog post.  U.S.owners and beneficiaries of foreign trusts have complex U.S. reporting requirements, which are different from the reporting requirements imposed on U.S.
domestic trusts. 

Please Note: All references to “U.S. owners” and “U.S. beneficiaries” refer to persons who are considered U.S. residents for income tax purposes; i.e., either a U.S. citizen, a green card holder, or someone who meets the “substantial presence test” in any tax year. 

The U.S. taxation of the income and distributions from a foreign trust depends on the type of foreign trust and the status of the trust’s beneficiaries at the time of distribution. 

How is the Tax Residence of the trust determined?
If your trust fails the "Court Test" and the "Control Test", then it is considered a foreign trust as per § 301.7701-7 (a) (2).  

For purposes of brevity for this post:

  • A "Court Test" is fulfilled when "any federal, state, or local court within the United States is able to exercise primary authority over substantially all of the administration of the trust (the authority under local law to render orders or judgments)". There are also bright-lines rules and safe harbor rules for fulfilling the "Court Test". 
  • "Control Test" is fulfilled when "one or more U.S. persons have the authority, by vote or otherwise, to make all “substantial decisions” of the trust with no other person having veto power (except for the grantor or beneficiary acting in a fiduciary capacity)".
  • The trust will automatically fail these two tests if the trust instrument provides words to the effect that will cause it fail the 2 tests. 

There are TWO types of foreign trusts, Foreign Grantor Trust and Foreign Nongrantor Trust:
The "grantor" is the person who creates the trust, and the beneficiaries are the persons identified in the trust to receive the assets. The "trustee" is a person who manages the trust for the benefit of someone else, namely, a "beneficiary". 

The US income taxation of a foreign trust depends on whether the trust is a grantor or nongrantor trust. Income from a foreign grantor trust is generally taxed to the trust’s grantor, rather than to the trust itself or to the trust’s beneficiaries. 

On the contrary, income from a foreign nongrantor trust is generally taxed when distributed to US beneficiaries, except to the extent US source or effectively connected income is earned and retained by the trust, in which case the nongrantor trust would pay US income tax for the year such income is earned. 

The following flow charts explain the tax compliance obligations of the trustees & US beneficiaries of the foreign grantor & nongrantor trusts. They only provide a broad overview of the obligations of the trustees, US owners and beneficiaries. 

Flow Chart for Foreign Grantor Trust Tax Compliance Obligations:

Flow Chart for Foreign Nongrantor Trust Tax Compliance Obligations:

There will also be reporting & tax obligations if a beneficiary uses property owned by a foreign trust, since the use itself is considered a "distribution". 

The disclosure requirements under § 6038D also apply to foreign trusts and so also the requirements to file the FinCEN Form 114. 

The Internal Revenue Service states that, "Citizens and residents of the United States are taxed on their worldwide income. To help prevent the use of foreign trusts and other offshore entities for tax avoidance or deferral, Congress has enacted several specific provisions in the Internal Revenue Code. Some provisions trigger recognition of gains that would otherwise be deferred. Others deny deferral of tax on income moved offshore."

So going back to the urban legend we started with, please consult an Enrolled Agent, CPA or Tax Attorney well-versed in foreign trusts if you are a beneficiary/ trustee of a foreign trust or are thinking of setting up a trust in a foreign country. 

Bibliography:; §301.7701-7; Form 3520; Form 3520-A; § 6308D; Abusive Offshore Tax Avoidance Schemes from the IRS. 

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, 

Thursday, November 19, 2015

Your Field Guide To Foreign Account Disclosure Programs- Which Is Your Pick?

There is a lot of buzz going around these days about FBARs, foreign accounts, foreign corporations, IGAs, tax treaties, more & more Swiss banks on the roll-call list, you name it and they cry "FATCA"! Confusion all-around, fear mongers are having a field day, may be rightfully so, fines are high and penalties higher. People are ready to hit the panic button. Or so one would think! 

To quote my favorite Buddhist teacher, Thich Nhat Hanh here, “People have a hard time letting go of their suffering. Out of a fear of the unknown, they prefer suffering that is familiar.” 

If you are wondering what a Thich Nhat Hanh quote is doing on a tax blog but you have one hand hovering over the panic button, just think about it...without going into many of Buddhism's wonderful practices let me assure you, do decide to end your suffering, however first- DON'T PANIC! Second, hire yourself a good Enrolled Agent who specializes in foreign tax matters. And third, look through your options

The Internal Revenue Service (IRS) has offered several formal offshore voluntary disclosure programs or initiatives since 2009. These programs are for those qualifying taxpayers who would like to come forward and disclose their foreign bank accounts in exchange for reduced penalties and a promise not to be criminally investigated. This was called the Offshore Voluntary Disclosure Program or the OVDP.  

This was updated in June of 2014, and major changes were brought to the OVDP, some penalties were increased from 27.5% to 50%. The IRS also announced the Streamlined Compliance Filing Procedures for US Citizens living abroad and then expanded that to include US citizens living in the country. There are also some other disclosure programs that can be used if you qualify. 

In the post today, we will touch briefly on each disclosure program: 
A. The Offshore Voluntary Disclosure Program {OVDP}: 

Taxpayers can avoid a long list of potential penalties by participating in the OVDP. They would have to submit to a standard, uniform penalty structure administered through the OVDP. Under the 2014 OVDP, participating taxpayers agree to pay a penalty equal to 27.5% of the highest year's aggregate value of OVDP Assets during a period that covers the past eight years, along with any applicable failure-to-file, failure-to-pay, and accuracy-­related penalties.

One has to go through a preclearance request process to determine if the taxpayer is eligible for the OVDP. Once the preclearance is received from the IRS, the taxpayer can go ahead and file the OVDP. The process of filing the OVDP is very complicated and arduous. It is not recommended you go through this as a DIY project.   

B. The Streamlined Compliance Filing Procedures:

The Streamlined Filing Compliance Procedures are available to both qualifying US citizens living abroad and withing the country. The taxpayers filing under this program have to certify that their failure to report their foreign bank accounts/ financial assets and pay all tax due in respect of income from it was not due to willful conduct. 

Under this process, the $1,500 tax threshold and the risk assessment process associated with it have been eliminated. It is open to both eligible individual taxpayers and to the estates of individual taxpayers.The taxpayers or their estates must have valid Tax Identification Numbers (TINs) and they must pay any previous penalty assessments on their delinquent returns before participating under the Streamlined Compliance Procedure.   

C. Delinquent Foreign Bank and Financial Accounts or FBARs Submission Procedure:

If you have properly reported your income from your foreign financial assets and paid all tax on timely filed US tax returns, the IRS will not impose a penalty on your failure to file the delinquent FBARs. 

More detail on my recent blog post here on this procedure.  

D. Delinquent International Information Return Submission Procedures :

Taxpayers who do not qualify to use the OVDP or the Streamlined Filing Compliance Procedures can use this procedure if they have not filed one or more required international information returns and have a reasonable cause for not doing so in a timely manner. As a part of the reasonable cause statement under this procedure, the taxpayer must certify that any entity for which the information return is being filed did not engage in tax evasion.  Without the reasonable cause statement attached, penalties may be assessed. 

You CANNOT use any of the above programs if:

  1. The Internal Revenue Service has already initiated a civil examination or criminal investigation of the taxpayer OR 
  2. Has notified the taxpayer that it intends to begin an examination or investigation OR 
  3. If it has already received information from a third party (e.g., informant, other governmental agency, or the media) alerting it to the specific taxpayer's noncompliance OR
  4. If it has acquired information directly related to the taxpayer's specific liability from a criminal enforcement action. 

Under all the programs, the taxpayer must make good-faith arrangements to satisfy the tax, interest, and penalties determined to apply. Please consult with an Enrolled Agent who specializes in these matters to decide which of these programs would be best suited to your needs. 

Bibliography: Internal Revenue Manual;; Legal Information Institute; AICPA Resources- Tax Advisor 

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,

Friday, November 13, 2015

Story of a Good Citizen Who Reports Foreign Bank Accounts But Forgets FBARs! Huh?

I have to say today's blog post was triggered by a phone call a few weeks ago. The would-be client wanted to report his foreign bank accounts. Apparently, this good citizen had all his Is dotted & Ts crossed- so to speak- so what was the problem you ask? I hate to say this, but it happens more than you would think. He did not know there were additional reporting requirements involved when it came to bank accounts in foreign financial institutions. (More on FBAR thresholds in my post here)

You have to know that the IRS will not impose a penalty for the failure to file the delinquent FBARs if you "properly" reported the foreign bank accounts on your US tax returns, and paid tax on the income from these accounts and have not been contacted by the IRS for an income tax examination or a request for the delinquent returns has not been made by them. 

In which case, you can file the FBARs (electronically at FinCEN) for the previous years in which the foreign bank accounts were above the $10,000 mark, including a statement explaining why the FBARs are late. 

Simple? In essence- yes. But here's what you have to remember:

1. You should make sure you are not required to report these foreign bank accounts under the Offshore Voluntary Disclosure Program (post here) or the Streamlined Domestic Procedures to file delinquent or amended tax returns to report and pay additional tax.

2. You cannot be under a civil examination or a criminal investigation by the IRS. 

3. You should not have already been contacted by the IRS about the delinquent FBARs.  

4. The FBARs will not be subject to audit automatically, but may be selected for audit for many other reasons that the IRS may determine. 

5. All open accounts during the disclosure period should be reported. So an account could be currently closed but if it was open during the period of disclosure, details have to be provided on the FBARs. 

If the above applies to you, know that a consultation with a knowledgeable Enrolled Agent specializing in Foreign Bank Account Regulations is a must. 

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.

Friday, November 6, 2015

QLACs and RMDs: Need a Break On Your Required Minimum Distribution? Read This!

I had a number of clients hit the magic RMD age this past year. RMD is an acronym for Required Minimum Distributions, if you are getting close to 70 years of age, you will be hearing that a lot. Even if that magic number is quite a ways down the road for you, this is a post you will want to read & remember. 

Read more about RMDs in detail here on my blog post.  

For a quick recap about what Required Minimum Distributions are, the Internal Revenue Service (IRS) defines it as "Required Minimum Distributions generally are minimum amounts that a retirement plan account owner must withdraw annually starting with the year that he or she reaches 70 ½ years of age or, if later, the year in which he or she retires. However, if the retirement plan account is an IRA or the account owner is a 5% owner of the business sponsoring the retirement plan, the RMDs must begin once the account holder is age 70 ½, regardless of whether he or she is retired."

The idea of required minimum distributions at the age of 70 years has been in contention for sometime now. Many people these days are still working at that age and are not ready to draw from their retirement accounts. People also are living much longer due to many medical advances and sometimes outliving their retirement savings does become a matter of concern. 

In essence, a retiree must begin to take RMDs from his/ her qualified plans and IRAs by April 1st of the year after the year in which he or she turns 70 and a half in age. This requirement is postponed for qualified plans like the 401(k) if the taxpayer is still working and not a 50% or more owner of a business. The amount of the RMD is calculated on the account balances at the end of the previous year and life expectancy tables. 

Like I said earlier, since there were a few more clients than usual this year that hit 70 and half years in age, we heard the term "QLAC" thrown around a lot. "QLAC" stands for qualified longevity annuity contracts. The Internal Revenue Services (IRS) recognizing the above short-comings so to speak, approved QLACs to be included for use in Traditional IRAs, 401(k)s and other approved retirement plans in the middle of 2014. 

 Under the new rules: 
  • You can use up to 25% of your non-Roth retirement funds or $125,000, whichever is less, to fund a QLAC
  • You can defer funds from the QLAC for an additional 15 years or till you reach 85 years of age
  • You can lessen your RMDs
  • Since QLACs cannot include a variable, indexed or comparable component, they must be fixed annuities, hence your principal is protected. 
  • The QLAC is indexed for inflation
Do contact your Enrolled Agent or your financial advisor if this is an option for you and please make an informed decision regrading your retirement & your estate needs.

Bibliography: IRB 2014-30; Journal of Accountancy; CPA Practice Advisor

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,

Monday, November 2, 2015

2015: Year End - Tax Planning For Individuals, What To Expect!

It's November! I am always surprised by it's arrival & the realization that it's year-end tax planning time. The shortened day-light hours seem to  make that certain without a doubt. So let's roll-up our sleeves, get down to work and fine-tune possible last-minute strategies for lowering your 2015 tax bill. 

Tax Brackets: Let's take a quick look at the 2015 tax brackets, you will see from the table below that the top tax rate of 39.6% will apply to incomes over $$413,200 (single), $464,851 (married filing jointly and surviving spouse), $232,426 (married filing separately), and $439,000 (heads of households)

Picture Courtesy: Forbes Magazine
The 3.8% net investment income tax and/or the 0.9% Medicare surtax will also apply if you are in the high income bracket. 

The personal exemption for 2015 is $4000 each & the standard deduction amounts are as follows:

Retirement Plan Actions-Maximize Contributions: 
A. 2015 maximum employee contribution is $18,000 and $24,000 if you are 50 years of age or older. 
B. If you have a SIMPLE 401K, your maximum pre-tax contributions are $12,500 and $15,000 if 50 or older. 

C. If you qualify to contribute to a Traditional IRA, that max is $5,500. For taxpayers 50 or over but less than 70 1/2 years of age, $6,500.

D. If you have just started out on your career, the "myRA", maybe a good starter option for you. The myRA follows the same tax treatment and rules as the Roth IRA.  

E. You may want to look into whether you should convert your traditional IRAs to a Roth. 

Many other options can be discussed with regard to your existing 401Ks, 403Bs and 457 plans if you have after-tax contributions in them. Or if you have contributed more than the maximum into traditional IRAs. An Enrolled Agent will be able to guide you with the nuances. 

AMT Actions:
For 2015, the AMT rate is 26% on alternative minimum taxable income (AMTI) up to $185,400 ($92,700 for married filing separately) and 28% on AMTI over that amount. Taxpayers are allowed an AMT exemption depending on filing status, but the exemption is phased out for taxpayer's above a certain income level.

If you think you may be falling into this category, discuss with an Enrolled Agent what your options to minimize exposure are. 

American Opportunity Credit (AOC):
The AOC is available to you if you/ spouse/ dependent had qualified education expenses. The modified adjusted gross income (MAGI) to take the AOC is phased out at quite a low amount, $80,000 or more for single and $160,000 or more for joint filers. 

"Obamacare" Points to be Noted:
Note the "shared responsibility payment" penalty for not having health coverage for two or more months. Check to see if you are eligible for an exemption from the penalty. 

Tax Extender on the Health Coverage Credit means now it can be claimed for coverage through 2019. If you wish to claim this for 2014, we are still awaiting the new Form 8885.

 Child Tax Credit:
 If you are excluding foreign earned income from tax, your refundable portion of the child tax credit will be limited. 

Important Actions Other than Above:

It must be remembered that the focus for year end tax planning is not always only tax savings, the big financial picture should be kept in mind when adopting tax saving strategies. 

Income can be accelerated into 2015, if projected income for 2016 is going to be significantly higher. Options for this include, harvesting gains, converting retirement accounts, taking IRA distributions, settling insurance claims and so on. 

Income can also be deferred to 2016, if income in the coming year is going to be significantly lower. Examples for his include, taking year end bonus in January, if selling assets at a gain, doing it in 2016, or considering selling on installment if feasible, or parking investments in deferred annuities. 

The same goes for accelerating or deferring deductions to 2016.   

Important life events in the year will also effect your year-end tax planning strategy. 

One can also keep in mind the HSA balances, rentals from vacation homes, shifting income to a child and most importantly checking balances in foreign bank accounts if any. 

Call your tax professional, preferable an Enrolled Agent, to make your year-end tax planning appointment. 

Bibliography: IRS News Releases; Accounting Today; Parker Tax Publishing; Forbes Magazine; AICPA Tax Release.   

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,

Saturday, October 24, 2015

Cybersecurity: Keep Them Virtual Doors Locked Please!

October has been established as National Cyber Security Awareness Month by the Dept. of Homeland Security, to especially educate individuals & small business owners about cyber security. No better time to talk about Cyber Security I thought!

It has been a busy summer over here at MN Tax Solutions LLC. I was taking stock of our big challenges from the 2015 tax season & so I thought I should share some of the important lessons we learnt from it. No matter how many times we say this, it cannot be said enough- It is imperative to take regular stock of your "cyber-security health"! Just like you would go to the doctor for regular check-ups! 

What are your best cyber-security practices? What are the types of threats you could face? How would you secure information? Understanding these questions help business owners make sound decisions and make intelligent investments for cyber-security protection.

Let us look at some Cyber-security tips that small business owners can put in place. Please also see the cyber-security tips available for small business owners on 

  • Protection against viruses, spyware, and other malicious code

Make sure each of your computers are equipped with antivirus software and anti-spyware and update regularly. Most software is available online from a variety of vendors. Configure all software to install updates automatically.

  • Secure your networks

Safeguard your Internet connection by using a firewall and encrypting information.  If you have a Wi-Fi network, make sure it is secure and hidden. To hide your Wi-Fi network, set up your wireless access point or router so it does not broadcast the network name, known as the Service Set Identifier (SSID). Password protect access to the router.

  • Establish security practices and policies to protect sensitive information

If you have employees, establish policies on how they should handle and protect personally identifiable information and other sensitive data.  Have a consequences for violating your business’s cyber-security policies.

  • Educate employees about cyberthreats and hold them accountable

Educate your employees about online threats and how to protect your business’s data, including safe use of social networking sites. Hold employees accountable to the business’s Internet security policies and procedures.

  • Require employees to use strong passwords and to change them often

Consider implementing multifactor authentication that requires additional information beyond a password to gain entry. Check with your vendors that handle sensitive data, especially financial institutions, to see if they offer multifactor authentication for your account.

  • Employ best practices on payment cards

Work with your banks or card processors to ensure the most trusted and validated tools and anti-fraud services are being used. You may also have additional security obligations related to agreements with your bank or processor. Isolate payment systems from other, less secure programs and do not use the same computer to process payments and surf the Internet.

  • Make sure you have made the latest change if you accept credit cards

Are you ready for the shift from magnetic-strip payment cards to safer, more secure chip card technology, also known as “EMV”? October 1st is the deadline set by major U.S. credit card issuers to be in compliance. 

  • Make backup copies of important business data and information

Regularly backup the data on all computers especially critical data regularly or store the copies either offsite or on the cloud.

  • Control physical access to computers and network components

Prevent access or use of business computers by unauthorized individuals. Laptops can be particularly easy targets for theft or can be lost, so lock them up when unattended. Make sure a separate user account is created for each employee and require strong passwords. Administrative privileges should only be given to trusted IT staff and key personnel.

  • Create a mobile device action plan

Mobile devices can create significant security and management challenges, especially if they hold confidential information or can access the corporate network. Be sure to set reporting procedures for lost or stolen equipment.

  • Protect all pages on your websites, not just the checkout and sign-up pages

If you are a small business owner, you may have smaller resources than the big guys to secure your systems & networks. This makes you an attractive target for cyber-criminals. You can still take many steps to create an economical cyber-security plan & protect what you have built. Also make sure you have a plan in place if your security is breached & do contact the authorities immediately.

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,

Wednesday, September 16, 2015

New Rules on Gifts & Inheritances from Expats Proposed by the IRS

We know that increasing globalization keeps us, Enrolled Agents, on our toes especially when we have to consider advising families, businesses and real property owners who have ties with the US and other countries as well. Thanks to my many clients who have business interests in other countries or still have ties/ families back in the countries they migrated from, I deal with cross-border issues quite often.  

Interestingly, this summer we did a work-up for a client who had surrendered their green-card & left the country but due to their length of stay in the country, they could be considered "covered-expatriates", the clients wanted to set up inheritances for their grand-children who are US citizens.

Under the estate and gift tax rules, a foreign person can make a gift to somebody in the U.S., and there is no gift tax as long as it’s not a U.S.-sited asset. There’s no tax consequence to the recipient. If the value of the gift is over $100,000, they need to file a 3520, but there’s no tax consequence. If you inherit property from a foreign person, and the value is over $100,000, you file a 3520, but there’s no tax consequence. You may have an 8938 filing obligation because an interest in a foreign estate is a reportable asset, but one doesn't have to do anything more.

Back in the day, before the "HEART" Act {Heroes Earnings Assistance and Relief Tax Act} of 2008, citizens and long-term residents of the US, who had expatriated to avoid US taxes, were subject to US income, estate and gift taxes under Code § 877, §2107 and §2501 respectively for 10 years after expatriation. 

§ 877A(g)(1)(A) states what a "covered expatriate is" and it is usually based on net worth on the date of expatriation or income for five years prior to expatriation. Details here in Notice 2009-85

§ 877A was introduced along with it's companion, § 2801 by the "HEART Act". Guidance had been issued by the IRS for the 877A in 2009 but there was nothing on the 2801 until now. 

What is this new component of § 2801? This new component { Prop. Reg. 28.2801-1} says that US taxpayers who receive gifts & inheritances from people who had previously expatriated are subject to  gift and/or estate taxes on the receipt of such gift or bequest. This tax is imposed on US Citizens who receive, directly or indirectly, "covered" gifts or "covered" bequests from a "covered" expatriate. 

Exceptions Applicable to Covered Gifts and Covered Bequests:  
Yes, there are exceptions. These include taxable gifts reported on a covered expatriate's timely filed gift tax return, and property included in the covered expatriate's gross estate and reported on such expatriate's timely filed estate tax return, provided that the gift or estate tax due is timely paid.

Your Responsibility if these rules were to apply to you: 
First, if you think these rules apply to you, you should consult an Enrolled Agent/ Tax Attorney/ a qualified CPA right away. They would need to determine under the proposed guidance if tax under Code Sec. 2801 is due. Under these proposed regulations, the burden is on the US Citizen/ resident to determine if the expatriate was a "covered expatriate" and hence, the gift or bequest is a "covered gift" or "covered bequest". 

Form 708 would be the new form for the calculation of tax due under § 2801. The form has not been issued yet. 

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,

Sunday, August 16, 2015

IRA-One Rollover Per Year Rule: Breaking It Down For You!

IRAs or Individual Retirement Accounts are a common vehicle for retirement savings, with tax-free growth or on a tax-deferred basis. There are 3 types of IRAs: Traditional, Roth and Rollover. Each of these have their own rules & regulations for contributions, eligibility, contribution limits, tax savings etc. 

So an IRA is essentially a basket in which you keep your stocks, bonds, mutual funds or other assets. IRAs are retirement accounts you can open on your own and unlike 401(k)s provided by employers, have lower contribution limits. 

What Is A Rollover?:  
A "Rollover" happens when funds from a retirement account such as a 401(k) into an IRA or from one IRA to another. A rollover is generally a non-taxable event, if you deposit a payment from one retirement account into another within 60 days. 

By rolling over a payment from an IRA, you’re not only saving for your future, your money continues to grow tax-deferred.

If you don’t roll over your payment, it will be taxable (other than qualified Roth distributions and any amounts already taxed) and you may also be subject to additional tax unless you’re eligible for one of the exceptions to the 10% additional tax on early distributions.

One Rollover Per Year Rule:
Beginning in 2015, you can only make one rollover from an IRA to another (or the same) IRA in a 12 month period. This is regardless of the number of IRAs you own. 

The IRS came out with clarifications to this rule via Announcement 2014-15 and Announcement 2014-32

According to these announcements; the limit will apply by aggregating all of an Individual's IRAs, including SEP and SIMPLE IRAs, traditional and Roth IRAs. This is effectively treating all your IRAs as one. 

Exceptions To The One Rollover Per Year Rule:

  • Direct transfers of IRA funds from one trustee to another are not affected. Revenue Ruling 78-406 does not consider this direct transfer a "Rollover". 
  • Rollovers from Traditional IRA to Roth IRA are considered "Conversions" and are not affected by the above rule either. 
  • This rule also ignores some 2014 distributions. This is called a "Transition" rule and it applies only to 2014 distributions and only if different IRAs are involved. 

Tax Consequences of the One Rollover Per Year Limit:
Unless the exceptions above apply, the tax consequences of this new rule will be:
  • You must include amounts of distribution from an IRA in your gross income, if you had made a IRA-IRA rollover in the preceding 12 months. 
  • You may be subject to the 10% early withdrawal tax on amounts included in gross income. 

  • If you put these distributed amounts into another or the same IRA, the amount maybe treated as an excess contribution and taxed at 6% per year as long as they remain in the IRA. 
Please consult with an Enrolled Agent regarding these complicated rules if you think they may apply to you. 

Bibliography: § 408(d)(3); Publication 590-A; Bobrow v. Commissioner, T.C. Memo 2014-21; Announcements 2014-15 & 2014-32. 

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,