Archive for January, 2012

FATCA – New Filing Requirements for Foreign Assets

January 30, 2012

Congress and the IRS have determined that taxpayers need yet an additional form to file in order to report foreign held assets. This latest filing requirement will add to the Form TD F 90-22.1 – Report of Foreign Bank and Financial Accounts (FBAR), Form 8865 – Return of U.S. Persons With Respect to Certain Foreign Partnerships, Form 5471 – Information Return of U.S. Persons With Respect To Certain Foreign Corporations, and the plethora of other foreign asset reporting requirements. Holding foreign assets has never been more difficult and potentially very costly from a tax perspective.

As part of the Hiring Incentives to Restore Employment (HIRE) Act, The Foreign Account Tax Compliance Act (FATCA) was enacted March 18, 2010. The IRS states that “The Foreign Account Tax Compliance Act (FATCA) is an important development in U.S. efforts to improve tax compliance involving foreign financial assets and offshore accounts.” In order to implement the reporting requirements under FATCA the IRS has just recently released the final Form 8938. Although FATCA has been in effect since enactment in 2010, its implementation has been delayed until the final form was published. As such, the 2011 tax return is the first return that will require this form to be attached.

The Form 8938 increases the scope of reportable assets and persons required to report foreign assets. For instance, certain private equity assets held through hedge funds that were exempted under the FBAR rules will now have to be reported on the Form 8938. Section 511 of FATCA creates a new IRC code section, Section 6038D. This code section sets forth the threshold filing requirements. Additionally, the IRS has published guidance on their website on who will be required to file the Form 8938.

Generally, you must file a Form 8938 if you are a specified individual. A specified individual is defined as:

  • A U.S. citizen;
  • A resident alien of the United States for any part of the tax year (see Pub. 519 for more information);
  • A nonresident alien who makes an election to be treated as resident alien for purposes of filing a joint income tax return; or
  • A nonresident alien who is a bona fide resident of American Samoa or Puerto Rico (See Pub. 570 for definition of a bona fide resident) and
  • Any such person holds an interest in a specified foreign financial asset required to be reported.

A specified foreign financial asset is defined as:

  • Any financial account maintained by a foreign financial institution, (with some exceptions)
  • Other foreign financial assets held for investment that are not in an account maintained by a US or foreign financial institution, namely:
    • Stock or securities issued by someone other than a U.S. person
    • Any interest in a foreign entity, and
    • Any financial instrument or contract that has as an issuer or counterparty that is other than a U.S. person.

It should be noted that this will not encompass international equity assets held in a US-based mutual fund or issued through a US broker. Though, it ostensibly would apply to a non-US based mutual fund or foreign broker.

There are filing thresholds such that not everyone that qualifies above will have to file this form. For unmarried taxpayers living in the US, the threshold will be if the total value of all specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year. For married taxpayers filing a joint income tax return and living in the US, the threshold will be if the total value of all specified foreign financial assets is more than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year. For married taxpayers filing separate income tax returns and living in the US, the threshold will be if total value of all specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.

There are special rules if you are a US taxpayer living abroad. These rules need to be reviewed carefully as they set forth a different standard of residency than found elsewhere in the IRC and regulations. Under the FATCA rules, a person is a taxpayer living abroad if:

  • You are a U.S. citizen whose tax home is in a foreign country and you are either a bona fide resident of a foreign country or countries for an uninterrupted period that includes the entire tax year, or
  • You are a US citizen or resident, who during a period of 12 consecutive months ending in the tax year is physically present in a foreign country or countries at least 330 days.

Note the second definition for US citizens living abroad and not qualifying under the first definition –  you will have a requirement to file if you are present in the US for more than 35 days (or 36 this year). For US citizens living abroad, this could catch a few persons unexpectedly.

The thresholds are also different for a taxpayer living abroad with a filing requirement. The IRS states that you will be required to report if:

  • You are filing a return other than a joint return and the total value of your specified foreign assets is more than $200,000 on the last day of the tax year or more than $300,000 at any time during the year; or
  • You are filing a joint return and the value of your specified foreign asset is more than $400,000 on the last day of the tax year or more than $600,000 at any time during the year.

FATCA also added, as would be expected, draconian penalties similar to the FBAR penalties. IRC § 6662 allows the IRS to impose a 20% penalty on a substantial understatement of income tax for negligence and other non-fraudulent behavior. FATCA amended this section and added a potential penalty of 40% for any underpayment attributable to financial assets required to be disclosed pursuant to IRC § 6038D. Additionally, there is a stiff failure to file penalty of $10,000.00 for failing to file by the required filing date for the tax return. After being notified of the failure to file, the taxpayer will be fined an additional $10,000.00 for each 30 day period during which they fail to file the return (capped at $50,000.00).

Additionally, FATCA has extended the statute of limitations with respect to returns which contained errors in the filing of the Form 8938. Generally, if all the tax is paid and a Form 8938 filed timely, the statute of limitations will remain at the usual 3 year period. However, if a Form 8938 is not filed, the statute of limitations will not start to run on any income attributable to assets which should have been reported on the form. Even after filing the Form 8938 and paying the tax due, the statute of limitations which respect to the form and the tax liability attributable thereto will be extended to 6 years if the amount of under-reporting of income from the reportable foreign assets was greater than $5,000.00.

This tax season it is imperative to alert your tax professional if you have foreign held assets. Even if you consider them exempt from reporting, it best to let your tax preparer know about those assets. The penalties for improper reporting are quite severe and therefore foreign assets warrant increased attention.

My name is Christopher James. I practice corporate law and tax law at Davis Brown Law Firm. I focus mainly on tax controversy matters with both state and local governments and the IRS. I have a BS in accounting from the University of North Carolina-Greensboro, a J.D. from Drake University, and a LL.m in taxation from Northwestern University. My complete bio can be viewed here.


Online Sales: Should You Be Collecting Sales Tax?

January 17, 2012

You have likely heard about the recent debate regarding collecting state sales tax for online sales. What’s the big deal? Typically, online retailers collect sales tax only from sales in a state where they have a physical presence. As a result, many online sales do not get taxed. The argument is this makes it hard for small businesses (who have to charge sales tax) to compete with the out-of-state online retailers.

 If this bill passes, what happens? The idea is that states would require the online retailers to charge sales tax based on your address, meaning, if the retailer sells to an Iowa address, it would charge Iowa sales tax.  At least one tax attorney sees constitutional issues here and does not expect the bill to move quickly.

 Speaking of online sales, weren’t you meaning to sell that old furniture and all of those toys the kids have outgrown? Selling things online seems easier than a garage sale, but should you be charging sales tax on those old “treasures”?  Most likely not, regardless of the outcome of this bill, thanks to the casual sales exception. 

Iowa has a 6% tax on retail sales (and any additional local option taxes) unless the sale fits a stated exception. Looking deep enough into the statute, there is an exception for “casual sales.”  So, just what is a casual sale?   In Iowa, it is a sale which is (1) “nonrecurring” and (2) by someone who is not in the business of selling that property for profit.  So, selling the items collecting dust in your basement is likely a casual sale.  But, if you are selling a certain type of product consistently, that seems recurring and starts to look like a business, and you should look into the sales tax issue a little further.

It’s that time, Tax Season 2012

January 12, 2012

It’s officially tax season.  Well, almost.  The IRS has announced it will start accepting e-File and Free File returns on Jan. 17, 2012. But for now, you should start compiling all your tax documents so you are ready to file.

The filing deadline this year will be April 17, 2012.  Why the extra two days?  April 15, the typical deadline, falls on a Sunday, and April 16 is Emancipation Day in the District of Columbia, which is treated as a federal holiday. As a result, 2011 returns are due April 17, 2012.  But why wait? Get working on your return today.

If you are unsure if you have to file a return this year, the IRS offers an Interactive Tax Assistant that will help you decide what you should do. The new resource takes users through a series of short question and answers related to tax law.

Even if you don’t have to file this year, you should. I know, you’re probably asking why someone would file a return if they don’t have to. Well, certain credits are refundable, meaning you can receive the credit even if you did not pay income tax. For example, students in their first four years of college are eligible for the American Opportunity Credit, $1000 of which is refundable.  For more information, see this IRS Tax Tip.

About me:
My name is Jana M. Luttenegger and I am an associate in the Business Division at the Davis Brown Law Firm. I have a B.B. in Economics from Western Illinois University, and a J.D. from the University of Iowa.  While at the University of Iowa, I prepared tax returns with the Volunteer Income Tax Assistance (VITA) Program.

Certain Management Contracts Can Cause Trouble for Tax-Exempt Bonds

January 10, 2012

The Internal Revenue Service has recently become more proactive regarding its efforts to conduct audits on tax-exempt bond financings and has indicated that issuers and borrowers should maintain and follow post-compliance policies and procedures in order to make sure that the interest on the bonds continues to remain tax-exempt.

One such example where bonds can lose their tax-exempt status is when a 501(c)(3) borrower or a governmental issuer enters into an arrangement with a private party which is a management or incentive payment contract on property that is financed with proceeds of tax-exempt bonds because this may result in private business use.  If the contract is considered a management contract under Regulation § 1.141-3 and does not pass the tests under Rev. Proc. 97-13 which make it a qualified management contract, then the contract may cause the bonds to lose their tax-exempt status.

One of the warning signs that a contract may not be a qualified management contract is when a contract provides compensation based in whole or in part on a share of either net profits, gross revenues or gross expenses.  Management contracts where compensation is based in whole or in part on a share of net profits are not allowed and there are limitations on the amount of compensation that can be based on a percentage of gross revenues or expenses and on the term of the contract.

If your organization has either entered into or is planning on entering into management or incentive payment contracts on property that is financed with proceeds of tax-exempt bonds, it would be a good idea to review the contract against the Internal Revenue Service rules for qualified management contracts to make sure that such contracts don’t trigger the loss of tax exemption on your bonds.

Welcome to Davis Brown’s Tax Law Blog

January 10, 2012

Do you have trouble understanding the tax laws or keeping up to date on the ever-changing tax rules and regulations?  Our tax laws are very complex and it can be an onerous task to try to keep up with all of the new rules and regulations.  Davis Brown Law Firm has one of the largest and most experienced tax departments in the State of Iowa and can be a great resource and guide in navigating these laws and helping to find answers to difficult questions.  

My name is Courtney A. Strutt Todd and I serve as  a chair of the Tax Department at Davis Brown.  I have a B.A. from the University of Northern Iowa and have passed the Certified Public Accountant’s examination.  I also have a J.D. and an M.B.A. from Drake University.  I practice primarily in public finance and have worked as bond counsel, underwriter’s counsel and issuer’s counsel in all kinds of tax-exempt financings.  Learn more about my practice.

 In addition to posts from myself, this blog may include posts from William Boatwright, Bruce Campbell, Frank Carroll, Thomas Houser, Christopher James, Thomas Stanberry, Jason Stone, Margaret Van Houten, David VanSickel, and Jana Lutteneger.

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