At the time you are reading this article you should have either filed your 2010 US Federal individual income tax return by the June 15, 2011extended filing date or requested an extension of time until October 17, 2011to do so. Form TD F 90-22.1 Report of Foreign Bank and Financial Accounts must be filed or before June 30, 2011. Tax law does not provide for an extension of time to file this Report.

Report of Foreign Bank and Financial Accounts

The obligation to file Form TD F 90-22.1 Report of Foreign Bank and Financial Accounts, more commonly referred to as “FBAR”, was modified by new final regulations issued on February 23, 2011. The final regulations clarify:

            What constitutes a financial interest in a trust

            Whether an account is “foreign”

Addresses the treatment of custodial accounts, and revises the definition of signature or other authority.

A US person is now defined as a US citizen, US resident or an entity formed under US laws. This definition differs from US Federal income tax law particularly in the definition of who is a US resident and when the trust is considered a US person.

The final regulations also clarify that life insurance and annuity policies are reportable if they have a cash value. Foreign mutual funds are also reportable if they are available to the general public and have a regular determinable value.

In the case of a foreign trust, the final regulations impose on the grantor the FBAR filing requirement. A financial interest is now defined as a “present beneficial interest” in the trust. This excludes discretionary beneficiaries and beneficiaries with remainder interest from having to file.

US Spousal Filing Requirement

Are you a US citizen living in Bermuda, married to a Bermudian or other foreign national and you are not employed? If you answered “yes” it is likely that you are not required to file a US individual tax return, assuming that your global investment income was less than $3,650. However, if you maintain a joint bank account with your spouse and the value of the account exceeded $10,000 at any time during 2010 than you are required to file Form TD F 90-22.1 Report of Foreign Bank and Financial Accounts. This filing will require you to disclose your spouse’s name, passport number and country of issue.

Qualified Residence Interest

The tax law allows an individual to deduct mortgage interest as an itemized deduction of their tax return. The technical term for mortgage interest is “qualified residence interest” and it is deductible on the first $1,000,000 of “acquisition indebtedness. ” Additionally

“qualified residence interest” on “home-equity indebtedness” of $100,000 is also deductible. In the past, case law has treated the two types of indebtedness as separate and distinct loans. That is you could deduct the interest on up to $1,000,00 of a loan used to acquire a residence and that you could later borrow and deduct the interest on up to $100,000 of home-equity indebtedness.

The Internal Revenue Service announced that they will not follow the court cases and in a recent Revenue Ruling announced that if an individual borrowed $1,100,000 to acquire a residence that the entire amount of interest paid would be treated as both acquisition indebtedness and home-equity indebtedness and be fully deductible.

Internal Revenue Service (IRS) Audits

Generally, the IRS has 3 years from the date you file your tax return to audit your return. However, if the taxpayer omits from reporting 25% or more of their gross income the statue of limitations is extended to 6 years. Generally, the IRS will notify you of an audit about 18 to 21 months after you file and on the outside 30 months. It is rare that an audit will start with only 6 months left in the statue of limitations. As the IRS has lagged behind in starting audits they are increasingly looking to ascertain if they can extend the time for 3 to 6 years. In a recent case the Courts held that overstating the basis of property sold could be construed as an omission of gross income.

Does Your College Age Child Qualify As A Dependent?

Generally, one does not even think about this. If your child lives with you and you provide more than half their support they qualify as a dependent. And if they are attending college they qualify as a dependent until they are 24 years old. The IRS is challenging this premise on two fronts. If the child takes a student loan in their own name and the proceeds are used to pay for college expenses the IRS has ruled this constitutes student paid support and are challenging parents to prove that they still provided the child with more than half their support.

With the popularity of parents using Code Section 529 college savings plan or Coverdell accounts to pay college tuition, the IRS is also challenging as to whether distributions from these accounts are to be counted as student provided support as the student is the beneficiary of the accounts.