UNITED STATES TAX ISSUES
The tax amnesty for individuals who have not filed U.S. individual tax returns in prior years and whose tax due is less than $1,500 per year goes into effect on September 1, 2012. Are you ready to take advantage of this one time offer?
Tax Amnesty
The Internal Revenue Service has issued new procedures to help nonresident U.S. taxpayers, including dual Canadian citizens, comply with U.S. tax laws even if they have previously undeclared foreign bank accounts. The new rules, which were announced last Friday, eliminate civil penalties and make life easier for taxpayers who follow the IRS’s streamlined disclosure process. The program also provides retroactive elections for certain retirement plans and adds relief for Canadian citizens in the U.S.
The streamlined procedure is designed for taxpayers who present what the IRS considers to be a low compliance risk. All submissions will be reviewed, but the intensity of review will vary according to the level of compliance risk presented by the submission. For those taxpayers who present a low compliance risk, the review will be expedited and the IRS will not assert penalties or pursue follow up actions. The streamlined procedure requires a submission of a questionnaire, along with the filing of US Federal income tax returns 2009-2011 and submission of Form 90-22.1 for the last six years.
Tax Rates Around the World
There is a common misconception that the U.S. tax rates which peak at 35% for individuals with taxable income in excess of $388,350 are too high. When compared to other countries they are actually on the low side.
Country Taxable Income Tax Rate (rounded)
Aruba $172,000 59%
Austria $ 75,000 50%
Belgium $ 46,000 50%
Denmark $ 71,000 56%
Finland $ 88,000 49%
Ireland $ 41,000 48%
Japan $229,000 50%
Netherlands $ 71,000 52%
Sweden $ 86,000 57%
United Kingdom $235,000 50%
Not only are the tax rates significantly higher, they become effective at a much lower income level. In addition, most of the above countries have a social security tax of between 7% and 10% on earned income and a few still have an additional wealth tax.
“Wealth Squad”
How will you fare if the new IRS “wealth squad” comes after you? The IRS recently formed a new Industry Group known as the Global High-Wealth Industry Group. The purpose of the Group is to coordinate an IRS team of specialists to coordinate the compliance review.
US/Switzerland Begin Negotiations for Disclosure of US Citizens Bank Accounts
Switzerland's Federal Council has authorized the beginning of negotiations with the US on Swiss banks' implementation of the US Foreign Accounts Tax Compliance Act (FATCA).
FATCA forces foreign financial institutions to identify their American clients, report their financial affairs to the US Internal Revenue Service (IRS), and withhold 30 per cent from their US-sourced income if the IRS deems them to be ‘recalcitrant’. As from January 2013, it also requires all banks, US or foreign, to deduct 30 per cent from US-sourced payments they make to other FFIs that are not registered as FATCA-compliant.
The US-Swiss talks will be based on a model agreement signed in June. This agreement states that Swiss banks will not have to automatically disclose full details of their US clients to the IRS, but in particular cases the IRS can demand this information via an administrative assistance request.
From Switzerland's point of view, the talks are aimed at securing a compromise deal that will protect its financial industry. It hopes that its banks will not be required to report the names of 'recalcitrant' US clients, or deduct US tax from their payments, or close their accounts. It prefers a system under which the IRS would have to enforce these parts of FATCA through an intergovernmental request. It also wants to have large classes of financial institutions presumed to be FATCA-compliant, particularly pension funds and insurance companies.
U.S. Taxpayers, Foreign Trusts and the IRS
The Internal Revenue Service (IRS) is wrongly threatening taxpayers with penalties for alleged errors in their Form 3520 foreign trust declarations, according to the American Institute of Certified Public Accountants (AICPA).
US persons who have dealings with foreign trusts must complete a Form 3520 every year. The AICPA says IRS staff dealing with 3520s for the year 2010 are writing to taxpayers who have filed these forms demanding various types of extra information that is not relevant.
For example, some taxpayers are being told they must disclose the gross value of the foreign trust, even though they are not the trust's US owner. Moreover, the IRS is warning them that they will be charged a penalty if they do not. Other taxpayers are being asked to explain why they are filing the form under the 2011 Offshore Voluntary Disclosure Initiative (OVDI), when they had already supplied this information on the original form.
In other letters the IRS alleges that 3520s filed on time were actually filed late - which also brings a penalty unless the taxpayer can provide a reasonable excuse. The penalties for non-compliance range from a minimum of $10, 000 to 35 per cent of the value of the trust.
The problem is causing numerous taxpayers to incur extra costs by getting their professional advisors to deal with the demands, says the AICPA's Patricia Thompson in a letter to IRS Chief Doug Shulman. Not only are US residents affected but also US persons living in Canada.
In her letter, Thompson asks Shulman to investigate the IRS's actions and get the incorrect letters stopped. The AICPA also wants Shulman to make a public statement announcing that the letters do not require a response, thus saving taxpayers ‘considerable time and expense in having their tax preparers respond to these incorrect letters’.
Pursuant to the requirements relating to practice before the Internal Revenue Service, any tax advice in this communication is not intended to be used, and cannot be used, for the purpose of (i) avoiding penalties imposed under the United States Internal Revenue Code, or (ii) promoting, marketing or recommending to another person any tax related manner.
The tax advice given by this column is, by necessity, general in nature. You should, of course, check with your own U.S. tax consultant as to how specific transactions affect you since tax advice varies with individual circumstances.
James Paul Sabo, CPA, is the President of ETS Ltd., PO Box HM 1574, Hamilton HM GX, Bermuda. Questions should be sent to: jsabo@expatriatetaxservices.com