Author Archive

Houston – 36th Annual Tax and Business Planning Seminar

October 30, 2013

This must-attend seminar will help ensure that you are as ready as the IRS for 2014. Hosted by Best Lawyers-ranked Tier One taxation law firm Chamberlain, Hrdlicka, White, Williams & Aughtry, the event will feature presentations by Patrick Jankowski, CCR, Vice President, Research, Greater Houston Partnership, and more than 14 experts from Chamberlain Hrdlicka’s labor, transactional, planning, and tax controversy practices. Attendees can earn CLE/CPE/CFP credit.

December 5, 2013
Houston Marriott Westchase
Houston, Texas

Click here to register online

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Atlanta – 28th Annual Tax and Business Planning Seminar

October 28, 2013

This must-attend seminar will help ensure that you are as ready as the IRS for 2014. Hosted by Best Lawyers-ranked Tier One taxation law firm Chamberlain, Hrdlicka, White, Williams & Aughtry, the event will feature presentations by named shareholder David Aughtry, a former IRS trial attorney and the firm’s leading tax litigator for nearly 30 years, and 15 other experts from Chamberlain Hrdlicka’s labor, transactional, planning and tax controversy practices. Attendees can earn CLE/CPE/CFP credit.

Wednesday, November 13, 2013
Cobb Galleria Centre
Atlanta, Georgia

Click here to register online.

Click here for more information.

Squib Note: The Opera Isn’t Over Yet on FICA Tax Refunds Until The Supreme Court Sings

April 3, 2013

By Phil Karter and John Hackney

In a blog posting earlier this year, we talked about the Sixth Circuit’s decision in United States v. Quality Stores (Civil No. 10-1563, 6th Cir. 2012) affirming a lower court’s decision that supplemental unemployment compensation benefit (SUB) payments are not taxable as wages and are consequently exempt from FICA taxes. The Sixth Circuit’s decision in Quality Stores directly conflicts with the Federal Circuit’s prior decision in CSX Corp. v. United States, 518 F.3d 1328 (Fed. Cir. 2008), which held that such payments were subject to FICA.  For many employers who have filed protective refund claims, the favorable resolution of this conflict could result in meaningful refunds.

Those speculating on whether Quality Stores will be appealed to the Supreme Court, and whether the Supreme Court will grant certiorari, will have to wait a little longer to find out.  The original deadline for filing a petition for certiorari has been extended from April 4th to May 3, 2013.

Although the deadline for the government’s petition has been extended, the April 15, 2013 deadline to file protective refund claims for 2009 (the oldest eligible year) has not.  For employers that haven’t already done so, particularly those located within the Sixth Circuit (Kentucky, Michigan, Ohio and Tennessee), there is still a small amount of time left.

A final word of caution about deadlines:  If a protective FICA tax refund claim is denied, employers have two years from the date of denial to file a tax refund suit or obtain an extension of the two-year period by filing a Form 907.   Given the uncertainty over the final outcome of this issue, it is unclear whether the IRS will summarily deny protective refund claims or wait until the dust settles.  Nonetheless, employers whose refund claims are denied are well advised to keep track of the two-year deadline.  If the Supreme Court accepts certiorari, it may take that long before the final word on the subject is written.

What is Form 8938 and How is it Different From an FBAR?

July 26, 2012

By Sebastien Chain and Tamara Woods

For tax year 2011, individual taxpayers with certain specified foreign financial assets found themselves subject to a new reporting requirement, Form 8938, Statement of Specified Foreign Financial Assets. Form 8938 is required if a taxpayer has a specified foreign financial asset in excess of various thresholds.  See Form 8938 – Foreign Reporting Trap for the Unwary.  Unlike Form T.D. 90-22.1, Report of Foreign Bank Account and Financial Accounts which is due by June 30th of every year, Form 8938 is attached to a taxpayer’s Form 1040.

Although many aspects of the Form 8938 and FBAR appear duplicative, the distinctions between the two are such that many taxpayers may find that only Form 8938 is required and not an FBAR or vice-versa.

On March 26, 2012, the IRS published a chart comparing the reporting requirements between Form 8938, Statement of Specified Foreign Financial Assets and T.D. 90-22.1, Report of Foreign Bank Account and Financial Accounts (“FBAR”).  A copy of this chart is found at this link.  This chart contains a basic overview of the fundamental similarities and differences between an FBAR and Form 8938.

The new Form 8938 has raised questions for taxpayers and tax practitioners alike.  As a result, the IRS published 14 questions and answers to anticipate the issues most likely to arise.  On June 7, 2012, the IRS added Q&A 15-23 on their website for Form 8938, Statement of Specified Foreign Financial Assets.

The guidance, as posted on the IRS website, is set forth below.  See http://www.irs.gov/businesses/corporations/article/0,,id=255061,00.html.

1. What are the specified foreign financial assets that I need to report on Form 8938? If you are required to file Form 8938, you must report your financial accounts maintained by a foreign financial institution. Examples of financial accounts include: Savings, deposit, checking, and brokerage accounts held with a bank or broker-dealer.

And, to the extent held for investment and not held in a financial account, you must report stock or securities issued by someone who is not a U.S. person, any other interest in a foreign entity, and any financial instrument or contract held for investment with an issuer or counterparty that is not a U.S. person. Examples of these assets that must be reported if not held in an account include: stock or securities issued by a foreign corporation; a note, bond or debenture issued by a foreign person; an interest rate swap, currency swap, basis swap, interest rate cap, interest rate floor, commodity swap, equity swap, equity index swap, credit default swap or similar agreement with a foreign counterparty; an option or other derivative instrument with respect to any of these examples or with respect to any currency or commodity that is entered into with a foreign counterparty or issuer; a partnership interest in a foreign partnership; an interest in a foreign retirement plan or deferred compensation plan; an interest in a foreign estate; any interest in a foreign-issued insurance contract or annuity with a cash-surrender value.  The examples listed above do not comprise an exclusive list of assets required to be reported.

2. I am a U.S. taxpayer but am not required to file an income tax return. Do I need to file Form 8938? Taxpayers who are not required to file an income tax return are not required to file Form 8938.

3. Does foreign real estate need to be reported on Form 8938? Foreign real estate is not a specified foreign financial asset required to be reported on Form 8938. For example, a personal residence or a rental property does not have to be reported.

If the real estate is held through a foreign entity, such as a corporation, partnership, trust or estate, then the interest in the entity is a specified foreign financial asset that is reported on Form 8938, if the total value of all your specified foreign financial assets is greater than the reporting threshold that applies to you. The value of the real estate held by the entity is taken into account in determining the value of the interest in the entity to be reported on Form 8938, but the real estate itself is not separately reported on Form 8938.

4. I directly hold foreign currency (that is, the currency isn’t in a financial account). Do I need to report this on Form 8938? Foreign currency is not a specified foreign financial asset and is not reportable on Form 8938.

5. I am a beneficiary of a foreign estate. Do I need to report my interest in a foreign estate on Form 8938? Generally, an interest in a foreign estate is a specified foreign financial asset that is reportable on Form 8938 if the total value of all of your specified foreign financial assets is greater than the reporting threshold that applies to you.

6. I acquired or inherited foreign stock or securities, such as bonds. Do I need to report these on Form 8938? Foreign stock or securities, if you hold them outside of a financial account, must be reported on Form 8938, provided the value of your specified foreign financial assets is greater than the reporting threshold that applies to you. If you hold foreign stock or securities inside of a financial account, you do not report the stock or securities on Form 8938. For more information regarding the reporting of the holdings of financial accounts, see FAQs 8 and 9.

7. I directly hold shares of a U.S. mutual fund that owns foreign stocks and securities. Do I need to report the shares of the U.S. mutual fund or the stocks and securities held by the mutual fund on Form 8938? If you directly hold shares of a U.S. mutual fund you do not need to report the mutual fund or the holdings of the mutual fund.

8. I have a financial account maintained by a U.S. financial institution that holds foreign stocks and securities. Do I need to report the financial account or its holdings? You do not need to report a financial account maintained by a U.S. financial institution or its holdings. Examples of financial accounts maintained by U.S. financial institutions include: U.S. Mutual fund accounts; IRAs (traditional or Roth); 401 (k) retirement plans; qualified U.S. retirement plans; and brokerage accounts maintained by U.S. financial institutions.

9. I have a financial account maintained by a foreign financial institution that holds investment assets. Do I need to report the financial account if all or any of the investment assets in the account are stock, securities, or mutual funds issued by a U.S. person? If you have a financial account maintained by a foreign financial institution and the value of your specified foreign financial assets is greater than the reporting threshold that applies to you, you need to report the account on Form 8938. A foreign account is a specified foreign financial asset even if its contents include, in whole or in part, investment assets issued by a U.S. person. You do not need to separately report the assets of a financial account on Form 8938, whether or not the assets are issued by a U.S. person or non-U.S. person.

10. I have a financial account with a U.S. branch of a foreign financial institution. Do I need to report this account on Form 8938? A financial account, such as a depository, custodial or retirement account, at a U.S. branch of a foreign financial institution is an exception to the general rule that a financial account maintained by a foreign financial institution is specified foreign financial asset. A financial account maintained by a U.S. branch or U.S. affiliate of a foreign financial institution does not have to be reported on Form 8938 and any specified foreign financial assets in that account also do not have to be reported.

11. I own foreign stocks and securities through a foreign branch of a U.S.-based financial institution. Do I need to report these on Form 8938? If a financial account, such as a depository, custodial or retirement account, is held through a foreign branch or foreign affiliate of a U.S.-based financial institution, the foreign account is not a specified foreign financial asset and is not required to be reported on Form 8938

12. I have an interest in a foreign pension or deferred compensation plan. Do I need to report it on Form 8938? If you have an interest in a foreign pension or deferred compensation plan, you have to report this interest on Form 8938 if the value of your specified foreign financial assets is greater than the reporting threshold that applies to you.

13. How do I value my interest in a foreign pension or deferred compensation plan for purposes of reporting this on Form 8938? In general, the value of your interest in the foreign pension plan or deferred compensation plan is the fair market value of your beneficial interest in the plan on the last day of the year. However, if you do not know or have reason to know based on readily accessible information the fair market value of your beneficial interest in the pension or deferred compensation plan on the last day of the year, the maximum value is the value of the cash and/or other property distributed to you during the year. This same value is used in determining whether you have met your reporting threshold.

If you do not know or have reason to know based on readily accessible information the fair market value of your beneficial interest in the pension plan or deferred compensation plan on the last day of the year and you did not receive any distributions from the plan, the value of your interest in the plan is zero. In this circumstance, you should also use a value of zero for the plan in determining whether you have met your reporting threshold. If you have met the reporting threshold and are required to file Form 8938, you should report the plan and indicate that its maximum is zero.

14. I am a U.S. taxpayer and have earned a right to foreign social security. Do I need to report this on Form 8938? Payments or the rights to receive the foreign equivalent of social security, social insurance benefits or another similar program of a foreign government are not specified foreign financial assets and are not reportable.

15. If I have to file Form 8938, am I required to report all of my specified foreign financial assets regardless of whether the assets have a de miminis maximum value during the tax year? If you meet the applicable reporting threshold, you must report all of your specified foreign financial assets, including the specified foreign financial assets that have a de minimis maximum value during the tax year. For exceptions to reporting, see Exceptions to Reporting on page 6 of the instructions for Form 8938.

16. I filed my income tax return but now realize that I should have filed Form 8938 with my return, what should I do? If you omitted Form 8938 when you filed your income tax return, you should file Form 1040X, Amended U.S. Individual Income Tax Return, with your Form 8938 attached.

17. Do I have to file both Form 8938 and Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR)? The filing of Form 8938 does not relieve you of the separate requirement to file the FBAR if you are otherwise required to do so, and vice-versa. Depending on your situation, you may be required to file Form 8938 or the FBAR or both forms, and certain foreign accounts may be required to be reported on both forms.

18. I have numerous specified foreign financial assets to report on Form 8938. Is there a continuation sheet for the Form 8938? If you have more than one account or asset to report in Part I or Part II of Form 8938, or more than one issuer or counterparty to report in Part II of Form 8938, copy as many blank Parts I and/or II as you need to complete, and attach them to Form 8938. Check the “If you have attached additional sheets, check here” box at the top of Form 8938.

19. I directly hold tangible assets for investment, such as art, antiques, jewelry, cars and other collectibles, in a foreign country. Do I need to report these assets on Form 8938? No. Directly held tangible assets, such as art, antiques, jewelry, cars and other collectibles, are not specified foreign financial assets.

20. I directly hold precious metals for investment, such as gold, in a foreign country. Do I need to report these assets on Form 8938? No. Directly held precious metals, such as gold, are not specified foreign financial assets. Note, however, that gold certificates issued by a foreign person may be a specified foreign financial asset that you would have to report on Form 8938, if the total value of all your specified foreign financial assets is greater than the reporting threshold that applies to you.

21. This tax year I sold precious metals that I held for investment to a foreign person. Do I have to report the sales contract on Form 8938? The contract with the foreign person to sell assets held for investment is a specified foreign financial asset investment asset that you have to report on Form 8938, if the total value of all your specified foreign financial assets is greater than the reporting threshold that applies to you.

22. I have a safe deposit box at a foreign financial institution. Is the safe deposit box itself considered to a financial account? No, a safe deposit box is not a financial account.

23. Am I required to hire a certified appraiser or actuary to determine the fair market value of a specified foreign financial asset? For example, if I have a foreign defined benefit plan, am I required to obtain the services of an actuary? You may determine the fair market value of a foreign financial account for the purpose of reporting its maximum value based on periodic account statements unless you have reason to know that the statements do not reflect a reasonable estimate of the maximum value of the account during the tax year. For a specified foreign financial asset not held in a financial account, you may determine the fair market value of the asset for the purpose of reporting its maximum value based on information publicly available from reliable financial information sources or from other verifiable sources. Even if there is no information from a reliable financial information source or other verifiable source, you do not need to obtain an appraisal by a third party in order to reasonably estimate the asset’s maximum value during the tax year.

Overall, tax practitioners and taxpayers alike will continue to have questions as Form 8938 evolves, but the direction provided by the IRS is responsive to many of the general issues associated with the new filing requirement.

Form 8938 – Foreign Reporting Trap for the Unwary

April 11, 2012

By Sebastien Chain and Tamara Woods

Beginning with the 2011 tax year (i.e., for returns filed April 17, 2012 or later), individual taxpayers will be required to file Form 8938 if he or she has an interest in a “specified foreign financial asset” (“SFFA”) (click for additional information on FATCA requirements) that has a value exceeding a certain threshold.  A Taxpayer has an interest in a SFFA if any income, gains, losses, deductions, credits, gross proceeds or distributions from the asset would be required to be reported on the income tax return.

The reporting thresholds differ depending on whether the taxpayer is married or single and whether the taxpayer is living inside or outside the United States.

Form 8938 Reporting Thresholds

STATUS

LIVING IN U.S.

LIVING ABROAD*

 Unmarried

OR

Married Filing Separately

>$50,000 at year end

OR

>$75,000 any time during year

>$200,000 at year end

OR

>$300,000 any time during year

Married Filing Jointly

>$100,000 at year end

OR

>$150,000 any time during year

>$400,000 at year end

OR

>$600,000 any time during year

There are certain exceptions and limitations to reporting.  Arguably, the most important limitation (other than the thresholds listed above) is whether the taxpayer reports the same assets on a separate foreign information return such as Forms 3520, 5471, 8621, 8865 or 8891 (but not Form T.D. F 90-22.1, Report of Foreign Bank Account (“FBAR”).  If so, the taxpayer is only relieved from fully completing the Form 8938.  The taxpayer is NOT relieved from filing Form 8938.

Form 8938 requires the following information:

  • Basic identification of the account/asset;
  • Name/address of financial institution where account is held (if applicable);
  • Name/address of issuer or counterparty of stock, securities or financial instruments (if applicable);
  • Information regarding whether the account/asset was acquired (opened) or disposed of (closed) during the year, the amount of income, gain, or other tax attributes recognized during the year and schedule, form or return on which reported to IRS, currency exchange rate (and source of rate, if not from Treasury’s Financial Management Service); and
  • If the SFFA is reported on another form (3520, 5471, etc.), the report type and number of such other form.

The minimum penalty for failing to file or report an asset on Form 8938 is $10,000 per year the Form 8938 is not filed.  The penalty can be increased up to a $50,000 maximum for noncompliance 90 days after receipt of an IRS notice.  It is important to note that the IRS has no discretion to reduce this penalty unless the Taxpayer “affirmatively shows the facts that support a reasonable cause claim.” It is unclear at this time what will constitute sufficient reasonable cause.  In addition to the above penalties, accuracy related penalties are increased from 20% to 40% for underpayments involving undisclosed SFFAs.

More Foreign Reporting for US Taxpayers? Absolutely says IRS

April 3, 2012

By Sebastien Chain and Tamara Woods

The Hiring Incentives to Restore Employment Act of 2010 (“HIRE Act”) enacted the Foreign Account Tax Compliance Act (“FATCA”).  P.L. 111-47.  FATCA greatly increases disclosure requirements and penalties on taxpayers with foreign accounts and assets.  These reporting requirements will affect individuals beginning with the 2011 tax year, and are expected to apply to certain domestic entities beginning with the 2012 tax year.

FATCA reporting is in addition to the Form T.D. F 90-22.1, Report of Foreign Bank Accounts (“FBAR”) requirements and other foreign reporting requirements such as Form 5471 (foreign corporations); Form 3520 (foreign estates and trusts); 8865 (foreign partnerships); 8621 (passive foreign investment companies); 8891 (beneficiaries of certain Canadian registered retirement plans).

These new reporting obligations apply to U.S. individuals with an interest in “specified foreign financial assets” (“SFFA”) with an aggregate value exceeding certain thresholds. SFFAs generally include:

  • Any financial account maintained by a foreign financial institution (i.e., a bank);
  • Any stock or security issued by a foreign person,
  • Any financial instrument or contract held for investment that has a non-U.S. issuer or counter-party, or any interest in a foreign entity.

It is important to note that the SFFA concept is much broader than related FBAR concepts.  Some examples include:

  • Investments by an entity that holds real estate;
  • Investments in foreign hedge funds and private equity funds;
  • Capital or profits interest in foreign partnership;
  • Foreign debt(e.g., notes, bonds, other indebtedness issued by a foreign person);
  • Interests in a foreign trust or estate;
  • Swaps, options, derivatives, etc. with a foreign counterparty; and
  • Foreign pension or deferred compensation plans.

As previously mentioned, beginning with the 2011 tax year, i.e., by April (or October if on extension) of 2012, Taxpayers with SFFAs must report these assets on new Form 8938 (click for additional information on Form 8938 ).  If a Taxpayer is required to file Form 8938, they must attach the Form to their 2011 tax return.  In contrast, the FBAR is not due until June 30th of each year and is mailed to Detroit (not with the Taxpayer’s tax return).

Going Quietly Into The Night May Not Be The Best Idea For U.S. Citizens Living Abroad

August 26, 2011

Apparently, there are a large number of U.S. citizens living outside the United States as well as a large number of individuals who are dual citizens of the United States and their country of residence (estimated to be in the millions).  Judging from the phone calls that I have been receiving from my contacts at foreign law and accounting firms, a large number of them have recently become aware of the IRS Offshore Voluntary Disclosure Initiative (“OVDI”) providing reduced penalties for U.S. citizens who come forward to report previously undisclosed foreign financial accounts.

The deadline for participating in the program – August 31, 2011 – is rapidly approaching so U.S. citizens living abroad, including dual U.S. citizens, must decide immediately whether to participate in the program.  Many of these individuals have not filed U.S. income tax returns and have not filed Treasury Forms TDF 90-22.1, more commonly knows as the FBAR, to report interests in foreign financial accounts.

A significant number of these individuals appear to be getting advice to make so-called “quiet disclosures.”  An individual making a quiet disclosure does not participate in the IRS’s OVDI, but merely files delinquent or amended income tax returns and delinquent FBARs.  The hope is that the IRS will not discover and audit the taxpayer, or if the IRS does audit the taxpayer, that the taxpayer will qualify for lesser penalties that apply to non-willful violations of the applicable income tax and FBAR provisions.1

For many, following the advice to make quiet disclosures may not be the best approach.  The IRS has created a special reduced penalty regime applicable to U.S. citizens living abroad who have complied with their tax obligations and filings in their country of residence.   For individuals that qualify, the IRS will apply a special 5 percent penalty for failing to report the foreign financial accounts if the individuals make a voluntary disclosure under the OVDI.  The penalty applies to the highest balances in the individual’s foreign financial accounts for the period from 2003 through 2010 so the penalty, although reduced, may still be quite substantial for some.  Nevertheless, the 5 percent penalty pales in comparison to the penalties that might otherwise apply.

The IRS has indicated that it will be looking for individuals who make quiet disclosures and will audit those individuals.  Also, the IRS has stated that it will consider criminal prosecution of those individuals when appropriate.  If criminal prosecution is not warranted, the IRS said that it will impose the maximum penalties that apply, including the penalty for willfully failing to file an FBAR — the greater of $100,000 or 50 percent of the amount in the foreign financial account for each violation.

U.S. citizens living abroad (including dual citizens) are taking a significant risk in filing quiet disclosures, particularly if they would otherwise qualify for the reduced 5 percent penalty under the IRS’s OVDI.  They may find out that their quiet disclosures will not be “quiet” after all and they may face much harsher penalties when the IRS discovers and audits them.

Going quietly into the night may not be the best choice.

1 The individuals may also have been advised that the FBAR penalty can be waived if that taxpayer had reasonable cause for failing to file the FBARs and all income from the foreign financial accounts was reported.  For those individuals living abroad who have not filed U.S. tax returns, the waiver of the penalty would not apply.  The penalty for a non-willful failure to file an FBAR is $10,000 per violation.


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