US Banks Reporting to IRS About Foreign Account Holders With US Deposits

April 20, 2012

US Banks Will Start Spilling the Beans on Foreign Account Holders With US Deposits

The IRS just issued final regulations (“Regulations”) setting out the rules requiring US financial institutions to report to the IRS interest payments made to certain nonresident alien individuals (“NRA”). Such reporting must commence on interest payments made after Dec. 31, 2012. The final regulations (T.D. 9584) can be accessed here. https://s3.amazonaws.com/public-inspection.federalregister.gov/2012-09520.pdf

This is a significant development. Generally, NRA’s are not taxed by the US when they receive interest income from amounts they have on deposit with certain US financial institutions, including banks and savings institutions as well as on amounts held by insurance companies. This exception from tax does not apply if the interest is connected with the NRA’s conduct of a US trade or business. Furthermore, as a general rule, the US financial institutions are not required to report to the IRS with regard to the interest income earned by the NRA. The aforementioned exemption from tax and reporting has existed in the US tax laws for about 50 years and was designed to encourage NRA’s to bank in the US thereby boosting the US economy.

With the advent of the new Regulations, the interest income will still not be taxed to the NRA, but the amounts will be reported to the IRS.

Rationale Behind the Mandate of IRS Reporting

A careful reading of the preamble to the Regulations makes clear that they were issued in response to the latest developments in international tax enforcement. These latest developments include enactment by the US of the “Foreign Account Tax Compliance Act” (“FATCA”) which, in part, mandates that foreign banks and other financial institutions report to the IRS with regard to their US customers. Another recent development is the increase in treaties and tax

information exchange agreements (TIEAs) throughout the world which provide for the exchange of information on tax matters between the parties.

Tax Treaties and Tax Information Exchange Agreements

The types of information that may typically be exchanged under an exchange of information provision of a US tax treaty and TIEA include:
• Tax returns and return information, such as verification of filing status, citizenship, residency, income, expenses and tax liability;

•Third party information return filings,

•Bank records and business records,

•Public records such as deeds, birth, death and marriage records, and

•Witness interviews

Many countries have now agreed to incorporate into their existing tax treaties what is known as the “internationally agreed tax information standard” regarding exchange of information. Essentially, this standard provides for a full exchange of information upon request by the treaty partner in all tax matters without regard to whether it has a domestic tax interest in the information and without regard to banking secrecy laws.

Reciprocal “Tattle-Tales”

The Regulations will enable the US to have information to “trade” with its treaty and TIEA partners about their citizens and residents. The Regulations will surely facilitate the exchange of information between the US and other foreign governments since the information will be readily at hand in the IRS data files. The IRS also claims that the reporting of information required under the Regulations will bolster US tax compliance by making it more difficult for US persons having domestic US deposits to falsely claim they are NRA’s in order to avoid paying US tax on the interest income.

Reporting is not required under the Regulations unless the interest is paid to a NRA who is resident in a country that has entered into an information exchange agreement with the US. IRS Revenue Procedure, Rev. Proc. 2012-24 lists the countries that have entered into such an information exchange agreement. It will be updated as new information exchange agreements are signed. Under the Regulations, the US financial institution is entitled to rely on address information provided on Form W-8BEN http://www.irs.gov/pub/irs-pdf/fw8ben.pdf to determine whether the payment is made to a NRA in one of the listed countries. The Regulations also allow the US institution paying the interest to elect to report interest payments made to all of its NRA customers in order to avoid any undue administrative burdens that would arise in determining if a particular NRA is in a country having an information exchange agreement.

No doubt about it – Big Brother just got bigger and he is here to stay!

by Virginia La Torre Jeker J.D.,. Find out more about Virginia La Torre Jeker J.D., here.

2012 updates for US citizens or dual citizens living outside the US

http://www.intltaxcounselors.com/blog/?p=10466

FACTA …. What is it and what are its effects ?

http://www.cato-at-liberty.org/obama-has-united-the-world-in-opposition-to-bad-u-s-tax-policy/

IRS hints at leniency for Americans living in Canada

gillian livingston

Globe and Mail Update

Published Thursday, Dec. 08, 2011 5:47PM EST

Last updated Thursday, Dec. 08, 2011 6:00PM EST

Americans living in Canada who feared the U.S. Internal Revenue Service would slap costly penalties on them for failing to file tax returns and detail their foreign financial holdings are getting a bit of relief.

The IRS confirmed in a release Thursday that for Americans living outside the country it will waive penalties for not filing tax returns – providing those taxpayers owe no U.S. tax. In addition, the IRS hinted that it may be lenient with penalties for those who have failed to file reports of foreign bank and financial accounts (FBARs).

More related to this story
•U.S. taxman to go easy on American residents in Canada
•Ottawa seeks leniency for Canadians in U.S. tax hunt
•U.S. tax crackdown has Canadian financial firms on edge

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“Taxpayers who owe no U.S. tax (e.g., due to the application of the foreign earned income exclusion or foreign tax credits) will owe no failure to file or failure to pay penalties,” the IRS said.

“In addition, no FBAR penalty applies in the case of a violation that the IRS determines was due to reasonable cause.”

Roughly one million Americans live in Canada and some had become fearful of a looming U.S. tax crackdown. Many Americans moved to Canada years ago and they stopped filing tax returns, assuming they owed no tax since taxes in Canada are higher.

U.S. citizens, regardless of where they live and work, are required by the IRS to file annual tax returns. When the U.S. moved to expose citizens hiding assets in offshore tax havens, it caused a wave of panic among Americans living in foreign countries, as they feared they would be hit by punishing penalties for failing to file tax returns.

In addition to filing a tax return reporting their income, Americans must also report all their foreign bank, brokerage, mutual fund and pension accounts. By 2014, Canadian financial institutions will have to identify accounts held by U.S. citizens to the IRS.

The penalties can be steep. Failure to disclose foreign bank accounts can result in penalties of $10,000 (U.S.) a year for every account. If it’s determined that a person willfully failed to file reports detailing foreign bank and financial accounts, the fines can be $100,000, or 50 per cent of the total balance of the account, at the time of the violation – whichever is greater.

While the IRS statement will give relief to some people, it doesn’t clear up all the issues, said accountant Kevyn Nightingale, a U.S. tax specialist with MNP LLP in Toronto.

“What I see here is that they are demonstrating a willingness to abate the penalties without committing that in all circumstances they’ll just say ‘fine no problem,’ ” he said. “That leaves a whole bunch of judgment to this and unfortunately the problem with this is that you don’t always get consistency with the judgment.”

In general, though, “the bulk of the people in Canada are going to be helped because the vast majority owe no tax,” Mr. Nightingale said. Americans who joined the IRS amnesty program earlier this year have until Friday to file their returns, he added.

Last week, David Jacobson, the U.S. Ambassador to Canada, raised people’s hopes that the IRS would soon clarify what Americans living in Canada would face if they hadn’t filed their U.S. taxes or foreign holdings. And hopes were that as long as those people came clean, they would not be penalized, said Wayne Bewick, a partner at Trowbridge Professional Corp., who specializes in expatriate and international taxation.

“I don’t know how much relief this is going to give to Americans in Canada because they’re still not going to have that certainty around penalties,” he said, since ‘reasonable cause’ is open to interpretation.

“Are you going to want to file if you’re not sure? It leaves a lot of stress on people and I don’t know if this is going to alleviate it.”

For Americans in Canada who are wondering whether to file past tax returns or not, he suggests it’s best to take action soon.

“I still do think now is the time to come forward if you’re going to do it because it’s going to get harder and harder” to argue ‘reasonable cause’ or say you weren’t aware of the issue due to all the media coverage, he said.

Testimonials

Hi Stan,

Thank you again for completing my taxes I need to file to the U.S. If there are any issues with the check please let me know and I will get you a bank draft.

As requested, I have put together a testimonial. Please feel free to use it as you need:

Thanks again!

CT

I moved to Canada with my parents after graduating high school. In the next 15 years that followed, I lived here, went to college here, became a Canadian citizen, started my own company and began a family – all in Canada. I had never had to file tax returns while in the U.S. because I did not work while in high school. So, imagine my surprise more than 15 years later when I see a news report telling me that I have to file U.S. tax returns or face penalties of tens-of-thousands of dollars per year in default the next time I decide to cross the border.

After furiously gathering my Canadian taxes and financial information (and panicking quite a bit), I called around the city of Calgary only to find a handful of accountants who could actually do U.S. Taxes, one being a well-known, well-advertised tax firm. After several weeks of back-and-forth with my accountant there, numerous phone calls to gather information and hours and hours of work gathering my financial information, the accountant then told me he would not do my returns because I owned a business. He also informed me that the cost for him to be coerced into doing my taxes would be outlandish.

Googling that afternoon, I discovered Dash Tax and Accounting and quickly made a phone call to Stan Dashevsky. By this time, I was panic-stricken thinking I would have to put holiday plans on hold with my family over fears the IRS would pull me off the plane and imprison me for tax evasion. Stan reassured me that I was not the only U.S. citizen unwittingly hit with the ‘surprise’ tax filing bug, and that as long as I got my taxes in and filed that all would be well.

Throughout the process, Stan was very patient and very helpful, instructing me on the multitude of papers, information, past tax returns and financial documents I needed to gather in order to complete my U.S. tax returns and avoid penalties. It was a well-needed piece of mind that I was being looked after and that there was a light at the end of the tax tunnel.

I can’t thank Stan enough for working tirelessly to organize all the tax information I needed to make a successful filing.

Thanks again, Stan!

Sincerely,

CT

US Tax payers must file form 5471 as owners of foreign coporations. We will prepare this complicated but necessary form.

If you are a US person (ie a US citizen or green card holder) and own 10% or more of a foreign corporation (a corporation organized and operating outside the US) you are responsible to file Form 5471 every year. If you own part of a partnership you must file Form 8865.

Any U.S. Person who received a distribution from a foreign trust, was a grantor of or a transferor to a foreign trust must also file Form 3520. A trustee of a foreign grantor trust with a U.S. grantor must file Form 3520-A. Annuitants and Beneficiaries of Passive Foreign Investment Companies (PRIC) may be required to file Form 8621.

If you want the gory details in thick legalese – here is the link to the IRS Website on filing requirements.

We are one of the few tax preparation firms who are real experts in this field and can help you prepare this form. The article below provides more information on this issue.

What Information Must be Provided?
The required information starts by listing the identity of the US shareholder and details about the foreign corporation. It must also include data on transactions between you and the foreign corporation, original capital contributions and other relevant data. It is 4 pages long. Several other schedules are required, which can make it a total of 6-7 pages. Among the schedules to be filled are the balance sheet for the corporation and income and expense sheet for the current year of operation.

Depending on which of the five categories apply to the taxpayer (in fact, there are four categories because category one has just been repealed), different schedules must be completed. An officer or director of a CFC who is not an owner of the CFC will be required to file under category 2 where certain U.S. persons have acquired additional stock in the corporation. A category 2 filer is only required to complete page one and schedule G. Where a U.S. corporation is the 100% owner of a foreign corporation that is not a Foreign Personal Holding Company (FPHC), the filer could be classified as a category 3, 4 or 5. Quite often, more than one category can be applied to one filer – all that applies must be checked and required,. schedules for each category filed.
When is it Due?
The form is due with the income tax return of the affected shareholder. For most corporations, that would March 15th or the extended due date. For most individuals, that would be April 15th or, if you are an expat, June 15th. This form is filed along with your personal tax return (or your business corporation / LLC tax return if it is the owner of the foreign corporation).
How Long Does it Take to Prepare?
The IRS estimates that it takes approximately 38 hours on average to prepare Form 5471 (aside from the record keeping time and the time required to learn about the relevant law and instructions). The learning time could be much longer for someone who is not familiar with the pertinent sections of the tax law. IRS estimates that the average time required for record keeping to prepare the form is 82.5 hours and that the average time required for learning about the form is 16 hours. And that does not include the separate time estimates for schedules J, M, N and O.
What Happens if You Don’t File Form 5471 or File it Late?
The penalties for a failure to file the return are severe – and it is not necessary for the corporation to have any profits for the penalties to apply. A return must be filed even if there is no taxable income to report.

Until recently, it was rare even to get a response from the IRS about the filing, even in the event that the for was filed late. However – as of late, the IRS has been vocal about the automatic penalties assessed by the computer for late filing of the Form 5471. The penalty under IRC Section 6038(b)(1) is $10,000 for each late or incomplete Form 5471.

You must remember that this is mostly an informational form, that does not result in any tax due for the taxpayer. So the $10,000 penalty is a “disclosure penalty”, unrlatd ot the actual tax tax consequences of the information provided on the Form 5471. If the failure continues for more than 90 days after the date the IRS mails notice of failure, an additional $10,000 penalty will apply for each 30-day period. The additional penalty is limited to a maximum of $50,000.

Controlled Foreign Corporation
If you, along with other US persons, own more than 50% of a foreign corporation, it is then defined as a Controlled Foreign Corporation (CFC). Then certain types of income (called Subpart F Income) may be taxed and flow through to the US shareholders. This would cause them to pay tax on that income on their US personal tax returns. The rules for determining which types of income are considered Subpart F are rather complex.

Certain types of corporate income such as dividends, interest, rental income, insurance income, offshore shipping income and personal service income are treated as Subpart F income. Subpart F income is taxable on the US shareholder’s personal return (or corporate return if a US corporation is the owner) in the year it occurs as ordinary income. This happens regardless whether the income was distributed.

Dividends paid to shareholders of Foreign Corporations are occasionally eligible for reduced qualified dividend rate (same rate as capital gains) when paid from the foreign corporation that is located in a country with which the US has a tax treaty.
Should a US Corporation with Net Operating Losses Still be Concerned?
With current tough economic climate, many US companies have accumulated significant Net Operating Losses (NOLs). Therefore, their managers may not be concerned about filing of Form 5471 – since they expect that the firm’s NOLs would protect from potential problems with the IRS. However – because the failure to file Form 5471 results in a penalty (and not a tax), NOLs would not offer any protection.

In addition, the three year statute of limitations that applies to normal tax returns (we discuss it in more detail here: Statute of Limitations for Tax Returns) does not start counting until Form 5471 is properly filed. This is because failure to file Form 5471 renders the personal tax return as incomplete at the time of original filing.
Conclusion
Preparation of Form 5471 is one of the most complicated and formidable challenges faced by tax preparers. Unfortunately even most professionals do not know how to handle it and may require help. If you believe that you need assistance with this particular form, we would be glad to help out, even if the rest of your personal tax return is prepared by your existing accountant. We can certainly handle your personal tax return as well. Either way – please talk to us to find out how we ca help

Foreign Bank account Reporting Information Returns

Report of Foreign Bank and Financial Accounts (FBAR)

If you have a financial interest in or signature authority over a foreign financial account, including a bank account, brokerage account, mutual fund, trust, or other type of foreign financial account, the Bank Secrecy Act may require you to report the account yearly to the Internal Revenue Service by filing Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR).

The FBAR is required because foreign financial institutions may not be subject to the same reporting requirements as domestic financial institutions. The FBAR is a tool to help the United States government identify persons who may be using foreign financial accounts to circumvent United States law. Investigators use FBARs to help identify or trace funds used for illicit purposes or to identify unreported income maintained or generated abroad.

Recent FBAR Guidance
On February 24, 2011, the Treasury Department published final regulations amending the FBAR regulations. These regulations became effective March 28, 2011, and apply to FBARs required to be filed with respect to foreign financial accounts maintained in calendar year 2010 and for FBARs required to be filed with respect to all subsequent calendar years. The FBAR form and instructions (PDF) have been revised to reflect the amendments made by the final regulations.

On May 31, 2011, the Financial Crimes Enforcement Network (FinCEN) issued FinCEN Notice 2011-1 (PDF), revised June 6, 2011, to provide administrative relief for certain individuals with signature authority over but no financial interest in foreign financial accounts. The deadline to report signature authority has been extended to June 30, 2012, for the following individuals:

an employee or officer of an entity under 31 CFR § 1010.350(f)(2)(i)-(v) who has signature or other authority over and no financial interest in a foreign financial account of a controlled person of the entity; or
an employee or officer of a controlled person of an entity under 31 CFR § 1010.350(f)(2)(i)-(v) who has signature or other authority over and no financial interest in a foreign financial account of the entity, the controlled person, or another controlled person of the entity.
For purposes of FinCEN Notice 2011-1, a controlled person is a United States or foreign entity more than 50 percent owned (directly or indirectly) by an entity under 31 CFR § 1010.350(f)(2)(i)-(v).

On June 16, 2011, the IRS issued Notice 2011-54 to provide additional administrative relief for individuals with signature authority but no financial interest whose filing requirements were properly deferred under Notice 2009-62 or Notice 2010-23. The deadline to file the FBAR for these individuals was extended until November 1, 2011. This extension only applies to reports for the 2009 or earlier calendar years. This Notice did NOT extend the reporting deadline for calendar year 2010.

On June 17, 2011, FinCEN issued Notice 2011-2 (PDF) to facilitate more accurate compliance with FBAR filing requirements. Notice 2011-2 was issued to provide administrative relief for certain officers or employees of investment advisors registered with the Securities and Exchange Commission who have signature or other authority but no financial interest in certain foreign financial accounts. The deadline to file an FBAR has been extended to June 30, 2012, for those specified individuals working for advisors registered with the Securities and Exchange Commission.

Who Must File an FBAR
United States persons are required to file an FBAR if:

The United States person had a financial interest in or signature authority over at least one financial account located outside of the United States; and
The aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year to be reported.
United States person means United States citizens; United States residents; entities, including but not limited to, corporations, partnerships, or limited liability companies created or organized in the United States or under the laws of the United States; and trusts or estates formed under the laws of the United States.

Exceptions to the Reporting Requirement
Exceptions to the FBAR reporting requirements can be found in the FBAR instructions. There are filing exceptions for the following United States persons or foreign financial accounts:

Certain foreign financial accounts jointly owned by spouses;
United States persons included in a consolidated FBAR;
Correspondent/nostro accounts;
Foreign financial accounts owned by a governmental entity;
Foreign financial accounts owned by an international financial institution;
IRA owners and beneficiaries;
Participants in and beneficiaries of tax-qualified retirement plans;
Certain individuals with signature authority over but no financial interest in a foreign financial account;
Trust beneficiaries; and
Foreign financial accounts maintained on a United States military banking facility.
Look to the FBAR instructions to determine eligibility for an exception and to review exception requirements.

Reporting and Filing Information
A person who holds a foreign financial account may have a reporting obligation even though the account produces no taxable income. Checking the appropriate block on FBAR-related federal tax return or information return questions (for example, on Schedule B of Form 1040, the “Other Information” section of Form 1041, Schedule B of Form 1065, and Schedule N of Form 1120) and filing the FBAR, satisfies the account holder’s reporting obligation.