Deadline looms for US citizens to file tax returns and FBAR reports

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Attention! United States persons meaning US citizens residing abroad, dual citizens with the United States, green card holders (Permanent Residents) and US residents for income tax purposes, deadlines are fast approaching for compliance with US reporting and filing obligations. Specifically, for individuals, there are two tax reporting and filings due this month: the Report of Foreign Bank and Financial Accounts (the ‘FBAR’) and the US Individual Income Tax Return.

What is an FBAR? The FBAR is used to report a financial interest in or signature authority over a foreign financial account. The report for the calendar year 2010, although linked to the US Individual Income Tax Return, is not sent to the US Internal Revenue Service. It goes to the US Department of the Treasury and must be received by the Treasury on or before June 30th 2011. Postmarked by June 30th is not acceptable, and note that no extension for later filing is available.

Who Must File an FBAR?

A United States person that has a financial interest in or signature authority over foreign financial accounts must file an FBAR if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year.

A very common misconception is that only one account has to be over $10,000. This is incorrect. It is the aggregate value of all foreign accounts. If the individual has five accounts with $2,000 in each of four, and $3,000 in number five, all accounts must be reported. Foreign financial accounts also mean accounts held jointly with others, such as foreign national spouses, friends, and as guardian for children, etc.

What kind of Financial Account are we talking about?

Foreign Financial Accounts are accounts and financial interests held in Bermuda or other jurisdictions outside the United States by US persons – see description above.

A financial account includes, but is not limited to, a securities, brokerage, savings, demand, checking, deposit, time deposit, or other account maintained with a financial institution (or other person performing the services of a financial institution). A financial account also includes a commodity futures, or options account, an insurance policy with a cash value (such as a whole life insurance policy), an annuity policy with a cash value, and shares in a mutual fund or similar pooled fund.

This comprehensive list includes foreign pensions, foreign whole of life insurance policies, foreign annuities, and investment accounts holding foreign mutual funds, foreign money market funds and related type accounts.

What does a Financial Interest mean?

A United States person has a financial interest in a foreign financial account for which:

(1) the United States person is the owner of record or holder of legal title, regardless of whether the account is maintained for the benefit of the United States person or for the benefit of another person; or

(2) the owner of record or holder of legal title is one of the following:

(a) An agent, nominee, attorney, or a person acting in some other capacity on behalf of the United States person with respect to the account;

(b) A corporation in which the United States person owns directly or indirectly: (i) more than 50 percent of the total value of shares of stock or (ii) more than 50 percent of the voting power of all shares of stock;

(c) A partnership in which the United States person owns directly or indirectly:

(i) an interest in more than 50 percent of the partnership’s profits or

(ii) an interest in more than 50 percent of the partnership capital;

(d) A trust of which the United States person:

(i) is the trust grantor and

(ii) has an ownership interest in the trust for United States federal tax purposes.

(e) A trust in which the United States person has a greater than 50 percent present beneficial interest in the assets or income of the trust for the calendar year; or

(f) Any other entity in which the United States person owns directly or indirectly more than 50 percent of the voting power, total value of equity interest or assets, or interest in profits.

This is a daunting list of financial interest situations and requires complex research in many instances. Those who may have signatory authority, but no financial interest, are generally assessed more on a case by case basis due to the complex nature of a compound structure.

Why do you have to report these accounts and financial interests?

Most importantly, the FBAR reports are also linked to new reporting requirements under the US Internal Revenue Service initiative and part of the Hire Act legislated by US Congress. The Foreign Account Tax Compliance Act FATCA as it is called placed new and very significant reporting requirements on foreign financial entities (FFE) and non-financial foreign entities (NFFS): your foreign bank, your foreign trustee, your foreign pension administrator, your foreign mutual fund investment provider, your foreign insurance company, your foreign small business private corporation if you own shares and others.

FFEs are required to report all US person’s accounts, balances, transactions, and identifiers to US Internal Revenue Service. Non-cooperation with this mandate by FFEs will trigger an onerous withholding tax penalty on the foreign financial institutions. It is an understatement to say that this new mandate has generated controversy offshore.

These are complex and taxing times for US persons abroad. The discussion above only covers one required form. There are a number of others that are linked to the FBAR that US citizens abroad may have no knowledge of. A good rule to follow is that every time you open/close an account, transfer monies, receive/give gifts, earn, invest, sell/buy an acquisition, die or otherwise implement estate and succession planning, there is a tax consequence.

If you misinterpret IRS instructions, miss deadlines, or inadvertently file incomplete returns, the penalties range from significant to very, very severe. Therefore, it is not recommended, when it comes to US and international tax matters, to rely upon the advice of anyone who does not have an extensive background, license and most importantly competency and experience in US and international tax matters. Well intended friends, foreign brokers, foreign counsel, foreign trustees, foreign pension administrators or even professionals such as CPAs who have had no experience in international tax law practice (they specialized in audit or investments) may not have the expertise to understand current US tax law regarding international tax issues affecting US persons residing abroad.

It is always preferable not to be exposed to significant tax errors or missed tax obligations. If you are audited by US Internal Revenue Service, you may be asked to provide the names of the foreign advisors who provided the advice to you, not a comfortable position to be in.

US Internal Revenue Service has instituted a complex licensing program for tax professionals who advise and prepare US tax returns for compensation. The practitioners are required to take a competency exam, demonstrate tax experience, complete continuing education programs every year, pass a background check (with fingerprints for non-CPA practitioners), be current on all personal individual and related tax reporting and liabilities, and submit to announced office audits by IRS personnel. The Service has implemented severe fines, disbarment from practice before the US Internal Revenue Service, and criminal prosecution for violations of professional conduct and lack of due diligence in conducting a tax practice.

The Internal Revenue Service has made it very clear through various pronouncements, meetings with experienced tax professional groups and in speeches by the Commissioner, Mr. Douglas Shulman, that there will be no relenting of the pressure to bring US persons back into compliance with US tax law.

American Citizens Abroad are aggressively lobbying Congress and various interested representatives on the disincentives of the current US citizenship-based tax system.

This could be a taxing summer for those not in compliance.

By Martha Myron

Tax Havens’ Days Are Numbered

Robert Olsen, 05.03.10

The era of banking secrecy may be coming to an end.

HONG KONG — As Democrats and Republicans haggle over the details of financial reform in the Senate, a new tax law is quietly approaching that will force all overseas banks to reveal the overseas holdings of American account holders.

“I don’t think a lot of people have paid attention to this,” said Scott D. Michel, president of Caplin & Drysdale law firm.

“The whole purpose of this is to put American account holders around the world in a position where they can have no safe haven in any bank that wants to offer U.S. investments to any of its clientele,” he added.

American citizens are required to report all of their worldwide income every year when filing their tax returns. As a part of that process, they are also required to disclose any offshore bank accounts they may have or hold signature authority over.

If an individual falsifies his or her tax claim by concealing their income in offshore accounts, banking secrecy laws in countries like Switzerland have in the past helped to keep that income hidden by making it a crime for the banks and their employees to disclose information about clients.

U.S. lawmakers designed the Foreign Account Tax Compliance Act (FACTA) to “force foreign financial institutions, foreign trusts, and foreign corporations to provide information” on undisclosed assets held by Americans after Dec. 31, 2012. If they fail to do so, the Internal Revenue Service (IRS) can hit the banks with 30% withholding on all income originating from the U.S.

The full details of FACTA have yet to be ironed out between the U.S. Treasury and the IRS, but one of its requirements will include a document for new account holders to sign that waives whatever rights they may have under local banking secrecy laws.

The U.S. estimates that it will raise an additional $8.5 billion in tax revenue over the next 10 years by forcing Americans to disclose income they are hiding from tax collectors.

Spurred by rising fiscal deficits, the United States and other members of the Organization for Economic Cooperation and Development (OECD), particularly Germany and France, have been using a variety of methods to clamp down on tax cheats, tax havens and overseas financial centers.

The most high profile of these were the UBS ( UBS – news – people ) AG case and the OECD’s attempt to name and shame those countries that fail to comply with internationally agreed standards.

Tax havens are usually characterized by extremely low tax rates, strong banking secrecy laws and flexible regulations in terms of licensing, incorporation and supervision. So-called shell companies, trusts and other legal entities are often used to shield assets from overseas authorities.

The OECD had initially singled out 47 jurisdictions that included the likes of Hong Kong, Macau, the Philippines and Malaysia, but hasty commitments to improve transparency along with some backroom deal-making led to all four being removed from the blacklist.

The U.S. tax authorities, however, have recently introduced another far more effective means of collecting information on tax evaders: They pay informers for it.

The IRS Whistleblower Office can pay anywhere between 15% and 30% of the taxes, penalties and interest collected for cases valued at $2 million or more. (See: “Tax Informants Are On The Loose”)

The IRS has yet to make any payments under the new scheme, but that hasn’t dissuaded people like Bradley C. Birkenfeld from trying. Formerly an employee of Switzerland’s largest bank UBS, Birkenfeld was sentenced to 40 months in jail for helping billionaire California real estate developer Igor M. Olenicoff hide $200 million offshore. (See: “April 15 Plea: Pardon Tax Whistleblower”) Motivated in part by the possibility of a reward, Birkenfeld provided evidence to U.S. tax authorities detailing how the secretive Swiss bank helped wealthy Americans hide money offshore.

As a result, UBS was forced to admit wrongdoing, pay a fine of $780 million and to turn over data on as many as 4,450 UBS accounts to the Swiss government, which will pass the information to the U.S.

A number of banks from some of Europe’s best-known tax havens are facing similar investigations. Germany launched over 1,000 tax evasion probes against clients of Credit Suisse ( CS – news – people ) last month. In December the French authorities said that it had the details of 24,000 Swiss bank accounts provided by a former HSBC ( HBC – news – people ) employee.

Fearing the possibility of heavy fines and prosecution, many tax evaders from the U.S., Germany and France have come forward to report their assets.

Michel believes the disclosure of banking secrets will continue to grow. “When you combine the whistleblower regime with the template that the [U.S.] government used in the UBS case, with the information they’re getting with all these voluntary disclosure cases and now FACTA, I think the era of bank secrecy is fairly rapidly eroding in front of our eyes,” he said

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CPAs Provide Expertise for Transfer Pricing Analyses

MAY 2010

Transfer pricing, the process by which multinational companies set arm’s-length prices for cross-border transactions within a corporate group, is complex and consistently ranks as the No. 1 international tax issue facing multinational companies, according to Ernst & Young’s 2009 Global transfer pricing survey. To avoid penalties and potential interest, most tax authorities require taxpayers to prepare annual transfer pricing reports when they file tax returns.

During its infancy, transfer pricing was dominated by economists. However, as global transfer pricing regulations developed, international examiners gained experience and financial accounting standards evolved. Consequently, companies now need experienced tax accountants not only to validate the reliability of the data during tax controversies but also to guide taxpayers during implementation. There is definitely still a role for economists on project teams, but CPAs are probably more conversant with such steps as making a compensating adjustment journal entry or quantifying FIN 48 risks (FASB Interpretation no. 48, Accounting for Uncertainty in Income Taxes, now codified in FASB ASC Topic 740) for financial reporting purposes.

Stuart Rohatiner, CPA, JD

Below are examples of transfer pricing issues where expert accounting skills are important:

Financial reporting. Certain industries have unique accounting revenue and expense treatment, and to calculate the appropriate benchmark ratios for transfer pricing purposes, an accountant needs to analyze the financial statement footnotes and understand which items are characterized as operating, pass-through, etc. For example, the income statements for a professional services firm include a special line item called “reimbursements” under the revenue and cost-of-sales categories. Reimbursements are generally pass-through contractor costs and reimbursed expenses and would likely be excluded from the operating revenue and operating expense calculations for transfer pricing purposes. In addition, with the currently volatile economy and corresponding impact on profitability, companies are increasingly monitoring their taxable income in each jurisdiction and likely making year-end compensating adjustments to the books and records to get profit margins within the arm’s-length ranges.

Transfer pricing audit document requests. The IRS and other tax authorities historically requested that taxpayers provide copies of their transfer pricing reports to support their pricing during audit years. Fast-forward to the current environment, and a typical audit request specifies tying the transfer pricing data from reports to general ledgers, consolidating income statements and balance sheets.

FIN 48 analysis. Public companies and their auditors are now required to analyze the income tax calculations and determine if the company needs to quantify and include in the financial statements any tax exposures that are “more likely than not” to be sustained upon examination. Auditors have increasingly identified transfer pricing risks, especially adjustments and penalties proposed by tax authorities, and forced taxpayers to disclose the details in SEC public filings and book reserves.

Reliability of financial data. Since much of transfer pricing financial analysis involves comparing unaudited financial statements with audited ones, a tax accountant who can validate the reliability of the unaudited data is invaluable, especially in tax controversy settings.

IRS analysis of adjustments and methods. The trend toward an increased focus on the accounting details of intercompany transactions may be a result of the IRS’ hiring international examiners with accounting backgrounds. Whatever the reason, the IRS has placed a new emphasis on reviewing all accounting and functional differences between the taxpayer-tested party and the comparable companies selected in the transfer pricing report. For example, during a recent meeting of a taxpayer with the IRS, the IRS international examiner compared each accounting line item from the taxpayer’s annual report with those of the comparable companies to make sure that adjustments were considered for any differences in functions or risks. Similarly, the examiner insisted on analyzing all potential transfer pricing methods and profit level indicators available, even though the IRS had agreed to the same method and profit level indicator with the taxpayer twice previously and the facts hadn’t changed significantly.

It shouldn’t come as a surprise that with the increasing complexity of transfer pricing and diminishing taxable income of corporations, the level of scrutiny by tax authorities has risen exponentially. In fact, in 2009, the IRS announced plans to hire an additional 800 agents in fiscal 2010 to focus on international examinations, and the agency’s proposed fiscal 2011 budget contains funding for 800 more. The field of transfer pricing will continue to grow and present employment opportunities for practitioners with the desired blend of economics and tax accounting skills.

 By Steve Snyder, CPA/CFF, CVA

Information and Issues on Foreign Bank Account Reporting

http://www.journalofaccountancy.com/Web/FBAR.htm

IRS Issues FBAR Notice

The IRS on Friday issued Notice 2009-62, 2009-35 I.R.B. ___ (Aug. 31, 2009), which provides information on the Report of Foreign Bank and Financial Accounts (FBAR) for government agencies to use in criminal, tax, or regulatory investigations or proceedings.