You owe the IRS 99 days of hard work

Stuart Rohatiner, CPA, JD

By Blake Ellis, staff reporter

NEW YORK (CNNMoney.com) — This year, it’s going to take the average American 99 days to earn enough money to pay the IRS. That’s one day longer than last year.

“Tax Freedom Day” marks the date that most Americans have earned enough money to pay their federal, state and local taxes, and this year that day arrives on April 9, according to the Tax Foundation’s annual calculation, which is based on government tax and income data.

Tax Freedom Day arriving one day later than it did last year means most Americans will have to work that much harder — for more than three months — just to pay their 2010 taxes.

The number of days Americans have to work to pay off their taxes has declined steadily since 2007. That’s due to a handful of tax cuts, certain income tax provisions that were repealed for 2010 and because the recession has reduced tax collections faster than it has cut income, according to the Tax Foundation.

But while it will take people less time to earn the money this year than it did in 2007, Americans will still spend more on taxes in 2010 than they will on food, clothing and shelter combined, the Tax Foundation said.

State-by-state:

Each state has its own Tax Freedom Day. The day arrived earliest in Alaska and Louisiana — on March 26 — because of “modest incomes and low state and local tax burdens,” the Tax Foundation said.

Mississippi, South Dakota and West Virginia celebrated soon after, on March 28, March 29 and March 30, respectively.

Connecticut, the state with the highest per capita income, will be the last to celebrate. Tax Freedom Day won’t arrive until April 27, the 117th day of the year.

New Jersey, New York, Maryland and Washington will join Connecticut as the last states to celebrate. In these states, Tax Freedom Day will fall on April 25, April 23, April 19 and April 15, in that order.

FinCEN Proposes Changes in FBAR Reporting Requirements

 

FinCEN (web site here) has announced here a Notice of Proposed Rule Making (NPRM) for changes in the FBAR requirements.  The press releases advises that, in formulating the NPRM, FinCEN worked closely with the Department of Treasury, Office of Tax Policy and the IRS, but FinCEN retained authority to revise the regulations.

The press release says:

The proposed rule:

•  Includes provisions intended to prevent persons from avoiding reporting requirements.
•  Defines a “United States person” required to file the FBAR and defines the types of reportable accounts such as bank, securities, and other financial accounts.
•  Exempts certain persons with signature or other authority over, but no financial interest in, foreign financial accounts from filing FBARs.
•  Exempts certain low-risk accounts e.g., the accounts of a government entity or instrumentality for which reporting will not be required.
•  Exempts participants/beneficiaries in certain types of retirement plans and includes a similar exemption for certain trust beneficiaries.
•  Clarifies what it means for a person to have a “financial interest” in a foreign account.
•  Permits summary filing by persons who have a financial interest in 25 or more foreign financial accounts, or signature or other authority over 25 or more foreign financial accounts. Also permits an entity to file a consolidated FBAR on behalf of itself and the subsidiaries of which it owns more than a 50 percent interest.

Foriegn Trust Reporting Requirements

Foreign Trust Reporting Requirements

Although there are legitimate reasons why a U.S. person might create a foreign trust, or have transactions with a foreign trust, they can have tax consequences and result in filing responsibilities as well. Regardless of your motivation, failure to meet these reporting and filing requirements can result in very significant penalties. General Rules In general, the reporting rules apply to a U.S. person who: Creates a foreign trust Transfers any money or property to a foreign trust Receives a distribution from a foreign trust Is treated as the U.S. owner of a foreign trust. Tax consequences can apply to the U.S. owners and U.S. beneficiaries of foreign trusts, and to the foreign trust itself. Reporting Requirements and Tax Consequences Information Returns Form 3520 – Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts Who must file Form 3520? There are several situations in which a Form 3520 (or statement with similar information) is required to be filed. The most common circumstances are where a U.S. person: Creates or transfers money or property to a foreign trust Receives (directly or indirectly) any distributions from a foreign trust Receives certain gifts or bequests from foreign entities Form 3520 Instructions have more detailed information about who must file a Form 3520; when, where, and possible penalties for late or incomplete filing. Form 3520-A – Annual Information Return of Foreign Trust with a U.S. Owner. This form provides information about the foreign trust, its U.S. beneficiaries, and any U.S. personwho is treated as an owner of any portion of the foreign trust. Who Must File Form 3520-A?  Each U.S. person treated as an owner of any portion of a foreign trust under the grantor trust rules is responsible for ensuring that the foreign trust files Form 3520-A and furnishes the required annual statements to its U.S. owners and U.S. beneficiaries. Instructions to Form 3520-A have more detailed information about who must file a Form 3520-A; when, where, and possible penalties for late or incomplete filing. Other Possible Reporting Requirements Form 1040, Schedule B, Part III, Foreign Accounts and Trusts must be completed if you receive a distribution from, or were grantor of, or a transferor to a foreign trust TDF 90-22.1: Report of Foreign Bank and Financial Accounts – You might have to file this form if you have a financial interest in or signature authority over an account associated with a foreign trust. Form 709 Gift Tax Return. A U.S. person who transfers money or property to a foreign trust may be required to file Form 709 United States Gift (Generation Skipping Transfer) Tax Return. See the Instructions for Form 709 for further information. Form 1040NR – A foreign trust , which is not taxed to a U.S. owner as a grantor trust, may be obligated to file a Form 1040NR to pay U.S. tax on certain U.S. sourced income. See Publication 519 and the Instructions for Form 1040NR for additional information. Income Tax Consequences U.S. owner of a foreign trust – In general, the U.S. owner of a foreign trust is taxed on the income of that trust. A U.S. person is treated as the owner of a foreign trust under the grantor trust rules of Internal Revenue Code sections 671-679, which includes someone who transfers assets to a foreign trust which has a U.S. beneficiary of any portion of the trust. *Each U.S. owner should receive a Foreign Grantor Trust Owner Statement (Form 3520-A, page 3), which includes information about the foreign trust income they must report. U.S. beneficiary of a foreign trust – In general, the U.S. beneficiary of a foreign trust will report their share of foreign trust income to the extent it is not reported by the transferors to the trust under the grantor trust rules. The U.S. beneficiary should receive a Foreign Grantor Trust Beneficiary Statement (Form 3520-A, or a Foreign Non Grantor Trust Beneficiary Statement which includes information about the taxability of distributions they have received and foreign trust income they must report. U.S. transferor of assets to a non grantor foreign trust – Internal Revenue Code section 684 requires the recognition of gain on certain transfers of appreciated assets to a foreign trust. See the Instructions for Form 3520-A for additional information. Compliance Issue Citizens and residents of the United States are taxed on their worldwide income. To help prevent the use of foreign trusts and other offshore entities for tax avoidance or deferral, Congress has enacted several specific provisions in the Internal Revenue Code. Some provisions trigger recognition of gains that would otherwise be deferred. Others deny deferral of tax on income moved offshore. A specialized industry has developed in attempting to circumvent these provisions. The promoters of offshore schemes often advance technical arguments which purport to show that their scheme is legal. These arguments are used to provide some comfort to their clients, who are then induced to enter into a scheme which usually involves concealing the true ownership and control of assets and income. The filing and reporting responsibilities discussed here also apply to the beneficial owners of foreign trusts as well. The term beneficial ownership applies to the true owner of an entity, asset, or transaction as opposed to any stated ownership provided in documents or oral representations. The beneficial owner is the one that receives or has the right to receive proceeds or other advantages as a result of the ownership. It is common practice in offshore financial secrecy jurisdictions to interpose entities, individuals, or both as stated owners. The beneficial or true owner is contractually acknowledged in side agreements, statements or by other devises. For more information about offshore tax schemes just click on the following link: Abusive Offshore Tax Avoidance Schemes Additional Information about any of the foreign trust reporting requirements and related income tax consequences is available by clicking on the relevant links throughout the article.

Alien Taxation – Certain Essential Concepts

The taxation of aliens involves certain essential concepts as follows. Resident Aliens A resident alien’s income is generally subject to tax in the same manner as a U.S. citizen. If you are a resident alien, you must report all interest, dividends, wages, or other compensation for services, income from rental property or royalties, and other types of income on your U.S. tax return. You must report these amounts whether from sources within or outside the United States. Nonresident Aliens A nonresident alien usually is subject to U.S. income tax only on U.S. source income. Under limited circumstances, certain foreign source income is subject to U.S. tax. Dual-Status Aliens You are a dual status alien when you have been both a resident alien and a nonresident alien in the same tax year. Source of Income A nonresident alien (NRA) usually is subject to U.S. income tax only on U.S. source income. Income Types In general, all income of a nonresident alien is Fixed, Determinable, Annual, Periodical (FDAP) income. However, certain kinds of FDAP income are considered to be effectively connected with a U.S. trade or business. These two types of income are taxed in different ways. Reporting your Income in U.S. Currency You must express the amounts you report on your U.S. tax return in U.S. dollars. If you receive all or part of your income, or pay some or all of your expenses in foreign currency, you must translate the foreign currency into U.S. dollars. Tax Withholding on Foreign Persons Payments of income to foreign persons are subject to special withholding rules. In particular, foreign athletes and entertainers are subject to substantial withholding on their U.S. source gross income. This withholding can be reduced by entering into a Central Withholding Agreement with the Internal Revenue Service. Foreign Students and Scholars Special rules apply to the taxation of foreign students and scholars which do not apply to other kinds of aliens. Taxpayer Identification Numbers (TIN) Anyone (including aliens) who files a U.S. federal tax return must have a Taxpayer Identification Number (TIN). In addition, aliens who request tax treaty exemptions or other exemptions from withholding must also have a TIN. Tax Treaties The U.S. tax liability of aliens is determined primarily by the provisions of the U.S. Internal Revenue Code. However, the United States has entered into certain agreements known as tax treaties with several foreign countries which oftentimes override or modify the provisions of the Internal Revenue Code. U.S. Person cf. IRC 7701(a)(30) and Treas.Reg. 1.1441-1(c)(2) The term ‘United States person’ means: A citizen or resident of the United States, A partnership created or organized in the United States or under the law of the United States or of any State, A corporation created or organized in the United States or under the law of the United States or of any State, Any estate or trust other than a foreign estate or foreign trust. See Internal Revenue Code section 7701(a)(31) for the definition of a foreign estate and a foreign trust, or Any other person that is not a foreign person. Foreign Person cf. Treas.Reg. 1.1441-1(c)(2) The term “foreign person” means: A nonresident alien individual; A corporation created or organized in a foreign country or under the laws of a foreign country; A partnership created or organized in a foreign country or under the laws of a foreign country; A foreign trust; A foreign estate, or Any other person that is not a U.S. person. See Internal Revenue Code section 7701(a)(31) for the definition of a foreign estate and a foreign trust.