Archive for 'Legislation'

FATCA chases money away

Thanks Randall for the email.

http://mobile.bloomberg.com/news/2012-05-08/u-s-millionaires-told-go-away-as-tax-evasion-rule-looms.html

Congress imagines itself to be the Borg. Resistance is futile. Submit and be assimilated.

In fact America is declaring itself irrelevant. And the rest of the world agrees. Add to this the way it is being done — in a schoolyard bully style — and is it any wonder that we are entering the American Pariah Era?

Nonresidents’ U.S. bank interest earned to be reported to IRS

The IRS came out with their Regulations which tell banks that they must report interest earned by nonresidents.  Up to now, this was not done.  If a nonresident opened a bank account in the United States, the interest earned was not reported to the U.S. government.

The bank interest itself is not taxable in the United States.  These new Regulations do not change that.  These new Regulations merely force the bank to tell the U.S. government how much interest was earned, and the identity of the nonresident bank account holder.

Why?

The IRS is trying to force every foreign bank in the world to report the accounts of U.S. persons.  It wants information from other countries shared with the IRS.  In that way, the IRS believes it can reduce tax evasion by U.S. persons.

If the IRS wants banks in Mexico to share information with the United States, it is reasonable that Mexico would ask for information about Mexicans with U.S. bank accounts.  Oh, wait.  

Up to now, the U.S. government has not had any information to share.  If the IRS wants to play the game of “Let’s share information on each other’s taxpayers!” then the IRS needs stuff to share.  These Regulations make that happen.

Logic Box

This move by the IRS makes complete sense, within the government’s tiny logic box.  The IRS Commissioner would be laughed out of the Diplomat Club as a hypocrite if information sharing was a one-way affair.  The U.S. government has not been shy about strong-arming other countries into changing their laws to serve the purposes of the United States.  This cannot go on forever.  The U.S. has to make a pretense at being even-handed.

The Regulations will stand.  Diplomats will junket amongst themselves happily and solemnly.  Treaties and Agreements will be signed.  Press releases will be released.  Everyone will be happy.  Within the logic box.

Outside the box

For those living outside the logic box, we know of the concept of “perverse incentives” and “unintended consequences.”  We understand that humans are not static.  New situations trigger new behavior.

The movement of capital out of U.S. banks to other countries is an obvious one.  (What are the effects to the U.S. economy?)  This has been resoundingly and repeatedly rejected by the IRS.  We now get to watch and see whose prediction is right.

The IRS will acquire a lot of information about interest earned by nonresidents.  Will this information be valuable?  Will it be useful in acquiring the reciprocal information that the U.S. government hopes to get?  Or will other governments find ways to resist the coquettish “come hither” blandishments of the U.S.?  My guess is that the government will get rather less use out of the information than expected.  This is a hypothesis that unfortunately cannot be tested rigorously because the data (if it is collected) will be inside the belly of the beast, and not available to impartial outsiders.

The IRS probably expects this to be an incentive that drives future voluntary income reporting by U.S. taxpayers with bank accounts abroad.  Maybe.  Again, the data to prove/disprove this hypothesis will lie deep inside the government, immune to truth serum.  Equally plausible is that this will continue to accelerate expatriations (we get calls daily for this).

Comment

The U.S. government launched itself on an aggressive course of rooting out and punishing U.S. tax evaders.  The hallmark of this quest was continued pressure to get information from other countries.  Once launched, the course of action must continue to its logical conclusion despite the best efforts of many to point out its flaws.

FATCA bomb

Form 8938 can apply to nonresident aliens

Overview

Even if you are a noncitizen of the United States, you may be required to report your worldwide financial assets to the Internal Revenue Service on Form 8938.

If you spend too many days in the United States, you become a resident for income tax purposes.  You must pay U.S. income tax on your worldwide income.  This is the so-called “substantial presence test.”

For people who live in countries which have an income tax treaty with the United States, there is a simple solution.  You can make an election (using the treaty) to be treated as a tax resident of your home country and a tax nonresident of the United States.

You may think you have escaped the grasp of the U.S. government by doing this.  You are wrong.  You are still subject to the filing requirement for Form 8938.  If your financial assets exceed certain (complicated) thresholds, you must tell the U.S. government about all of your financial assets outside the United States.

Who should be worried

The person who should be worried about this (this is the “you” I am speaking to) is someone who:

  • – Is not a citizen of the United States;
  • – Spends too many days in the United States, thus qualifying to be a resident for tax purposes;
  • – Does something to require the filing of a U.S. income tax return; and
  • – Has enough assets outside the United States to satisfy the financial threshold filing requirements of Form 8938.

What is Form 8938?

Form 8938 is a new disclosure document that most people are seeing apply to their 2011 income tax returns.  It largely duplicates the FBAR (Form TD F 90-22.1) with some startling exceptions.  Here I show you one of these startling exceptions.

The disclosure requirements that are embodied in Form 8938 are found in Internal Revenue Code Section 6038D and the Temporary Regulations issued in late December, 2011.  See Treasury Decision 9567 (December 14, 2011).

Everyone on the planet must file Form 8938 . . .

The law is written so that everyone on the planet is a potential filer of Form 8938:

Any individual who, during any taxable year, holds any interest in a specified foreign financial asset shall attach to such person’s return of tax imposed by subtitle A [26 USCS §§ 1 et seq.] for such taxable year the information described in subsection (c) with respect to each such asset if the aggregate value of all such assets exceeds $50,000 (or such higher dollar amount as the Secretary may prescribe).

See Internal Revenue Code Section 6038D(a).

. . . but some exceptions apply (nonresidents are exempt)

This is self-evidently silly.  Therefore, the law includes a command to the Secretary of the Treasury to write regulations in order to make the law workable:

The Secretary shall prescribe such regulations or other guidance as may be necessary or appropriate to carry out the purposes of this section, including regulations or other guidance which provide appropriate exceptions from the application of this section in the case of–

    (1) classes of assets identified by the Secretary, including any assets with respect to which the Secretary determines that disclosure under this section would be duplicative of other disclosures,

    (2) nonresident aliens, and

    (3) bona fide residents of any possession of the United States.

See Internal Revenue Code Section 6038D(h).

. . . and no Form 8938 if you don’t file a tax return

There is another exclusion from the filing requirements:  if you are not required to file a U.S. income tax return, then you are not required to file Form 8938:

A specified person, including a specified individual who is a bona fide resident of a U.S. possession, is not required to file Form 8938 with respect to a taxable year if the specified person is not required to file an annual return with the Internal Revenue Service with respect to such taxable year.

See Temporary Regulations Section 1.6038D-2T(a)(7)(i).

Therefore, if you have to file a U.S. income tax return, you are subjected to the Form 8938 filing requirements.  This might trip you up in one of two ways:

  • – You file a U.S. income tax return in order to claim status as a nonresident of the United States for income tax purposes, under the provisions of an income tax treaty (using Form 8833); or
  • – You have some U.S. source income that requires you to file an income tax return, such as the sale of U.S. real property.

Temporary Regulations require a “specified person” to file Form 8938

The Temporary Regulations say that a “specified person” must file Form 8938:

Except as otherwise provided, a specified person that has any interest in a specified foreign financial asset during the taxable year must attach Form 8938, “Statement of Specified Foreign Financial Assets,” to that specified person’s annual return for the taxable year to report the information required by section 6038D and section 1.6038D-4T if the aggregate value of all such assets exceeds [certain thresholds].

See Temporary Regulations Section 1.6038D-2T(a)(1).

A “specified person” who has enough in “specified foreign financial assets” must file Form 8938.  We assume that this applies to you.  So are you a “specified person”?

A “specified person” includes a “specified individual”

A “specified person” means someone who is a “specified individual” or a “specified domestic entity.”7  Since a human being is not an entity, you must be an individual.  But are you a “specified” individual?

“Specified individual” includes resident aliens

A “specified individual” is someone who is a a resident alien of the United States for any part of the tax year [see Temporary Regulations Section 1.6038D-1T(a)(2)(ii)], or a nonresident alien who makes a tax election to be treated as a resident of the United States for tax purposes see Temporary Regulations Section 1.6038D-1T(a)(2)(iii)].  Let’s ignore the idea of making the tax election [see Internal Revenue Code Section 6013(g)] to be treated as a resident of the United States.  (There are other definitions that apply to U.S. citizens and residents of U.S. possessions.  Let’s ignore those, too).

Are you a “resident alien” of the United States for any portion of calendar year 2011?  If you are, then you must file Form 8938 if you meet the financial thresholds for filing and you are required to file a U.S. income tax return.

“Resident alien” carries the normal meaning

“Resident alien” is a term of art defined in the Internal Revenue Code and Treasury Regulations.

The term resident alien has the meaning set forth in section 7701(b) and section 301.7701(b)-1 through 301.7701(b)-9 of this chapter. See Temporary Regulations Section 1.6038D-1T(a)(3).

Let us now look at the normal definitions of “resident alien” to determine whether you are one.  Or not.  If you are not a “resident alien” then you are not required to file Form 8938.

People who spend too much time in the United States are resident aliens

One way to become a “resident alien” for income tax purposes is to spend too many days in the United States. [Internal Revenue Code Section 7701(b)(1)(A)(ii).] There is a bit of light mathematics required to figure out what “too many days” means. [See Internal Revenue Code Section 7701(b)(3).]  Briefly, do the following calculations:

  • – Take the number of days you were in the United States in 2011.  Write that down.
  • – Take the number of days you were in the United States in 2010.  Divide by three.  Keep the fraction, if you have a remainder.  Write that down, too.
  • – Take the number of days you were in the United States in 2009.  Divide by six.  Keep the fraction, if you have a remainder.  Write this number down, too.
  • – Add all three of those numbers together.  Is the sum equal to or greater than 183?  If so, you are a resident alien for U.S. income tax purposes.

Let’s assume the worst.  You are a resident alien for 2011 because you spent “too many days” in the United States.

You can stop being a resident alien by using an income tax treaty

The Treasury Regulations tell us what to do if someone is treated–for income taxation purposes–as a resident of the United States and a resident of another country.  If there is an income tax treaty between the two countries, you may elect to be treated as a resident of the other country, and a nonresident of the United States:

* * * If the alien individual determines that he or she is a resident of the foreign country for treaty purposes, and the alien individual claims a treaty benefit (as a nonresident of the United States) so as to reduce the individual’s United States income tax liability with respect to any item of income covered by an applicable tax convention during a taxable year in which the individual was considered a dual resident taxpayer, then that individual shall be treated as a nonresident alien of the United States for purposes of computing that individual’s United States income tax liability under the provisions of the Internal Revenue Code and the regulations thereunder . . . with respect to that portion of the taxable year the individual was considered a dual resident taxpayer.

See Treasury Regulations Section 301.7701(b)-7(a)(1).

The United States and Canada, for instance, have such a treaty, and the treaty contains the required “tie-breaker” language that you can use to be treated as a resident of Canada and nonresident of the United States. The language is at Article 4 of the treaty. In fact, you will find the tie-breaker language at Article 4 of almost every income tax treaty that the United States maintains with other countries.

There are some paperwork requirements to be satisfied if you want to be treated as a nonresident alien for income tax purposes in the United States.  You must file a nonresident income tax return (Form 1040NR) and attach a statement to it:

An alien individual described in paragraph (a) of this section who determines his or her U.S. tax liability as if he or she were a nonresident alien shall make a return on Form 1040NR on or before the date prescribed by law (including extensions) for making an income tax return as a nonresident. The individual shall prepare a return and compute his or her tax liability as a nonresident alien. The individual shall attach a statement (in the form required in paragraph (c) of this section) to the Form 1040NR. The Form 1040NR and the attached statement, shall be filed with the Internal Revenue Service Center, Philadelphia, PA 19255. The filing of a Form 1040NR by an individual described in paragraph (a) of this section may affect the determination by the Immigration and Naturalization Service as to whether the individual qualifies to maintain a residency permit.

See Treasury Regulations Section 301.7701(b)-7(b).

The specific statement required is Form 8833:

The statement filed by an individual described in paragraph (a)(1) of this section, for a return relating to a taxable year for which the due date (without extensions) is after December 15, 1997, must be in the form of a fully completed Form 8833 (Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b)) or appropriate successor form. See section 6114 and Section 301.6114-1 for rules relating to other treaty-based return positions taken by the same taxpayer.

Treasury Regulations Section 301.7701(b)-7(c)(1).

You can use an income tax treaty to stop resident alien status

Therefore, you will be a nonresident alien for U.S. income tax purposes if you:

  1. – file a timely Form 1040NR income tax return for 2011, and
  2. – attach Form 8833 to claim treaty-based treatment as a nonresident alien for U.S. income tax purposes.

Let’s say that you do both of these things.  As far as the definition of “nonresident alien” is concerned, Treasury Regulations Section 301.7701(b)-7 makes you a “nonresident alien” in the eyes of the United States for income tax purposes.

Nonresident for calculating income tax but resident for everything else

Becoming a nonresident alien by using the income tax treaty does not make you a nonresident alien for all purposes of U.S. tax compliance.  Making the election under an income tax treaty makes you a nonresident alien for the purpose of computing your U.S. income tax liability.  But all other provisions of U.S. tax law will continue to apply to you as if you are a U.S. resident:

Generally, for purposes of the Internal Revenue Code other than the computation of the individual’s United States income tax liability, the individual shall be treated as a United States resident. Therefore, for example, the individual shall be treated as a United States resident for purposes of determining whether a foreign corporation is a controlled foreign corporation under section 957 or whether a foreign corporation is a foreign personal holding company under section 552. In addition, the application of paragraph (a)(2) of this section does not affect the determination of the individual’s residency time periods under section 301.7701(b)-4.

Treasury Regulations Section 301.7701(b)-7(a)(3).

This means that your income tax obligations in the United States would be computed using the rules applicable to nonresidents.  However, your U.S. legal obligations in the tax realm (including the obligation to declare foreign bank accounts on Form 8938) would remain intact, because this is a “[purpose] of the Internal Revenue Code other than the computation of [your] United States income tax liability.”

Nonresident alien for income tax, resident alien for Form 8938

The Form 8938 filing requirement remains intact, and you will have to complete Form 8938.  The introductory text to the Temporary Regulations tells us that the little legal analysis above is correct:

For section 6038D purposes, a specified individual is a U.S. citizen, a resident alien of the United States (as determined under section 7701(b) and section 301.7701(b)-1 through 301.7701(b)-9 of this chapter), or a nonresident alien who has elected under section 6013(g) or (h) to be taxed as a U.S. resident. A resident alien who elects to be taxed as a resident of a foreign country pursuant to a U.S. income tax treaty’s residency tie-breaker rules is a specified individual for purposes of section 6038D and the regulations.

Emphasis added. See Treasury Decision 9567 (December 14, 2011), Explanation of Provisions, Section 1(A).

At least it is internally consistent logic within the alternate universe that is the Internal Revenue Code. But I foresee a great number of people who will screw this up mightily.

FBARs and Delays in Detroit

I know I promised that I wouldn’t blog about FBARs anymore.  (This stuff chews up too many Life Credit Units, as Just Me calls them.)  But I wanted to share something with all of you that may help you make decisions.

From a correspondent by email today:

Just a quick update.  I called the FBAR 1-800 number to check if my delinquent FBARs for 2005-2009 that I sent in October had been received.  The lady informed me that they are not in the system as they have probably not yet been processed.  She said they had millions of documents and they were still processing July.

This tells me that if you are a normal person with unfiled FBARs, now is the time to dump them into the system.  Your delinquent filings will be compared against the cohort of other filings entering into the system.  In your favor you have IRS overload and you have a very large bell curve distribution of taxpayers.

The hard decision is to guess how you look compared to the expected pool of filers.  Among those “millions of documents” what will yours look like?  You hope that the IRS behaves like Foghorn J. Leghorn.  The person who opens your envelope merely glances at your FBARs, and snaps “Go, I say, go away, boy.  Ya bother me.” (Sound file)

That decision is where you need to talk to someone smart and experienced.

Obligatory

This is not legal advice to you.  You’d be a damn fool to make important legal decisions with serious consequences just because you read a blog post by some yutz (that would be me) on the inter webs.  Especially a yutz who likes to watch cartoons with his kids.

Form 8938 – new disclosure form

Form 8938 is out in draft form.  I hear the The instructions were published today on the IRS website but I looked for them and didn’t find them. When I find them I will let you know. Draft Instructions to Form 8938 (PDF) are now available, too.

This form duplicates the information required on the FBAR form.

I was asked at lunch yesterday (by regular business people with whom I recently concluded a large real estate acquisition on behalf of a nonresident investor) whether the international tax laws change frequently.  I said no.  Congress doesn’t play around here too much.  But, I said, the enforcement attitude of the cop on the street (aka the IRS) changes frequently.  Over any considerable time, things get worse, never better.

It’s like the parking laws in your home town.  Periodically your local constabulary decides to religiously enforce the laws on expired parking meters.  They collect a bunch of fines.  Get gold stars in their crowns at the next City Council meeting for adding to the City’s revenues for the year.  Then the local merchants wonder why their patrons are not returning as frequently.

Between this new form, the FBAR, and the FATCA train a-comin’ my strategic advice is to lower your risk profile.

That is all.