Foreign Tax Issues Chapter 13 pp. 445-476 2016 National Income Tax Workbook™

Foreign Tax Issues p. 445 Issue One: compliance w/reporting Issue Two: individual taxpayer ID number Issue Three: tax on nonresident aliens Issue Four: estate and gift tax Issue Five: Canadian tax returns Appendix One: foreign issue checklist Appending Two: financial institutions

Issue One: Compliance p. 446 with Reporting Streamlined filing compliance procedures Delinquent report of foreign bank accounts Delinquent international information returns Offshore Voluntary Disclosure Program

Reporting – Foreign p. 446 Account Tax Compliance Act Foreign Account Tax Compliance Act (FATCA) Report foreign financial assets File Form 8938 Foreign financial institutions must register and report

Foreign Bank Account p. 447 Report Foreign Bank Account Report (FBAR) Report foreign financial interests File electronic FinCEN 114 If aggregate value greater than 10K at any time during the tax year

Penalties p.447 FATCA - $10,000 penalty for failure to file (add’l penalty if fail to file within 90 days of notice) FBAR - $10,000 penalty per non-willful violation (higher penalty for willful violation)

Streamlined Filing pp. 448-449 Compliance Procedures (SFCP) If failure to report foreign financial assets and pay tax is non-willful: Streamlined procedure to file delinquent or amended returns Special terms for resolving tax and penalties

SFCP Requirements p. 448 Not under civil exam or criminal investigation Taxpayer is individual or estate Reside in US (domestic procedure) or outside US (foreign procedure)

SFCP Application p. 449 3 yrs complete/accurate returns Write “streamlined domestic offshore” Sign Form 14654 Submit tax, interest, and penalty (if applicable)

Non-Willfulness pp. 450-451 Negligence Inadvertence Mistake Good faith misunderstanding of law

Explanation of non- p. 451 Willfulness Reasons for past failure Source of foreign financial assets and accounts Explanation of contacts History of the account or asset Reliance on professional advice

Presumption p. 451 If evidence that tax practitioner asked about foreign financial assets and taxpayer denied: Presumption of willfulness Can’t use the SFCP

SFCP Penalties pp. 453-454 No failure-to-file, failure-to-pay, information reporting, accuracy-related or FBAR penalties 5% penalty for domestic No 5% penalty for foreign

Delinquent FBAR p. 454 Submission Use if: Have not filed required FBAR Not under exam or investigation IRS has not contacted re FBAR No penalty for failure to file if: Reported and paid all tax

Delinquent Internat’l p. 454 Information Return Use if: Have not file required internat’l information return Reasonable cause for not timely filing Not under exam or investigation IRS has not contacted re return File delinquent return with reasonable cause statement – for each return

Offshore Voluntary p. 455 Disclosure Program For taxpayers with: Potential criminal liability High civil liability due to willful failure Benefits: Protects from criminal liability Terms to resolve tax and penalties

OVDP FAQs pp. 455-457 Eligibility for transitional treatment Effect of transitional treatment Process to apply Evaluation of application See “OVDP Frequently Asked Questions and Answers 2014” at www.irs.gov

Individual Taxpayer ID p. 458 Number (ITIN) 9-digit number for tax processing Only for foreign persons who are not eligible for a SSN

Obtaining an ITIN p. 458 Form W-7 Documentation of foreign status and identity Supporting documentation US tax return or documentation to show reason for ITIN

Documentation p. 458 Submit original documentation of foreign status and identity or: Certified by issuing agency Certified acceptance agent New rules for dependents

Expiring ITIN pp. 459-461 ITINs expire if: 3rd consecutive year of nonuse Issued before 2013 Use 9/2016 Form W-7 to renew

Tax of Nonresident p. 461 Aliens Nonresident alien: Not a US citizen or national Not met green card test Not met substantial presence test

Nonresident Income p. 461 Tax Returns May have to file US return if: Engaged in trade or business in US US source income Representative or agent Fiduciary for foreign estate/trust Fiduciary or other person with care of person or property of nonresident

Income to Report p. 462 Effectively connected with US trade or business (EFI) US source income that is fixed, determinable, annual, or periodic (FDAP)

Form 1040NR p. 462 File Form 1040NR April 15 or June 15 deadline Form 4868 to request extension Must file to claim deductions or credits

Foreign Investment in p. 463 Real Property Tax Act (FIRPTA) Withholding on the sale of US real property by non-us taxpayer Typically withhold 10% or 15% of gross sale proceeds Includes certain entity dispositions Primary obligation on the buyer

FIRPTA Exceptions p. 464 Common exceptions: $300K or less and buyer uses as residence Non-recognition provision applies (must file notice) $0 realized on the sale

Withholding Certificate pp. 464-465 Apply for certificate to reduce or eliminate withholding Commonly based on calculation of max tax liability File Form 8288-B

Reporting and Paying p. 465 Withhold and remit to IRS by 20th day after day of transfer File Forms 8288 and 8288-A Transferor receives file-stamped 8288-A from IRS File with US tax return

Estate and Gift Tax p. 466 $5,450,000 estate/gift exemption for US citizens and residents $60,000 estate exemption for nonresident aliens Special treaty rules apply

Gift Tax for Nonresident p. 466 Alien Tax on transfers of real and tangible property in the US Includes: US real property Tangible property in the US Currency or cash held in the US

Exclusions/Deductions p. 466 Annual exclusion $14,000 $148,000 for gift to noncitizen spouse No gift splitting

Estate Tax pp. 466-467 Deductions Unlimited marital deduction for property passing to US spouse Unlimited marital deduction for property passing to resident (non-US citizen) spouse if transfer to qualified domestic trust (QDOT)

Estate Tax pp. 466-467 Exemptions $60,000 estate tax exemption US Canada Income Tax Treaty Canadians receive a fraction of the US estate tax exemption E.g. 1/3 of Canadian’s worldwide assets are US assets, receive 1/3 exemption

Canadian Tax Returns p. 467 Client may have to file in Canada if: Canada employment income Business in Canada Disposition of Canadian property Exercised Canadian stock option Canadian grant, scholarship, or prize Canadian resident Recaptured capital cost allowance Income interest in Can. trust or insurance

Passive Income p. 468 Generally no tax filing for: Interest Dividends Rent Pensions and annuities Withholding requirements may apply

Canadian Rentals pp. 468-469 Section 216 election to report net tax on rental income at graduated rates File by June 30 of year after rental income paid or credited Form NR6 to avoid withholding

Canadian Real pp. 469-470 Estate Sales Notify CRA Request clearance certificate If no certificate received before sale, withholding required Canadian tax return for year of disposal

Canadian Pensions pp. 470-471 Canada Old Age Security System, Canada Pension Plan, or Quebec Pension Plan Treat the same as US social security payments Combine with US social security

Canada Estates p. 471 and Gifts Deemed disposition regime Deemed disposal at FMV on date of death Deemed disposition when donor makes gift Exceptions for transfer to spouse

US Resident pp.471-472 Decedent Disposition of Canadian real estate by nonresident Sale rules apply Registered retirement accounts deemed liquidated

Appendix One Questions to ask every client: Lived in foreign country? Worked in foreign country? Real estate in foreign country? Interest in foreign companies? Beneficiary of foreign trust/estate? Gift from foreign source? Foreign investments, bank accounts, pension, life insurance, or powers of attorney?

Appendix One pp. 472-474 Continued If answer to any initial question is “yes” may have to ask supplemental questions Verify answers on an annual basis

Appendix Two pp. 474-476 Foreign Financial Institutions Under investigation or cooperating with gov’t investigation If taxpayer has accounts with any of these institutions likely will not qualify for streamlined filing compliance procedures

Questions?