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

2. 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

3. 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

4. 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

5. 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

6. 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)

7. 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

8. 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)

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

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

11. 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

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

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

14. 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

15. 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

16. 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

17. 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

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

19. 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

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

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

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

23. 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

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

25. 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

26. 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

27. 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

28. 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

29. 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

30. 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

31. 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

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

33. 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)

34. 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

35. 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

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

37. Canadian Rentals pp
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

38. 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

39. Canadian Pensions pp
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

40. 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

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

42. 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?

43. 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

44. 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

45. Questions?