Archive for the ‘International’ Category

Bozo Tax Tip #3: Only Income Earned Outside the US Is Taxable

Wednesday, April 10th, 2019

A few days ago I was explaining to a client the basics of the US Tax Code: All income is taxable unless Congress exempts it; nothing is deducible unless Congress allows it. That’s the basics.

My office is in Las Vegas, Nevada. I’m a US citizen. So I owe US income tax on my earnings, right? Of course I do. But where few willingly go the Bozo contingent jumps in. Here’s a method of avoiding tax on all your income. It’s been used by celebrities such as Wesley Snipes. So let’s use Section 861 of the Tax Code to avoid tax!

Section 861 states that certain items are always considered as income from within the United States. It does not say that income earned in the US is exempt from tax. But tax protesters claim that’s the case; courts, though, basically state, ‘You must be kidding.’ This argument has never been used successfully. In an audit or in court, if you use the Section 861 argument you have no chance of success.

The US taxes its citizens on their worldwide income. That includes the United States. Indeed, if that weren’t the case I’d be out of a job. Mr. Snipes received three years at ClubFed. In the long-run it’s far, far easier to simply pay your tax.

Bozo Tax Tip #6: They Shoot Jaywalkers, Don’t They? (Or Ignoring the FBAR)

Friday, April 5th, 2019

I have, unfortunately, become quite competent in the Report of Foreign Bank and Financial Accounts. That form is better known as the FBAR. It used to have the form number TD F 90-22.1 (yes, it really did) but now goes by Form 114. The form must be filed online through the bsaefiling center of FINCEN, the Financial Crimes Enforcement Network.

You must file an FBAR if you have $10,000 aggregate at any time during the year. The report for 2018 is due April 15, 2019. Do note that there is an automatic extension until October 15, 2019.

The form is fairly simple and straightforward: Note every foreign financial account you have with name, address, account number, and maximum balance at any time during the past year. Let’s say you have one foreign account, a bank account at the Royal Bank of Canada. You would take your maximum balance and convert it to US dollars from Canadian dollars (you should use the year-end Treasury Department conversion rates no matter when the high balance was). The form must be electronically filed and is filed separately from your tax return.

The penalties for not filing it are quite high. Willful non-filing has a minimum penalty of $100,000 or half the balance in the account–and that’s per account! There’s also possible jail time.

So what must be reported:
– Foreign Bank accounts;
– Bank accounts outside the US of a US financial institution;
– Foreign financial accounts where all you have is signature authority;
– Foreign securities accounts;
– Foreign mutual funds;
– Foreign life insurance with a cash or annuity value; and
– Online gambling accounts if outside the US.

There are probably others, too.

The IRS does have a chart that lists most things that need reporting on the FBAR and Form 8938. Form 8938 is the “cousin” of the FBAR; this form needs to be filed if you have larger balances in foreign accounts.

Millions of FBARs are filed each year. When I started in tax, filing an FBAR was a huge audit red flag; that’s no longer the case. There are just too many FBARs filed. Do note that if you have an FBAR filing requirement you must note that in question 7 at the bottom of Schedule B.

To end this with some humor, one of my pet peeves in dealing with taxes is that there are three different sets of abbreviations for foreign counties used in tax. The FBAR has one set; question 7 at the bottom of Schedule B has another set, and Form 8938 has a third set. Some countries are noted identically while others are not. On one of of the abbreviations Curacao is “CU” while that means Cuba in another.

In any case, the FBAR is no laughing matter. The IRS’s mantra here is to shoot jaywalkers. Don’t become such a person: If you have an FBAR filing requirement, file it! Again, the FBAR is due April 15th (but with an automatic extension until October 15th).

Bozo Tax Tip #8: The Shell

Wednesday, April 3rd, 2019

I was talking with a friend who is an attorney in the Midwest. She told me about an individual who decided to use ten layers of shell companies to hide his income. It worked so well that the Bozo had trouble accessing his income.

He was using the usual foreign shelter countries: the Cayman Islands (in the Caribbean), the Channel Islands (in the English Channel), the Isle of Man (in the Irish Sea), and Vanuatu (in the South Pacific). There was a land-based country in there, too: Panama. In any case, somehow the ownership got so messed up that one of the shells refused to deal with another.

My friend didn’t get involved to get the money situation resolved. No, she got involved because her client ended up going through a messy divorce, and her client’s now ex-wife happen to find one of the papers dealing with one of the shells companies. My friend’s a divorce attorney, and a good one, and she was able, with some help, find a lot of the hidden money. The judge was not as amused as I was hearing about the difficulties the man was having getting his money out. And neither was the IRS because he had “forgotten” to pay tax on a lot of income.


There are lots of good strategies for businesses to use to lower their taxes. Income balancing to C corporations can be a good strategy. Maximizing Section 179 depreciation is another. Retirement Accounts are another good strategy. There are many, many others. But hiding income in foreign jurisdictions is a very bad one, and if you get caught you are likely looking at a lengthy term at ClubFed.

A Dutch Lament: Where oh Where Is PokerStars Located?

Wednesday, January 9th, 2019

In a few weeks I’ll be publishing my list of where online gambling sites are located. A question that arose in the Netherlands is in regards to the location of PokerStars, the largest online poker site. An excerpt from my 2018 list shows:

PokerStars
Rational Entertainment Enterprises Limited dba PokerStars
Douglas Bay Complex, King Edward Rd
Onchan, IM3 1DZ Isle of Man

PokerStars.eu
Rational Gaming Europe Ltd dba PokerStars.eu
Villa Seminia, 8, Sir Temi Zammit Ave
Ta’Xbiex, XBX1011, Malta

Why is this a big deal? Taxes.

PokerStars.com is based on the Isle of Man. The Isle of Man is a self-governing British Crown Dependency. It is not part of the European Union. The Isle of Man is located in the Irish Sea. Malta is another island; it’s located near Sicily in the Mediterranean Sea. Malta is a member of the European Union. PokerStars.eu is based in Malta. This matters for taxes in the Netherlands. If you’re a resident of the Netherlands and you play on PokerStars.com, you owe 29% tax on your winnings; however, if you play on PokerStars.eu, you don’t. Needless to say, Dutch residents play on PokerStars.eu.

Except the Dutch Tax Office disagreed. They held that since PokerStars.eu is owned by the Rational Group (the parent of PokerStars), and the Rational Group is based on the Isle of Man, that playing on PokerStars.eu is still playing on a site outside the European Union and 29% tax is owed. A District Court agreed with the Dutch Tax Office. That decision was then appealed to the Court of Appeals in ‘s-Hertogenbosch.

That court reversed the ruling (link is in Dutch). The ruling, as best as I can determine, states that the place of establishment of the holder of internet poker (here, Malta) is decisive for the classification as domestic or foreign game of chance and, thus, taxation of play on PokerStars.eu violates the Treaty Establishing the European Union. The decision can be appealed to the Supreme Court of the Netherlands but for now, playing on PokerStars.eu is tax-free.

News Story (in English): Dutchnews.nl

Can a Professional Gambler Take the Foreign Earned Income Exclusion?

Saturday, September 15th, 2018

I was asked that question this past week: Can a professional gambler take the Foreign Earned Income Exclusion? The Exclusion allows one to exclude about $100,000 of income from income tax.

The IRS website (which is quite good) has a page on the general rules for the Exclusion. The IRS notes,

Self-employment income: A qualifying individual may claim the foreign earned income exclusion on foreign earned self-employment income. The excluded amount will reduce the individual’s regular income tax, but will not reduce the individual’s self-employment tax. Also, the foreign housing deduction – instead of a foreign housing exclusion – may be claimed.

A professional gambler (unlike an amateur) will have self-employment income. A professional gambler files a Schedule C, and that qualifies as “earned income.” As the name implies, you must have earned income to take the Foreign Earned Income Exclusion.

But there are other requirements. Your “Tax Home” must be in a foreign country. Your Tax Home is where your main place of business, but there are other rules that influence the location of your Tax Home. One thing, though, is certain: If your Tax Home is in the United States you won’t qualify for the Exclusion.

Let’s assume your Tax Home is abroad. You also need to meet one of two other tests: The bona fide resident text or the physical presence test. A bona fide resident is an individual who, in the view of US tax law, resides in another country. Generally, you must be a citizen or official resident of another country (more than just being present in another country via a “tourist visa”). Additionally, you must be a bona fide resident for an entire calendar year to qualify under this test. If you’re residing in, say, the United Kingdom for the entire year and have a work permit for the U.K., you’re likely a bona fide resident of the United Kingdom.

The physical presence test is simpler. You must be outside of the United States for at least 330 days out of a 365-consective day period that includes part of the tax year involved. (If the 365-day period is split among two calendar years, the maximum exclusion is pro-rated based on the number of days in the tax year that fall in the 365-consecutive day period.) There are some other rules about this test: A day in (or above) international waters is considered a day in the United States; if you change planes in the United States (say you’re flying from Toronto to Mexico City), that does not count as a day in the United States; and any portion of a day in the United States (other than transit between foreign points) is considered a full day in the United States.

Finally, the Exclusion only covers foreign earned income. Let’s say a professional gambler qualifies for the Exclusion, earning $80,000 outside the United States. But he spent a week in the United States, and earned $20,000 while in the U.S. That $20,000 isn’t eligible for the Exclusion.

So let’s circle back to the original question: Can a professional gambler take the Foreign Earned Income Exclusion? Assuming he (a) is a professional gambler, (b) with foreign-source income, (c) has a Tax Home outside the United States, and (d) qualifies by either the bona fide resident or physical presence tests, he can take the Exclusion. Do note that while the Exclusion impacts income tax, it does not impact self-employment tax.

The FBAR Is *Not* Due Tomorrow

Thursday, June 28th, 2018

Most tax-related deadlines are on the 15th of various months. Income tax returns for individuals are due on April 15th; the extended deadline is October 15th. But just to have fun with us there are some exceptions. One of these used to be the FBAR—the Report of Foreign Bank and Financial Accounts (Form 114).

The FBAR used to be due on June 30th, and that was a receipt deadline. Almost every other deadline in tax is a postmark deadline; for example, if you mail your tax return on April 15th and it takes a month to get to the IRS it’s still considered timely filed. That wasn’t the case for the FBAR. Luckily, Congress changed the law.

Beginning with 2016 FBARs (those filed last year) the deadline was changed to be concurrent with the tax deadline (April 15th). There’s an automatic six-month extension until October 15th. A few years ago the FBAR changed and now must be electronically filed. It now also does not have to be accepted by the deadline to be considered timely; it only has to be filed by the deadline.

Every year I get asked by a few clients, “Russ, why haven’t you reminded me about the FBAR deadline at month-end?” I’m happy to tell them that’s simply no longer the case.

IRS Offers Penalty and Filing Relief on New Transaction Tax on Foreign Earnings

Monday, June 4th, 2018

Individuals who own foreign entities typically have complex returns. I prepare returns for three such individuals; they’re all on extension. Yet one item needed to be prepared for these individuals by April 18th: the new Section 965 transition tax.

One of the key issues with the §965 tax is that you needed to make an election by April 18th to elect to make your payment in eight equal installments. If you didn’t make the election, you owed all the tax with your 2017 tax filing–ouch! This was a difficult deadline for many individuals due to the complexity of their returns.

Luckily, the IRS today announced penalty and filing relief on the §965 tax. As the IRS noted,

• In some instances, the IRS will waive the estimated tax penalty for taxpayers subject to the transition tax who improperly attempted to apply a 2017 calculated overpayment to their 2018 estimated tax, as long as they make all required estimated tax payments by June 15, 2018.

• For individual taxpayers who missed the April 18, 2018, deadline for making the first of the eight annual installment payments, the IRS will waive the late-payment penalty if the installment is paid in full by April 15, 2019. Absent this relief, a taxpayer’s remaining installments over the eight-year period would have become due immediately. This relief is only available if the individual’s total transition tax liability is less than $1 million. Interest will still be due. Later deadlines apply to certain individuals who live and work outside the U.S.

• Individuals who have already filed a 2017 return without electing to pay the transition tax in eight annual installments can still make the election by filing a 2017 Form 1040X with the IRS. The amended Form 1040 generally must be filed by Oct. 15, 2018. See the FAQs for details. For more information about the transition tax and other tax reform provisions, visit IRS.gov/taxreform.

The FAQs noting this are available on the IRS website.

Do note this is not complete relief. Many taxpayers impacted by this will owe interest from April 15th; you also have to owe less than $1 million in transition tax. But it does allow many taxpayers to proceed in an orderly manner in determining what tax they will owe on Section 965 rather than rushing to meet a deadline. (Individuals outside of the US have until next Friday to timely file their returns. They can now file extensions and still, in many cases, elect the installment treatment for this tax.)

Bozo Tax Tip #3: Use a Foreign Trust to Avoid Taxes!

Wednesday, April 11th, 2018

By far the worst tax schemes in the view of the IRS are offshore (foreign) trusts. In fact, trusts of all sorts—domestic and foreign—are regularly abused.

First, not all trusts are bad. Many trusts serve a legitimate purpose, such as family trusts. (Family trusts are a device to avoid probate, and are used in many states. For tax purposes, these revocable trusts are ignored.) Survivors’ trusts are another useful vehicle. Grantor trusts, another asset protection vehicle, are useful. Special Needs Trusts are extremely useful. There are plenty of ‘good’ trusts.

But trusts set up to avoid income tax are abusive, and very much Bozo-like. Individuals and businesses have spent thousands of dollars trying to avoid taxes (in some cases, mid five-figure amounts)…and many times these tax structures have been challenged successfully by the IRS.

And those are the domestic trusts.

The foreign trusts are worse. These are usually organized just to avoid taxes and hide money. If you look at Schedule B on your tax return you’ll see that you are supposed to report your foreign trusts. They work great until the IRS finds out about them. Yes, you have to report moving money into them.

But I’m smarter than the IRS, and they’ll never catch my trust set up in Luxembourg, Liechtenstein, or the Isle of Man. Well, you will spend thousands to set up your trust, and if the IRS does catch on–and in these days where governments are exchanging tax information, this can (and does) happen–your foreign trust will have served only one purpose: It will have enriched the promoters who set it up.

Remember: If it sounds too good to be true it probably is. A trust set up to evade taxes is just that.

Bozo Tax Tip #7: Only Income Earned Outside the US Is Taxable

Thursday, April 5th, 2018

A few days ago I was explaining to a client the basics of the US Tax Code: All income is taxable unless Congress exempts it; nothing is deducible unless Congress allows it. That’s the basics.

My office is in Las Vegas, Nevada. I’m a US citizen. So I owe US income tax on my earnings, right? Of course I do. But where few willingly go the Bozo contingent jumps in. Here’s a method of avoiding tax on all your income. It’s been used by celebrities such as Wesley Snipes. So let’s use Section 861 of the Tax Code to avoid tax!

Section 861 states that certain items are always considered as income from within the United States. It does not say that income earned in the US is exempt from tax. But tax protesters claim that’s the case; courts, though, basically state, ‘You must be kidding.’ This argument has never been used successfully. In an audit or in court, if you use the Section 861 argument you have no chance of success.

The US taxes its citizens on their worldwide income. That includes the United States. Indeed, if that weren’t the case I’d be out of a job. Mr. Snipes received three years at ClubFed. In the long-run it’s far, far easier to simply pay your tax.

Israel Tax Authority Targets Poker Professionals

Wednesday, November 1st, 2017

Some unknown bureaucrat working at the Israel Tax Authority was likely reading something about poker or perhaps watching the World Series of Poker on television when he asked himself, “I wonder if Israeli poker players are paying their income taxes?” He likely looked at poker websites such as Hendon Mob and did a search on ‘Israel.’ He discovered that there were Israeli poker professionals and even an Israel Poker Tour (held in Cyprus).

As an article in Globes notes, the Tax Authority wants its share. The current disputes include:

– Taxing poker as a business (at a rate of up to 50%) rather than as gambling (at 35%);
– Allowing business expenses, such as travel and tournament fees; and
– Allowing poker losses and ‘staking losses’ (where a player wins money but must give it to others) as an offset to income.

It appears that the Tax Authority has won that poker income will be taxed as a business, but has not allowed all business expenses and what I’m calling staking losses. Disputes are finding their way into Israel’s court system; it will likely be months to years before there’s a resolution of the issues.

That said, one thing is clear: With the Internet and publicity, it’s getting harder and harder to hide the fact that you’ve earned income. Sharon Fishman, the manager of criminal taxation department of Doron, Tikotzky, Kantor Gutman and Amit Gross law firm, is quoted in the Globes article:

An administrative decision was recently taken there to zero in on this segment of professional poker players. This is due mainly the accessibility of the information about them on the Internet, because there are now international websites that report who won international tournaments, who plays on the Internet, and who is traveling to overseas tournaments. They publish the names of the winners, where they come from, and how much money they earned, so the tax authorities suddenly have abundant evidence, and you can’t tell them that you weren’t there and didn’t win.