Archive for the ‘International’ Category

IRS Releases New Forms W-8BEN and W-8ECI

Wednesday, March 19th, 2014

The IRS released a new version of Form W-8BEN. The new version should be used by an individual responding to a withholding request from the US. It’s commonly used to note tax treaty benefits.

There is a disclaimer on the form: “For use by individuals. Entities must use Form W-8BEN-E.” There’s only one problem with that: Form W-8BEN-E has not been released yet; it’s still in draft form. I suspect that until the Form W-8BEN-E is released, an entity can use the Form W-8BEN.

The IRS also released a new version of Form W-8ECI. This is the form used by individuals and businesses who are foreigners with a business in the US; that is, income that is effectively connected with the US. Individuals and entities completing this form are required to complete a US tax return.

People receiving either of these forms should make sure they receive the new forms (dated by the IRS as February 2014). The old forms should no longer be accepted.

FBAR Changes for 2014

Tuesday, January 7th, 2014

There have been some changes made by by FINCEN (the Financial Crimes Enforcement Network) for the Report of Foreign Bank and Financial Accounts (FBAR) for 2014. While overall these are minor, they will impact everyone who files an FBAR.

First, Form TD F 90-22.1 is no more. The FBAR has a new form number, Form 114.

Second, as of last July the FBAR must be electronically filed. The good news is that as of last October, your tax accountant can file the form for you as long as you complete Form 114a.

Third, as of January 1st, you don’t have to register to efile an FBAR. You can now just go the BSA efile website, follow the instructions and file the form. Do note that past experience is that the BSA efile website works well in Internet Explorer but might not work in Firefox or Chrome.

And most importantly, the definition of who must file has changed slightly. The new rule effective November 23, 2013, states:

United States persons are required to file an FBAR if:

The United States person had a financial interest in or signature authority over at least one financial account located outside of the United States; and
The aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year to be reported. [emphasis added]

It used to be that the rule was take the maximum value of each account, sum the maximums, and compare the sum to $10,000. Now, the rule (except for dollar amounts) matches that of FATCA (except for dollar amounts) in that it looks at your value in an account on one day.

Some things haven’t changed, though. The FBAR is due on June 30th and there are no extensions. If you have a foreign financial account you must check a box at the bottom of Schedule B even if you don’t need to file the FBAR. There’s a second box you must check if you need to file an FBAR, and you have to list the countries you have foreign accounts in (if you must file an FBAR) on your tax return. Thus, if you do need to file the FBAR, get your information together as your tax professional will need it in order to file your return.

It’s Nice to Know I’m Right, But…

Saturday, December 14th, 2013

I’ve written on a few occasions about my battles with the IRS over incorrectly assessed Failure to File and Failure to Pay penalties. (See here, here, and here.) As I noted in the last post linked to above, I submitted this to the IRS’s Systemic Advocacy Management System (SAMS). Well, progress has been made.

It turns out there’s not a systemic issue, but at least two of them (and almost certainly at least three). First, the regulation that exists does provide an automatic extension for taxpayers outside of the US on April 15th for any reason. Here’s that regulation again (it’s Treasury Regulation, 26 CFR § 1.6073-4 (c)):

(c) Residents outside the United States. In the case of a U.S. resident living or traveling outside the United States and Puerto Rico on the 15th day of the 4th month of a taxable year beginning after December 31, 1978, an extension of time for filing the declaration of estimated tax otherwise due on or before the 15th day of the 4th month of the taxable year is granted to and including the 15th day of the 6th month of the taxable year.

The woman I’ve been dealing with at SAMS confirmed that the plain language of the regulation does govern. It’s also noted in the Internal Revenue Manual (IRM), which is how the IRS is supposed to resolve penalties. But:

1. IRS publications are likely wrong. Publication 54 notes that an extension is available only if outside of the US on April 15th for business purposes and you have to reside outside of the US. The clear language of the regulation is different and governs, so publications are wrong. They’ll have to be rewritten, which won’t happen for 2013 publications (they’ve already been issued and have a July deadline).

2. IRS staff is not using the IRM to properly resolve the matter. Based on the experiences of my clients, these penalties should have been resolved at the service centers. The staff at the service centers may be using publications rather than the IRM to look up how the Tax Code works. (It’s also possible that the IRM needs to be rewritten in this area to note this situation.) There will be a need to determine why the penalties weren’t resolved at the service center; it’s possible that retraining some staff is required.

3. The IRS computer system likely needs to be reprogrammed to stop these penalties from being assessed in the first place. That’s almost certainly not going to happen before 2013 returns are processed, but the sooner the underlying problem(s) in the programming are discovered, the sooner they can be resolved.

Since SAMS now agrees that there is at least one systemic issue, the matter is being elevated and an analyst (and team) will be assigned to attempt to resolve this…hopefully before 2013 tax returns are filed. Unfortunately for my clients impacted by this for 2012 returns, each such case must be fought individually. While I am now fairly certain my clients will all win in the end, it’s still a pain in the neck.

There are two related matters. First, how many taxpayers were erroneously assessed these penalties and didn’t fight them? I noticed the systemic issue because I had multiple individuals impacted in multiple years. It’s likely there are hundreds or thousands of taxpayers who paid penalties that shouldn’t have. If you happen to be one of them (and the tax year in question is still open), I’d immediately write the IRS requesting a refund of the penalty(ies).

Second, I wish to praise the Taxpayer Advocate’s Office of Systemic Advocacy. They did not blindly assume that the IRS was right on these penalties, and did look fully at the evidence I brought up. While I would have liked SAMS to move somewhat faster, getting the acknowledgment of being correct in four months is probably quite fast in terms of the normal speed of the bureaucracy.

It’s All Greek to Me

Thursday, November 21st, 2013

In reading through the poker world today, news from Greece pushed to the forefront: The Greek government has implemented an up to 20% “Player Withholding Tax” on online gambling. It doesn’t sound like much, but like everything the devil is in the details.

Suppose you play online poker in Greece, and you win €1,000. The first €100 is not taxed. The next €400 are taxed at 15% and the remaining €500 at 20%. So you really win €840. Let’s further suppose you lose €1,000 the very next day. There is no tax, but you’re two break-even days net you a loss of the withheld tax, €140.

That’s doesn’t sound that bad. It’s withheld tax; I can recover it when I file my income tax return. No, you can’t. Although it’s called withholding it’s not the same as withholding in the US–this tax is lost (to the government) for good. Effectively, it’s like you’re playing in any of the bad states for US gamblers: You can’t deduct your losses.

Professional gamblers in Greece do have the availability of the moving truck. While the climate in the United Kingdom is anything but similar to Greece, the tax climate in the UK for professional gamblers is (at least for now) sunny with mild temperatures. Gambling, even for professionals, isn’t taxed in the UK.

The end result for this new tax in Greece is that it will bring in less money than projected. The big gamblers who would otherwise fill the Greek coffers will make economic decisions that benefit themselves but not the Greek government.

The FBAR Has Changed

Thursday, October 3rd, 2013

Tax professionals can now file FBARs (Form TD F 90-22.1) for clients. We have to have our client sign Form 114a authorizing the preparer to efile the FBAR. Today, when I went to file an FBAR for a client, I was greeted with a very colorful new FBAR. The form also has a new number: FINCEN Form 114.

The form has seven pages (groan). The data-entry portions are the same; however, there is now a pull-down menu on page 1 for the reason for late filing (where applicable):

Page 1 of New FBAR

Not shown on the pull-down menu is “Other Explanation.” You can then enter a lengthy explanation if need be.

There’s now also a place for tax professionals to enter their information when we file the form for clients; this is on page 7 of the form:

Page 7 of New FBAR

Unfortunately, many of the entry boxes uses pull-downs which don’t allow you to just type, say, “NV” for Nevada. Instead, you type an N (or an O) and then move the slider bar down or up to select Nevada. This is definitely annoying when you enter countries for foreign financial accounts.

FINCEN has said that they are working with the IRS and eventually we’ll be able to file FBARs through tax software. I’m likely going to take the over on anyone’s bets for when that will happen….

Thigh Injury the Least of Messi’s Problems

Sunday, September 29th, 2013

Football Soccer star Lionel Messi injured his thigh in yesterday’s game against Almeria (a game his team won, 2-0). Messi will miss two to three weeks with the injury.

Meanwhile, Lionel Messi and his father are accused of something more familiar to readers of this blog: cheating on their taxes. Messi is alleged to have created shell companies in Uruguay, Belize, Switzerland, and the United Kingdom to hide income (his image rights) from Spain and the Spanish income tax agency, Agencia Tributaria, from 2006 through 2009. The UK Telegraph reports that Messi and his father have made a five million euro “corrective payment.”

A judge will rule on whether to dismiss the charges or impose a fine. If found guilty, the maximum fine he could face is €24 Million (just over $31 million at today’s exchange rates) and potentially five years in prison.

Probable IRS Systemic Issue with Individuals Taking the Automatic Two-Month Extension

Thursday, August 22nd, 2013

If you read my previous post, you will see that I mailed in an Appeal today regarding a client who took the automatic two-month extension for being outside of the country on April 15th. To date, an extremely high percentage of my clients who were outside of the US on April 15th but who file with US addresses have been assessed the Failure to File penalty and/or the Failure to Pay penalty. In all cases the taxpayer either filed by June 17th or filed an extension with full payment by June 17th (and included the required statement with his return).

I would appreciate it if other tax professionals who have seen this issue correspond with me (or comment to this post). I have submitted this issue through the IRS’s Systemic Advocacy Management System (SAMS). I am also working with my practitioner liaison at the IRS in trying to resolve this issue. I have a large number of clients who file in this manner; many tax professionals will have just one such client. We’re trying to determine how big of an issue this is (we suspect it is impacting almost all such returns). Thus, the request for assistance from the tax professional community.

You can email me at rcfox [at] claytontax [dot] com.

The Law and Regulations vs. IRS Publications

Thursday, August 22nd, 2013

Let’s say that the Tax Code (which is law) said, “Every tax return must be signed in red ink.” If that were the case, we’d all be using red ink to sign returns. The Tax Code is law, passed by Congress; until a court overrules it (a court that has precedential authority) or Congress changes the Code, we must follow it. The Tax Code and court decisions are the highest form of guidance: They are akin to Thou shalt do this.

The next lower level of rules in tax are Treasury Regulations (the IRS is housed in the Department of the Treasury). Congress, when they write laws, usually states that The Secretary of the Treasury or his designate will develop regulations to implement [something]. Regulations have the force of law. Regulations are written and then published in the Federal Register. After initial publication, there’s a period for public comment. After that, the comments are addressed in the Federal Register, and the final regulation is published. After a waiting period (usually 90 days), the regulation becomes final.

Regulations can be challenged in Court (see the Loving case). The US Supreme Court has held that in most instances agencies are to be given deference in their regulations. That means successful regulatory challenges are rare. As stated above, regulations have the force of law.


That brings me to the point of this post: What happens when a regulation applies to all taxpayers but an IRS publication limits it to just some taxpayers? The answer is that IRS publications are not legal guidance; the regulation would apply to all taxpayers. Why do I bring this up? Because the IRS appears to be having a problem with individuals outside of the United States on the April tax due date.

IRS Publication 54 is titled “Tax Guide for US Citizens and Resident Aliens Abroad.” As you may be aware, there’s an automatic two-month extension available to certain taxpayers. Publication 54 states,

Automatic 2-month extension. You are allowed an automatic 2-month extension to file your return and pay federal income tax if you are a U.S. citizen or resident alien, and on the regular due date of your return:

  • You are living outside the United States and Puerto Rico and your main place of business or post of duty is outside the United States and Puerto Rico, or
  • You are in military or naval service on duty outside the United States and Puerto Rico.

That would seem to imply you need to be outside of the United States for work (be it employment or self-employment). One of my clients filed her tax return in late April, taking advantage of this extension. The IRS assessed the late filing penalty (but not the late payment penalty) even though a statement was attached to the return noting the two-month extension. Before I wrote a letter to IRS Appeals, I looked up the actual law behind the rule. It’s Treasury Regulation, 26 CFR § 1.6073-4 (c):

(c) Residents outside the United States. In the case of a U.S. resident living or traveling outside the United States and Puerto Rico on the 15th day of the 4th month of a taxable year beginning after December 31, 1978, an extension of time for filing the declaration of estimated tax otherwise due on or before the 15th day of the 4th month of the taxable year is granted to and including the 15th day of the 6th month of the taxable year.

Well, it appears that while what is stated in Publication 54 is true, anyone outside of the United States on April 15th is eligible for the automatic two-month extension. That’s the plain language of 26 CFR § 1.6073-4 (c). Yet my client was told she’s ineligible for the automatic two-month extension. (My client was outside of the United States for purposes of self-employment, too.) We’re heading to IRS Appeals where I’m nearly 100% certain we’ll prevail. Still, my client must spend time and money on fighting something that she shouldn’t have to.

Foreign Gamblers Get Equal Footing

Wednesday, July 10th, 2013

The United States Court of Appeals for the District of Columbia ruled yesterday that foreign gamblers should be treated similar to US citizens and residents. The issue has to do with a basic idea in gambling: Should gamblers be taxed on every pull of a slot machine, or just their results for their session?

Two years ago I wrote about the case of Sang Park. Mr. Park, a citizen of South Korea, liked to gamble. In the original Tax Court case, Mr. Park tried to argue that the US-South Korea Most Favored Nation Treaty didn’t allow the US to tax his gambling. He lost that argument.

Mr. Park appealed, but not on that issue. Instead, he argued that he should be allowed to be treated just like a US gambler and be able to use session accounting for his gambling. As the Court noted,

The IRS taxes non-resident alien gamblers such as Park differently than U.S. citizen gamblers. The relevant difference here concerns the period of time over which gambling winnings from casino games such as slots are measured. Are gamblers required to pay taxes on every winning bet – for example, every winning pull of the slot machine? Or can they report the overall income – gains minus losses – from a session of gambling? The IRS allows U.S. citizens to subtract losses from their wins within a gambling session to arrive at per-session wins or losses. But the IRS has applied a per-bet rule rather than a per-session rule for non-resident aliens such as Park.

The Court looked at the IRS Chief Counsel memorandum on how gambling should be taxed. I’ve noted this memorandum in the past, and the Court noted it, to:

“We think that the fluctuating wins and losses left in play are not accessions to wealth until the taxpayer redeems her tokens and can definitively calculate” her gains.

The Court noted that nothing in the interpretation of the portion of the Tax Code that covers US gamblers (Section 165(d)) says anything about citizens. Indeed, the Court also noted that the IRS’s approach here is, “consistent with the commonsense understanding of what it means to have gambling winnings, and of what it means therefore to have ‘gains.’”

The IRS then argued that because a recreational gambler cannot deduct losses, they can’t use session accounting. The Court wasn’t impressed.

The IRS’s reasoning is a non sequitur. What the IRS says about deductions for non-resident aliens is certainly accurate as far as it goes, but the point has nothing to do with the issue in this case. The fact that non-resident aliens may not deduct gambling losses from gambling winnings does not tell us how to measure those losses and winnings in the first place.

The Court’s conclusion was succinct:

We conclude that the relevant provision of the Tax Code, Section 871, allows non-resident aliens to calculate winnings or losses on a per-session basis.

The case was remanded to the Tax Court.

For Mr. Park, the ruling likely will have limited benefits. In the initial Tax Court case decision, it appeared that Mr. Park did not keep good records. If he is unable to show his gambling losses, the result will not be satisfactory to him. However, if he does have records (the ideal would be a contemporaneous written log; next best would be slot club records and ATM records), he should be able to lower his US tax.

For others, the ruling will have some benefits. For foreigners who gamble at slot machines, the ruling’s impact is clear: If you have proof of your losses during a session, you will be able to take those losses. However, if you do not have proof, the fact that you can net those losses won’t do you any good.

For poker players from abroad, the ruling has little impact. There currently is no withholding made on cash game play. Though non-resident aliens are supposed to include such gambling on their tax returns, I suspect the number who do is zero. The ruling has no impact on tournaments: Each poker tournament would be considered a separate session, so withholding would still be required based on every tournament.

Hat Tips: TaxProf Blog, TaxDood

I Haven’t Filed my FBAR. What Should I Do?

Sunday, July 7th, 2013

It’s July 7th, and you suddenly realize that you haven’t filed your FBAR. You print it up, and have a letter of explanation, but:

  • You can’t file an FBAR using paper (it must be electronically filed using the BSA efile system); and
  • You need to attach a letter of explanation but the BSA efile system doesn’t allow that.

Jack Townsend of the Federal Tax Crimes Blog has a post that is directly on point as to what to do. You can efile, keep the back-up documentation (the letter of explanation), and wait for the IRS to contact you; or you can call the FINCEN BSA resource center (800-949-2732) and ask for an exemption from efiling and mail the form (once the exemption is granted). You would then attach the letter of explanation to the FBAR.

In any case, if you forgot your FBAR filing take care of this immediately. Penalties on the FBAR are draconian; this is not something to put off until tomorrow.

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