Final regulations on reporting by individuals of foreign financial assets to IRS

The Treasury Department and IRS yesterday released for publication in the Federal Register final regulations (T.D. 9706) concerning the requirement that individual taxpayers report to the IRS specified foreign financial assets for tax years beginning after March 18, 2010 (the date of enactment of the FATCA rules).

The final regulations provide guidance relating to the requirement that individuals attach a statement to their income tax return to provide required information regarding specified foreign financial assets in which they have an interest. Proposed regulations addressing the application of these rules to domestic entities remain in proposed form and will be finalized at a later date.

These regulations finalize regulations that were proposed in December 2011, and remove corresponding temporary regulations. Among the items addressed in the final regulations or in the preamble to the final regulations are measures concerning:

• The reporting requirements of dual resident taxpayers
• Individuals who are residents of the United States under non-immigrant visas
• Persons that do not owe U.S. tax for the tax year
• Reporting threshold amounts
• Employees who are seconded to work in the United States
• Clarifications of reporting requirements for certain assets, such as nonvested property under section 83, assets held by a disregarded entity, and jointly owned assets

The final regulations, which have an effective date of Dec. 12, adopt a recommendation that dual resident taxpayers who determine their U.S. tax liabilities as nonresident aliens and claim a treaty benefit are exempt from reporting on their tax returns specified foreign financial assets under tax code section 6038D.
Other provisions of the regulations, or the preamble, address short-term accounts, assets in an account maintained by a foreign financial institution, life insurance with a cash surrender value, assets held for investment or not used in the taxpayer’s business, certain hedging transactions, employment contracts, shares of foreign companies traded on public stock exchanges, investments in social security or social insurance programs, interests held in foreign trust, among other topics.

The final regulations declined to adopt requests made, in comments to the proposed regulations, to eliminate duplicate reporting related to Form 8938 and the requirement to report foreign financial accounts on FinCEN Form 114 (generally referred to as the “FBAR”). Also, the preamble to the final regulations notes that the IRS and Treasury Department are considering the proper treatment of virtual currency under section 6038D and request comments on this topic.

Great news.....IRS Is Big Loser in Government Funding Bill

Wall Street Journal, Funding Bill: The Losers:

House and Senate negotiators unveiled Tuesday evening a $1.1 trillion agreement to fund the U.S. government for the next fiscal year, and some federal government agencies, their staffs and the people they serve got some bad news. ...

The 3.1% reduction in the budget of the Internal Revenue Service — bringing its funding below its 2008 level — comes amid Republican outrage over allegations IRS officials targeted conservative political groups for extra scrutiny of their filings for non-profit status.

Mother Jones, Rich People Cheer As Republicans Cut IRS Budget, by Kevin Drum

Notorious Swiss whistleblowers

Christoph Meili was a Swiss security guard who saved Holocaust-era bank documents from the shredder at UBS bank in 1997.
Meili, who was then working for an outside security firm, gave the documents he saved to a Jewish organisation. The disclosure led to the Zurich authorities opening a judicial investigation against Meili on suspicion of violating banking secrecy.
Bradley Birkenfeld, a former Credit Suisse and UBS private banker, handed over confidential information to the United States authorities, starting a process that allowed them to prosecute several banks and tear down some of Switzerland’s secrecy walls.
Herve Falciani took data from his former employer, HSBC Switzerland, to several foreign governments. As a result, more charges have been laid at the doors of Swiss banks whilst Falciani holes out in Spain, which refuses to extradite him.
Rudolf Elmer worked for nearly two decades at Swiss private bank Julius Bär until he was sacked in 2002. He unsuccessfully attempted to pass on evidence of alleged malpractice of the bank to the media until finding a willing recipient in Wikileaks in 2007, that appeared on the campaigning group’s website.
In 2011, he passed on a second batch of information to Wikileaks, days before being convicted of violating Swiss banking secrecy laws. On December 10, 2014, Elmer will appear again before the same Zurich court to stand trial of a second breach of banking secrecy laws.
Other bankers have also passed on information (sometimes in exchange for financial rewards) in direct violation of Swiss laws. A few individuals have been jailed or fined for their activities, most recently former Credit Suisse employee Renzo Gadola who was given a suspended fine this summer for handing secret data to the Department of Justice in exchange for a lighter sentence in the US.

Elmer trial highlights whistleblowing dilemma

The Swiss whistleblowing debate has ratcheted up a few notches with the new trial of notorious former banker Rudolf Elmer, accused of violating banking secrecy as well as proposed new laws to prevent informants going to the media with their concerns.

Former Julius Bär employee Elmer could get up to three and half years behind bars if found guilty of illegally handing over client data to the Wikileaks campaigning website.In 2011, Elmer – dubbed the “Robin Hood” of Swiss banking by some media – was originally given a suspended fine for breaking bank secrecy laws. But days before that trial he defiantly, and publically, handed over more data to Wikileaks, leading to his further arrest and now the second court hearing.Elmer was not paid by Wikileaks, but has embarked on a crusade to expose what he claims are the immoral activities of some Swiss banks. His court cases are vehicles for drawing public attention to his message: that his former employer allegedly set up trust funds and other constructs to help people evade taxes and launder money.

The IRS Scandal, Day 579

Forbes:  Horrible Bosses, IRS Edition, by Robert W. Wood:

People joked about horrible bosses long before Horrible Bosses, Horrible Bosses 2, and The Office. I’m guessing that at least some employees over at the IRS may not be too impressed with their own leadership. I mean big issues, not relatively harmless but kitschy things like Star Trek, Gilligan’s Island or line dancing videos. Perhaps there may have been some mistakes from regular employees, but the bosses surely have the most explaining to do.

The news that the lost or destroyed Lois Lerner emails were actually not lost or destroyed, for one. Remember, when the IRS brass said they looked really hard, and spent $10 million (of taxpayer money!) trying to find those emails? After a year of investigation, they belatedly said they were lost, hard drives were recycled, etc. Anyhow, now they will be sorted, cataloged and released, which is good.

Some people are upset that money is being spent on a ‘witch hunt’ that reveals not even a smidgen of corruption. Others aren’t so sure. The Treasury Inspector General for Tax Administration has confirmed that, on top of the backed-up email horde, there are also nearly 2,500 documents relating to investigations of the improper disclosure of confidential taxpayer information by the IRS to the White House. ...

Lois Lerner–the former IRS official at the heart of Tea Party targeting–supposedly didn’t even direct them, though she remains silent. She was held in contempt of Congress for refusing to testify, but hasn’t been prosecuted. Yet after her long silence, in an exclusive interview with Politico she said did nothing wrong and considers herself the victim.She bristled at any suggestion she had anything to do with destroying emails, switching to texts, or letting her own political views influence her treatment of Tea Party “a__holes.”

In the midst of all this, many Americans could use a little reassurance on key points:

• We Want To Be Dealt With Fairly ...
• We Don’t Want Others To Get Away with Anything ...
• We Want Our Private Information Kept Private ...
• We Want IRS Employees To Be Policed ...
• We Don’t Want More Complex Tax Laws ...

Since the IRS is made up of humans, sometimes the IRS is unreasonable or wrong. Richard Nixon supposedly asked the IRS to audit his political enemies. There has been no proof yet that President Obama tried to influence the IRS in the Tea Party targeting scandal. But it’s not unreasonable to want to get to the bottom of it once and for all. ...

The IRS has a very hard job to do, and in general, does it well and fairly. But that is precisely why this is so important. We need fairness and faith in the tax system restored. We shouldn’t need a Freedom of Information Act lawsuit to get it.

Swiss Bank Drops Out of IRS Tax Compliance Program

Reversing earlier moves taken this summer and fall, a major international bank is ending its cooperation with the Internal Revenue Service’s efforts to prevent investors from investing money in foreign countries with more amenable tax structures and policies, such as Ireland or Switzerland.
During a Zurich speech, Barclays bank executive Francesco Grosoli announced that the firm’s Swiss operations had “recently exited the program,” after evaluating its legal options. Grosoli declined to reveal additional details, but said that the bank had decided to end compliance with the U.S. extra-territorial enforcement actions at some point within the last “three or four months.”

Renouncing vs. Naturalizing or quality vs. quantity !

The number of individuals who wish to come to the U.S. to become citizens is far in excess of the number who are renouncing their citizenship.  According to the USCIS, there are about 700,000 individuals annually who become naturalized citizens.  In the year 2008, there were more than 1 million naturalized citizens.  See table:
Compare these numbers to just about 3,000 annually of individual who are renouncing their citizenship.
Of course, everyone has their own story and reasons for either coming or going, but in relative terms, those who find it desirous to renounce citizenship (at least in absolute numbers and relative terms) represent a small speck (less than 1/2 of 1 percent), compared to those who are becoming naturalized citizens.
Finally, for anyone who wishes to become a naturalized citizen, they must be aware they cannot “reverse” the decision without having potentially adverse U.S. tax consequences.

 

Lackluster Tools For International Collection

I have written and mentioned it before that only 5 treaties provide for assistance in collecting tax judgments against U.S. citizens living abroad..... Canada, France, Holland, Denmark and Sweden.
I’m referring to the ability of the US to collect tax claims against its own citizens who happen to be living in one of these 5 countries. Because these treaties are bilateral, the reverse is also true: partner countries may collect tax claims against their own citizens who happen to be living in the United States. Which means the US has no collection treaties with 190 countries !
The IRS filing a notice of federal tax lien with the foreign taxing authority as is typical in a domestic collections case, or using foreign courts to collect U.S. taxes would not work. These collection devices are useless when it comes to the cross-border collection of taxes.
 One technique that has been getting a lot of attention lately – not to mention gathering up steam – is the “Customs Hold" in connection with TECS data sharing. The procedure for detaining such taxpayers is so simple that it could happen to virtually anyone. First, the revenue officer prepares Form 6668, TECS Entry Request, to have a Customs Hold placed on a delinquent taxpayer. The completed form is sent to the group manager for approval, which consists of nothing more than a signature. After signing it, the group manager emails it to the TECS Coordinator. The TECS Coordinator adds the taxpayer’s name into TECS. Finally, DHS notifies the IRS whenever the taxpayer attempts to reenter the United States. Taxpayers are (theoretically) informed with a Letter 4106, Letter Advising Taxpayer of Department of Homeland Security Notification, that an international revenue officer has notified the DHS “that the taxpayer has outstanding tax liabilities.”

This procedure allows  for brief detainment of the person by a Customs and Border Protection Officer for the purpose of gathering his or her “contact information” (i.e., “where he will be staying while in the United States”). Nothing more. Nothing less. In other words, while it is supposed to be a tool for collecting taxes from delinquent taxpayers, it offers no ironclad guarantee that the person being detained will actually pay the tax. Holding individuals as they seek to return to the United States only works as a collection device if the experience itself was so emotionally traumatic as to convince them to pay. At a primitive level, it only works if it instills the fear of God in the taxpayer.
While it might potentially cause the person some alarm, it’s hard to imagine that it will have the desired effect of inspiring taxpayers to take out their checkbooks and write out a check to Uncle Sam. And before we can even get to that point, do not forget that the person has to attempt to reenter the United States. Suffice to say, it would be a cold day in hell before someone who receives Letter 4106 steps foot back in the United States again.
 According to recent statistics, there are approximately 1,700 taxpayers on the TECS with approximately $ 1.6 billion in delinquent tax assessments. This includes assessments of approximately $ 1.1 billion exclusively owed by international taxpayers.

Lol...H&R Block CEO Asks IRS To Make it Harder to Self-Prepare Tax Returns

Last month, William Cobb, the President and CEO of H&R Block, wrote to the Commissioner asking that the IRS implement changes to tax forms to make it more difficult for taxpayers to prepare their own returns claiming the earned income tax credit (EITC). The cynical response to this is that Cobb wants more taxpayers to come to the paid preparer behemoth. After all, Cobb’s main role is to increase profitability for the company.

As most readers know, the EITC is and has been for some time one of the principal ways the federal government incentivizes lower-wage work and reduces poverty, especially among children. Its administrative costs are relatively low, and the credit has generally received bipartisan support. Despite the EITC’s success, its error rates have drawn attention from those who criticize the credit (or wish to discredit the IRS or transfer programs generally; more on EITC errors and reasons for bashing IRS for its EITC administration in an earlier post EITC: Do Attitudes on Redistribution Fuel a Particular Focus on Errors). Despite the criticism, the EITC error rate is relatively low compared to other segments of the tax gap, such as small business underreporting of income (which costs the fisc way more than misclaimed EITC), and I suspect that many of the EITC errors are more in the way of foot faults with a wrong parent or relative claiming a child whom the relative has some connection with. Alternatively, in some instances what is reported as an EITC error may in fact be the result of correspondence audits that taxpayers are ill-equipped to meaningfully engage even when the claimed credit was proper (To that end see a 2010 article by former clinician Kate Leifeld in the Maine Law Review discussing a 2007 Taxpayer Advocate Service study on the impact of representation on low-income taxpayers subject to audit).

From the 106 Requests of Swiss Entities to participate in a DOJ settlement program now only 96 remain

Update : 10 Swiss Banks that requested the US Department of Justice’s non-prosecution program have now withdrawn from it because they have decided they did not systematically break US tax laws.

Give up green card, make an election to file a joint tax return

Today's question comes from Ann:

I'm a green card holder for over 9 years already (starting from year 2006 date count) and I want to expatriate on 2015 because my husband (American citizen) and I plan to move to my country (country removed) by 2015.

The tricky part for me to handle this matter is the IRS filing status. I want to expatriate next year 2015 hopefully from my green card residency, but my husband will remain as an American citizen. How will I fill up the IRS tax form filing status? Will it be "married filing jointly" or "married filing separately"?

I'm planning to choose or opt for "married filing jointly" because of tax savings advantage on my part considering I only earn around $12,000 in a year and also my husband and I have been filing joint income tax returns from the start of our marriage in the United States. I need your advice or suggestions on this matter on what to do, so I can start planning now and the next year to avoid any hassles when the time is near.