Generally, if you are a United States citizen or permanent resident (green card holder) living outside the United States for more than one year, you are called an expatriate or “expat.”* Rather than adding to the long list of tax guides that explain the general concepts of expat taxation,** we will focus on the specific requirements to file several US international tax forms. These are forms not well known, but they carry huge penalties for excluding or screwing up.
We will give you a general understanding of the following US tax forms: 1) Treasury Form 114, Report of Foreign Bank and Financial Accounts (FBAR), 2) Form 3520/substitute 3520-A, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, 3) Form 5471, Information Return of US Persons With Respect To Certain Foreign Corporations, 4) Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund, 5) Form 8858, Information Return of US Persons With Respect To Foreign Disregarded Entities, 6) Form 8865, Return of US Persons With Respect to Certain Foreign Partnerships, 7) Form 8938, Statement of Specified Foreign Financial Assets, and 8) Form 8992, U.S. Shareholder Calculation of Global Intangible Low-Taxed Income (GILTI). We then discuss ways to comply if you haven’t filed through the Streamlined Filing Compliance Procedures, the Delinquent FBAR Submission Procedures and the Delinquent International Information Return Submission Procedures.
There are about 57 million small businesses and self-employed taxpayers in the United States, including:
Corporations and partnerships with assets less than $10 million
-Members of a partnership that carries on a trade or business
-Others in business for themselves, even if the business is part-time
-Gig workers (i.e., Uber/Lyft drivers, owners of Airbnb rentals, delivery services, etc.)
-The Taxpayer Advocate Service is sharing the following information with small business taxpayers to:
Help you meet their filing requirements
Share resources for information and tax return preparation
Help you file accurate returns
Small Business Filing Requirements
Generally, the federal tax forms you will need to file vary depending on the type of business:
The World Bank is an organization dedicated to providing financing advice, and research to developing nations to aid in their economic advancement. In its 110 page Global Progress report it states ” The recent IMF/WBG Annual Meetings was aptly titled Development in Crisis highlighting the fact that today’s crises are happening all at once, and their negative repercussions are compounded by climate change. The war in Ukraine and aftershocks from the COVID-19 pandemic triggered a steep rise in food, fertilizer,and energy prices, and interest rates. Many developing countries are experiencing historically high inflation,and more than half of IDA countries are at high risk of debt distress or already in debt distress, seriously limiting fiscal space available for many developing countries to alleviate the burden on their populations with spending measures.
In all these crises, the poor and vulnerable are the hardest hit. The recently published World Bank’s Poverty and Shared Prosperity Report finds that COVID-19 dealt the biggest setback to global poverty-reduction efforts: it’s estimated that about 70 million people were pushed into extreme poverty in 2020, the largest one-year increase since global poverty monitoring began in 1990. This period also dealt the worst blow to progress on education and learning— learning poverty has increased by a third in low- and middle-income countries—which may further worsen poverty in the future.
To respond to these multiple crises, many developing economies need to spend more to protect the poor and vulnerable households, to service their debt, to reverse the learning losses and to invest in climate change mitigation and adaptation. At the same time, these countries are experiencing slower revenue recovery as their economic growth slows. Global tax revenues in 2020 declined by 12 percent in real terms, a steeper 15 percent decline in low-and middle-income countries.
According to the Federal News Network, The IRS is facing substantial cuts to funds meant to rebuild its workforce and modernize its legacy IT systems over the next decade, as part of a deal to raise the debt ceiling and avoid a first-ever government default.
The White House and congressional Republicans reached a final agreement Sunday night to limit federal spending over the next two fiscal years, in exchange for raising the debt limit through January 2025.
Congress still needs to pass the spending plan by June 5 to avoid a federal default. That’s about how long the Treasury Department estimates it still has enough revenue on hand to make scheduled payments, without having to borrow additional funds.
The spending deal struck by the Biden administration and House Speaker Kevin McCarthy (R-Calif.) would keep non-defense discretionary spending roughly flat in fiscal 2024, and would cap growth in non-defense spending to 1% in FY 2025.
Due process requires that matters be resolved according to established rules and principles and that taxpayers be treated fairly. The international information return (IIR) penalty regime under IRC Chapter 61, Subchapter A, Part III, Subpart A does not adhere to this fundamental mandate. Now is the time for Congress to fix this broken system by providing a clear path for implementation of these penalties. This fix, which would provide much-needed clarity and finality, will require legislation.
The need for this legislation has been brought to a head by the U.S. Tax Court’s recent decision in Farhy v. Commissioner, which holds that the IRS lacks statutory authority to assess and collect penalties under IRC § 6038(b). In part one of this series, I provide a discussion of this decision and a recommendation that would protect the rights of both taxpayers and the government.
Since assuming the role of National Taxpayer Advocate, I have recommended that the IRS cease systemic assessment of these penalties, and I have requested that Congress enact legislation providing the IRS the ability to utilize deficiency procedures for IIR penalties. Among other things, deficiency procedures allow for judicial review in the Tax Court prior to the assessment and payment of the asserted penalties.
Compared to other courts, the Tax Court is more accessible for taxpayers and is by far the least expensive and easiest to navigate for low-income taxpayers. Amending the IRC to implement deficiency procedures would solve the problem highlighted by the Tax Court in Farhy. Nevertheless, there remains a separate and important issue regarding Chapter 61 IIR penalties that also needs a legislative fix.
Chapter 61 International Information Return Penalties Require Finality
Taxpayers are entitled to finality and a fair and just tax system. Protection of these rights is a bedrock aspect of quality tax administration.
The failure to provide a clear statute of limitations for some Chapter 61 penalties represents a defect in the IRC. Unlike most other penalty provisions in the code, there is no explicit statute of limitations impacting some Chapter 61 penalties. Nothing in the code specifically prohibits the IRS from imposing penalties going all the way back to the enactment of some code sections. That being said, the Court noted in Farhy, “28 U.S.C. § 2461(a) expressly provides that ‘[w]henever a civil fine, penalty or pecuniary forfeiture is prescribed for violation of an Act of Congress without specifying the mode of recovery or enforcement thereof, it may be recovered in a civil act.’” 28 U.S.C. § 2462 provides that a suit to enforce penalties must be commenced within five years.
For US expats who own businesses in foreign countries and need to file Form 5471, the recent Farhy v. Commissioner decision by the US Tax Court may be of interest. On April 3, 2023, the U.S. Tax Court made a decision in Farhy v. Commissioner regarding penalties for failure to file Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations. This decision has implications for U.S. expats who own businesses in foreign countries and need to file this complicated form.
In the case, Alon Farhy owned two Belize corporations from 2003 to 2010, but did not file Forms 5471 for either corporation, despite being required to do so. In November 2018, the IRS assessed penalties of $10,000 per failure to file, per year, and a continuation penalty of $50,000 for each year. However, the U.S. Tax Court ruled that the Internal Revenue Code does not authorize the IRS to assess these penalties, and therefore the IRS cannot collect them via levy.
While this ruling may lead some taxpayers to consider filing refund claims for penalties previously assessed and paid under Section 6038(b), it is unclear whether this case creates a right to a refund. Additionally, it is important to note that the case does not relieve the obligation to file Form 5471 or any other required form. Failure to file certain international information returns, such as Forms 5471 and 5472, may impact the limitations period on a taxpayer’s return, and this case does not change that rule. U.S. expats who own businesses in foreign countries should be aware of the requirements for filing Form 5471 and consult with a tax professional to ensure compliance with all applicable tax laws.
Need help with US expat taxes? Our expert tax professionals provide free email advice. Contact us for answers to your questions about double taxation and reducing your tax liability. We’re here to help you navigate international tax laws. Have a question? Contact Olivier Wagner, 1040 Abroad.
One of the thorniest issues in Texas sales and use tax is the distinction between the rental of tangible personal property (which is subject to tax) and the provision of a service (which is only taxable if the service is taxable). This distinction not only affects the taxability of charges for the rental or service but also that of equipment that is purchased to provide the rental or service.
What’s a Rental?
The rental of tangible personal property in Texas is subject to sales or use tax. A rental occurs when possession but not title to tangible personal property is transferred for consideration. A person acquires possession of tangible personal property when that person acquires operational control over that property. Operational control, in turn, means that the customer can use, control, or operate the tangible personal property.
What are Taxable Services?
Only the following services are subject to Texas sales or use tax:
When my eldest daughter entered her senior year of high school, she paid the high school’s parking-space-paint-fee and used the opportunity to paint and profess her mantra of: Treat People with Kindness.
Kindness – a term stemming from circa 1300, with origins of the religious act of benevolence.
“Benevolence” – the quality of being kind.
For tax-exempt public charities, benevolent acts must be considered within the guardrails of section 501(c)(3) of the Internal Revenue Code. To enjoy tax-exemption as an organization described in Section 501(c)(3), the organization must be organized and operated primarily to accomplish one or more of the exempt purposes specified in section 501(c)(3). See 26 U.S.C. § 501(c)(3); 26 C.F.R. § 1.501(c)(3)-1(c). To enjoy or maintain tax-exempt status, the charitable organization must avoid use of charitable assets for the substantial benefit of unqualified individuals or, for certain, control persons.
So, how do public charities, especially religious organizations, manage the confluence of benevolence (i.e., kindness) and tax regulations when seeking to tend to the poor, naked, infirmed, or hungry, i.e., those “in need”?
In a technical sense, the answer is, basically, identification of need and provision of sufficient resources that do not exceed that need—identify a life necessity that the beneficial recipient cannot meet with available resources.
Not a perfect science.
But, theoretical science should not unreasonably deter the objective of treating people with kindness.
WRITTEN TESTIMONY OF
INTERNAL REVENUE SERVICE
HOUSE WAYS AND MEANS COMMITTEE
ON THE FILING SEASON AND THE IRS BUDGET
APRIL 27, 2023
Chairman Smith, Ranking Member Neal and members of the Committee, thank
you for the opportunity to discuss the 2023 filing season and the IRS budget.
I am honored to serve as the 50th IRS Commissioner and have the chance to
lead a group of extremely dedicated and talented public servants at a pivotal
moment in IRS history. My first few weeks as Commissioner have reinforced my
belief in the importance of the IRS to the nation, as I have witnessed the ongoing
efforts of our workforce to fulfill the critical mission of administering the nation’s
tax system. This includes administering the tax filing season, which has gone
smoothly in terms of processing tax returns, the operation of our information
technology systems and improvements in taxpayer service.
As I begin my new role, I have a unique opportunity coming into the agency to
bring a fresh perspective on our operations, examining them to determine where
improvements can be made and what processes and controls need to be
strengthened to better fulfill our mission. Ensuring a high-performing IRS is
critical for our nation, as the agency collects more than $4 trillion in revenues
each year, generating about 96 percent of the funding that supports the federal
government’s operations – everything from roads and other infrastructure to
education and the nation’s military.
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Since the R&D Tax Credit is activities-based, eligibility is determined by testing the research activities a company performs.
In order to qualify for the Credit, a research activity must pass all four parts of the Four-Part Test:
Part #1: The research activity must be related to developing a new or improved business component for a “qualified purpose”—i.e. related to new or improved functionality, quality, reliability, or performance. The development or improvement doesn’t have to be brand new or vast in scope.
Part #2: The research activity must be undertaken for the purpose of eliminating some uncertainty related to appropriate design, method, or capability. Even research that is ultimately unsuccessful in eliminating uncertainty may still qualify.
Part #3: The research activity must involve some Process of Experimentation designed to resolve the uncertainty. The “Substantially All” Test adds a quantitative aspect to Part #3.
Part #4: The research activity must fundamentally rely on principles of physical sciences, biological sciences, computer science, or engineering, or their applications.
Certain activities are automatically excluded from Credit eligibility, including foreign and funded research.
Thorough documentation is required to demonstrate compliance with all Four Parts of the Test. The recent Little Sandy Coal case serves as a cautionary tale.
Introduction: An Activities-Based Credit
The Federal Research and Development (R&D) Tax Credit is an activities-based tax credit for companies that incur R&D expenses in the United States. Based on IRC § 41 & § 174, the Credit is intended to incentivize innovation and experimentation.
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