TaxConnections Picture - suit with a shirt and a tieA few weeks ago, Mohanbhai Ramchandani, pled guilty to violating the laws implementing the United States Treasury Department’s Foreign Bank and Financial Accounts Report (FBAR) as well as to filing false tax returns to conceal $3.2 million earned in his swanky New York City tailoring business. While the tailor could probably easily estimate a customer’s suit size, he had completely underestimated the tenacity of the Internal Revenue Service to “follow the money”… But, find it they did, in bank accounts located at the Bank of India, in Hong Kong and at accounts in Canada and India (some in his son’s name). Between 2007 and 2009, Ramchandani did not pay tax on the hidden $3.2 million he had stashed in the foreign bank accounts and, in violation of FBAR laws, he failed to report that he had those accounts. Ramchandani’s cheating resulted in a tax loss of US$ 736,002 for the 3-year period 2007, 2008 and 2009. When sentenced, Ramchandani faces up to five years in prison (let’s hope the tailor likes black stripes!). Also, he faces a penalty of $1.6 million for the FBAR violations, restitution to the Internal Revenue Service of $736,002.00 for unpaid taxes and probably oodles and oodles of interest!

Meanwhile… back at the ranch, eighty percent of the Treasury’s workforce has been furloughed.

In accordance with Circular 230 Disclosure

TaxConnections Blogger Virginia La Torre Jeker reminds to file extensionTax filing time is here for Americans. Due date is October 15 for those on extension and many people are panicking. Despite the shutdown of certain IRS operation, the IRS has made clear that the Oct 15 due date is still in effect and people must still file timely. You can read more from the IRS about the effect of the lapse in appropriations here. Taxpayers should continue to file and pay taxes as they would under normal government operations. Individuals who requested an extension of time to file should still file their returns by Oct. 15, 2013 either electronically or on paper. The processing of paper returns will be delayed until full government operations resume. Payments accompanying paper tax returns will still be accepted as the IRS receives them. Tax refunds will not be issued until normal government operations resume.

What happens if the overseas filer still cannot get his return in on time? They are sometimes allowed an additional extension beyond October 15, discussed more fully below.

Additional Extension of Time for Taxpayers Out of the Country

Taxpayers who are out of the USA can request a discretionary 2-month additional extension of time to file their returns (that is, returns are due by December 15 for calendar year taxpayers).

To request this extension, you must send the Internal Revenue Service a letter explaining the reasons why you need the additional 2 months. Send the letter no later than the extended due date (October 15 for calendar year taxpayers) to the following address: Read More

TaxConnections Picture - SSN and PassportUnited States Social Security and Medicare taxes continue to apply to wages for services performed as an employee working outside of the United States if you are working for an “American employer”. Similarly, if you are abroad and you are a self-employed US citizen or resident you generally are subject to the so-called “self-employment tax”. Self employment tax is a social security and Medicare tax on net earnings from self-employment. You can learn more about Self employment tax when working abroad from my blog post here on TaxConnections.

Many questions arise about US social security when one is working overseas. Some of these questions are: If you are working for an American employer, do you have to pay tax to both the US and the foreign host country’s social security systems? What happens if you are employed overseas but you are neither self-employed nor working for an American employer? If you do not have enough credits under the US social security system to qualify for benefits, does your work overseas “count” for purposes of US eligibility? If you already have enough credits under the US system to qualify for benefits, what happens with your foreign social security benefit credits — does the US count your foreign social security credits toward your US coverage?

Learn the answers in today’s blog posting.

Totalization Agreements

The US has negotiated international Social Security agreements, called “Totalization agreements,” with 24 countries. See the list here. Totalization agreements achieve two main goals: The first goal is to eliminate the possibility of Read More

TaxConnections Blogger Virginia La Torre Jeker writes about offshre trustsThe Use of Offshore Trusts

This is an area requiring great care and planning if there is a United States grantor or any possible US beneficiaries. Prior to certain US tax law changes, a US person was able to establish a trust in a foreign, tax-neutral jurisdiction that could generally accumulate income and capital gains without paying tax at the trust level. These would ultimately be taxed only at the time of distribution to US persons. The value of tax deferral and the time value of money was very significant. Imagine no tax being paid for twenty or thirty years while the assets in the trust continued to grow and grow. Comparable tax deferral was not available with the use of US trusts, since a US trust is itself, a separate taxpaying entity. The law was thus changed to make the use of foreign trusts created by US grantors with a US beneficiary (or even the possibility of a US beneficiary) highly inadvisable.

A US grantor who establishes a foreign trust with a US beneficiary will himself generally be taxed directly on the trust’s income (including capital gains) even if the trust makes no distributions to anyone! It is very important to note that when a foreign trust is funded by a US person, the trust will automatically be treated as having a US beneficiary unless the trust document specifically prohibits all US persons, including the US grantor, from benefiting from the trust at any point in time. Without this critical language in the trust instrument, a foreign trust created by a US person will be taxed as discussed, that is, the US grantor will pay tax each year on all the income earned by the trust regardless of whether or to whom, trust distributions were made. Read More

TaxConnections Tax Blog Post - Statute of Limitations on Tax EvasionFor any of you out there who are hiding income or assets from the taxman, please take the time to learn about how the statute of limitations rules work. I have had clients mistakenly believing that the passing of several years since the filing of their returns which deliberately omitted income will afford them protection.

The tax laws contain what is known as a statute of limitations. The statute prescribes the length of time permitted to the government to enforce the tax laws. If the length of time runs out for a particular tax year, then the government is forever barred from asserting tax claims or bringing an indictment against you. It is important to understand how the statute of limitations works, because in certain cases, the statute of limitations will be longer than others or it will not start to run at all.

Today’s blog posting focuses on the statute of limitations that applies in the case of the Government bringing a criminal indictment for the crime of tax evasion – for example – when a taxpayer files a return, but it is a false return that under-reports his income; or when the taxpayer willfully does not file a return so as to evade taxes.

Criminal Tax Evasion

The general rule is that the statute of limitations is for a six year period that commences once the tax return is filed; or from the date there was a willful failure to file the return when otherwise due. The six-year statute of limitations is Read More

TaxConnections Picture - IncomeIt may come as a shock to foreign (non-US) companies and other foreign businesses to learn that they may have US tax withholding obligations with respect to their US employees, even if the foreign business is not in any way involved in US activity. Pursuant to the US Internal Revenue Code, an employer is required to withhold federal income and social security taxes from the wages of its US employees. Every quarter, the employer must file a Form 941, the Employer’s Quarterly Tax Return, reporting the amount of income and social security tax withheld during the period. A Federal Tax Deposit Form must be filed with the remittance of the withholding taxes the month following the close of each quarter.

Income Tax Withholding

With certain exceptions, every employer making payment of “wages” to US employees is required to deduct and withhold upon those wages an income tax determined in accordance with Internal Revenue Services procedures.

For income tax withholding purposes, “wages” is defined, with certain exceptions, as all remuneration for services performed by an employee for his employer, including the cash value of all remuneration (including benefits) paid in any medium other than cash. The term “wages” includes remuneration for services performed by a citizen or resident of the United States as an employee of a nonresident alien individual, foreign partnership, or foreign corporation whether or not such alien individual or foreign entity is engaged in a trade or business within the United States. Thus, for example, a foreign partnership without any US activities is responsible for income tax withholding on wages paid to its US person employees. Read More

TaxConnections Picture - JOBWhat is Self-Employment Tax?

The self-employment tax is a social security and Medicare tax based on net earnings from “self- employment”. We’ll review what it means to be “self-employed” later in this posting. The dollar threshold trigger for paying self-employment tax is quite low – you must pay self-employment tax if your net earnings from self-employment are at least US$400.

For self-employment income earned in 2013, the self-employment tax rate is 15.3% imposed on your net earnings. The rate consists of two parts: 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance).

If you are a “self-employed” United States citizen or United States resident, the rules for paying self-employment tax are generally the same whether you are living in the US or living and working overseas.

Effect of Foreign Earned Income Exclusion (FEIE)

You must take all of your self-employment income into account in figuring your net earnings from self-employment, even income that is exempt from income tax because of the FEIE. Briefly, for those who may not be familiar with the FEIE, Americans working abroad may be eligible to exclude certain foreign earned income (wages, compensation for services) from US taxable income under the rules governing the Foreign Earned Income Exclusion (FEIE), and certain foreign housing costs paid by their employers. If one is self-employed, then instead of taking a housing exclusion, a housing deduction is taken which further reduces the amount of taxable income. For self-employed persons, both the FEIE and the housing deduction will be calculated based on the individual’s net income as figured on Schedule C or Schedule F. Calculating the right amount of the exclusion depends on figuring one’s business income accurately. Read More

TaxConnections Picture - Las VagesGambling winnings usually make people really happy! Imagine the euphoria of the foreign national on vacation in Las Vegas or Atlantic City when she wins $1,000,000 at the casinos. Now, imagine her extreme disappointment and unhappiness when the casino pays her only $700,000 and tells her that the balance will be paid over directly by the casino to the United States taxation authorities, the IRS. “Is this possible?”, she wonders. YES, it is! Here are the basic facts about gambling winnings won by a nonresident alien individual (NRA) in the United States.

By way of background, a NRA who is considered to be “engaged in a US trade or business” at any time during the tax year, is taxed at regular graduated US rates on the net taxable income effectively connected with that business. This means she is taxed on the US source gross income minus all permissible deductions. Sometimes, depending on the facts, professional gamblers may be considered “engaged in a business”.

On the other hand, a NRA is taxed by withholding, at a flat 30% (or lower treaty rate, if applicable) on certain US-source income that is not treated as effectively connected with a US trade or business. In this context, the 30% withholding regime would apply to the casual as opposed to the professional gambler on certain types of gambling winnings. Some types of gambling winnings are specifically exempt from tax. Generally, these are winnings from blackjack, baccarat, craps, roulette or big six wheel, except to the extent provided in IRS regulations. Read More