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IRS 2012 Offshore Voluntary Disclosure Program, and Expatriate (Both U.S. persons abroad and Foreign Nationals now filing as a U.S. resident) Taxation Updates Regarding Foreign Pension

There is an unconfirmed rumor that the latest IRS “2012 Offshore Voluntary Disclosure Program (OVDI) will terminate without notice on December 31, 2012. Just because you filed your FBAR and think you have reported all your foreign source income YOU MUST TAKE THE TIME TO READ THIS IMPORTANT REPORT. Please read this carefully and if you think we should be reviewing the information that you reported on your FBARs, or income tax returns again based on new information, please let me know.

IRS 2012 Offshore Voluntary Disclosure Program

Effective September 1, 2012 the IRS initiated their FINAL Offshore Voluntary Disclosure Program. Although it mostly discusses Form TDF 90-22.1, Foreign Bank Account Reports, the IRS is also focused on all international information report compliance including those required to report U.S. ownership in foreign corporations and transactions between those entities and related parties; 25% foreign owned U.S. corporations or foreign corporations with income that is effectively connected with U.S. trade or business; transactions between U.S. tax return filers and foreign trusts, etc. One of the primary purposes of these reports is to enable the IRS to utilize these reports to identify foreign source income that is not being reported on U.S. tax returns. Thus as an integral component of the IRS initiative is to give U.S. taxpayers one final chance to file past due tax returns or amend them to include foreign income that may not have been originally reported. 

Similar to the first initiatives, the IRS is requiring anyone who takes advantage of this opportunity to amend their income tax returns for the last three years if those returns did not include all sources of foreign income, even if the U.S. tax is offset by credits for foreign taxes paid or accrued. However those who need to file or amend their FBARs need to go back 8 years. Previously this was six years. 

US taxpayers taking advantage of the initiative will be separated between high and low risk. Low risk taxpayers (those who owe less than $1,000 for any prior year income tax return) will be charged penalties for understating income as well as late penalties and interest however those in the high risk category could well be facing substantial monetary penalties but would not face criminal prosecution. 

Once the IRS terminates this FINAL initiative, however, all deals would be taken off the table and not only would the penalty of $10,000 per form/per year be assessed, high risk filers could be facing penalties of 27 ½ percent of the aggregate unreported balance in offshore accounts. Thus if all account balances combined totaled $1 Million, the penalty would be $275,000. 

CRIMINAL PENALTIES 

Blatant disregard of the rules pertaining to FBARs including taking advantage of the OVDI, in addition to the statutory monetary penalties, carries potential criminal penalties as well. The maximum sanction for anyone convicted includes up to ten (10) years of imprisonment plus a fine of up to $500,000.  

What foreign accounts must be disclosed in FBARS 

The IRS has now clarified exactly what foreign accounts must be disclosed in FBARS, many which were previously considered to be not reportable or totally overlooked.  See list below.  

Expatriate (Both U.S. persons abroad and Foreign Nationals now filing as a U.S. resident) Taxation Updates Regarding Foreign Pension 

As a result of these compliance initiatives combined with newly issued guidance from the U.S. Department of Treasury and the IRS, one of the highest profile issues is now becoming that of foreign pensions, including what pensions need to be reported on the FBARS, what income is reportable on U.S. income tax returns, and when it is to be reported. Also of issue is what payments of foreign tax can be utilized as a foreign tax credit to avoid or mitigate the effects of double taxation.   

FOREIGN PENSIONS AND RETIREMENT SAVINGS 

Even for experienced tax professionals, this has become one of the most confusing areas affecting U.S. citizens and tax residents (including foreign nationals required to file a resident U.S. tax return) is the U.S. tax treatment surrounding transactions involving foreign retirement plans. Therefore I will make every attempt to simplify this as much as possible. 

·         The U.S. general tax rules that apply to retirement savings accounts and pensions ONLY apply to U.S. pensions-EXCEPTION: Foreign Pensions involving those countries that have amended their tax treaties with the U.S. to stipulate that the pensions and retirement accounts of both countries would be treated equally. These countries include the United Kingdom, Belgium and Canada (although US tax returns involving Canadian pension plans require special elections and tax treatment).

·         With the exception of retirement plans connected to those countries mentioned above that are protected by treaty, the following U.S. income tax rules apply:

1.      Contributions made by EMPLOYEES to a foreign company pension plan are NOT deductible excludible on a U.S. income tax return.

2.      Contributions made by EMPLOYERS of a foreign company pension plan MUST BE INCLUDED in income reported on U.S. tax returns. -note however there are exceptions to this rule if the employee is not fully vested and there is substantial risk of forfeiture of plan entitlements.

3.      The employee’s portion of the annual valuation appreciation of the employer plan must be included in U.S. income-note however there are exceptions to this rule if the employee is not fully vested and there is substantial risk of forfeiture of plan entitlements.

4.      Any U.S. income tax on income that is required to be included as a result of the above can be treated as foreign source earned income can offset by foreign income taxes paid to the extent that they are available.

5.      Employer contributions to an foreign employee company plan is considered as being earned income for purposes of the Internal Revenue Code Section 911 foreign earned income exclusion and housing rules.

6.      Employee contributions to a PRIVATE retirement savings account are NOT deductible on U.S. tax returns.

7.      Annual valuation appreciation of the private retirement savings plan must be included in U.S. income-note however there are exceptions to this rule if the employee is not fully vested and there is substantial risk of forfeiture of plan entitlements.

8.      The above rules do not apply to government social retirement plans.

9.      Mandatory payments in the form of deductions from salary paid to a U.S. tax resident working for a foreign employer or a mandatory assessment by the foreign government against income that is applied to government social retirement may be available to be treated as a foreign tax credit and used to offset the income listed above PROVIDED THAT THERE DOES NOT EXIST A TAX TOTALIZATION (SOCIAL SECURITY) TREATY BETWEEN THE U.S. AND THAT COUNTRY. If a TAX TOTALIZATION (SOCIAL SECURITY) TREATY does exist then the mandatory contributions may NOT be treated as an income tax for purposes of determining the U.S. foreign tax credit.  Thus in cases where the foreign tax rates are less than the U.S. or if there exists a treaty as described, then the U.S. tax filing individual may be subject to U.S. income tax on the income listed above. Countries with which the United States has Tax Totalization Agreements and the date it went into effect is as follows:

 

Countries with Social Security Agreements

Country

Entry into Force

Italy

November 1, 1978

Germany

December 1, 1979

Switzerland

November 1, 1980

Belgium

July 1, 1984

Norway

July 1, 1984

Canada

August 1, 1984

United Kingdom

January 1, 1985

Sweden

January 1, 1987

Spain

April 1, 1988

France

July 1, 1988

Portugal

August 1, 1989

Netherlands

November 1, 1990

Austria

November 1, 1991

Finland

November 1, 1992

Ireland

September 1, 1993

Luxembourg

November 1, 1993

Greece

September 1, 1994

South Korea

April 1, 2001

Chile

December 1, 2001

Australia

October 1, 2002

Japan

October 1, 2005

Denmark

October 1, 2008

Czech Republic

January 1, 2009

Poland

March 1, 2009

 

What foreign accounts must be disclosed in FBARS 

WHO MUST FILE? 

All U.S. persons, which by definition includes U.S. citizens, resident aliens, resident aliens of U.S. territories, trusts, estates, and domestic entities (corporations, partnerships, LLCs, LLPs, etc.) , that have an interest in or signing authority over foreign financial accounts (as defined below) which, in the aggregate, equal or exceed $10,000 at any time during the calendar year bust file Form TDF 90-22.1 (FBAR).  

TYPES OF FOREIGN ASSETS THAT ARE REPORTABLE 

·         Financial deposit accounts held in a foreign financial institution

·         Financial account held at a foreign branch of a U.S. institution

·         Stock or securities held by a foreign financial institution outside the U.S.

·         Indirect interests in foreign financial assets through an entity where there is a 50% or greater interest in the entity holding the foreign assets.

·         Foreign mutual funds

·         Foreign accounts and foreign non-account investment assets held by foreign or domestic grantor trust for which you are the grantor.

·         Foreign issued cash value life insurance or annuity contracts 

NOTE THAT FOREIGN STOCKS HELD DIRECTLY AND NOT IN A FOREIGN FINANCIAL ACCOUNT DO NOT NEED TO BE REPORTED ON THE FBAR. ALSO FOREIGN REAL ESTATE HELD DIRECTLY (NOT IN A REAL ESTATE TRUST OR INVESTMENT FUND) DOES NOT NEED TO BE REPORTED ON AN FBAR.

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