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Tax Highlights

IRS IMPOSES HIGHER PENALTIES
GREEN CARD LEGISLATION
TAXPAYER ADVOCATE SERVICE
WEP UNDER ASSAULT
GREEN CARD HOLDER GUIDE
OFFSHORE INVESTMENT SCHEMES
NEW AUDIT INITIATIVES
UNDELIVERED 2004 TAX REFUNDS
REPORTING REQUIREMENTS OF NON-RESIDENT ALIENS
PAYING TAXES ONLINE
WINDFALL ELIMINATION PROVISION
ANNUAL EXPATRIATION FILING REQUIREMENT
COLLECTING DELINQUENT TAXES
HOW DOES TIPRA AFFECT AMERICAN EXPATRIATES?
PENALTY SEVERE FOR FAILING TO REPORT
NEW E-MAIL SCAM
FOREIGN TRUST FILING REQUIREMENTS
WHAT TO DO ABOUT ATTRIBUTED FOREIGN INCOME
SOMETIMES TAXES ARE NOT SO TAXING
FILING REQUIREMENTS FOR NONRESIDENT ALIENS
EU TAX DIRECTIVE
TAXATION OF GREEN CARD HOLDERS

iIRS IMPOSES HIGHER PENALTIES
Effective 1 January 2008, a new law entitled the Small Business & Work Opportunity Act imposes higher penalties on tax return preparers who take a position on a return that is unacceptable to IRS. The new standard - "more likely than not" to be sustained in the event of an audit - subjects return preparers to a minimum penalty of $1,000. The Act means that preparers must now act as both tax accountants and attorneys in the sense of following tax laws that can be unclear or changing.

GREEN CARD LEGISLATION
The US Citizenship and Immigration Services branch of Homeland Security proposed that holders of Green Cards with no expiration dates renew their cards.  This step forces over 750,000 holders to provide documentation, photographs, fingerprint and signature submissions, and submit to personal interviews.  The aim of USCIS is to update cardholder information, conduct background checks, and electronically store applicants' biometric information for comparison and authentication purposes.  But foreign executives who work for American corporations stateside could find themselves unable to re-enter the United States and retirees living in foreign countries may no longer be able to file tax returns to claim refunds of taxes withheld by Social Security.

TAXPAYER ADVOCATE SERVICE
The Taxpayer Advocate Service has recently been established to help curb the arbitrary power occasionally exercised by Internal Revenue Service in its collection proceedings.  Now Taxpayers can appeal to this Service whenever they feel that their issues are not being addressed by IRS.

WEP UNDER ASSAULT
In 2005 Social Security was adjusted downward by the Windfall Elimination Provision.  The idea was that American expatriates were not entitled to as much Social Security pensions as Americans stateside because by working abroad they would receive a foreign pension.  However, in general Americans paid into the Social Security system in bygone years at lower contributory rates, entitling them to less Social Security in retirement.  Now legislation has been introduced into Congress that would correct this offset.  Expatriates should keep an eye on whether the Social Security Fairness Act of 2007 passes.

GREEN CARD HOLDER GUIDE
Internal Revenue Service has made available Publication 4588 - Basic Tax Guide for Green Card Holders.  This guide address questions that preocupy the minds of these card holders.  1) What if my green card has been taken or given to someone in the US government? 2) What if I haven't filed any income tax returns? 3) What if I have been absent from the US for a long period of time?

OFFSHORE INVESTMENT SCHEMES
IRS is in hot pursuit of offshore investment schemes for tax revenues.It targeted a scheme in the Commonwealth of the Northern Mariana Islands where locals filed tax returns and claimed the earned income tax credit.  The intent was to obtain tax refunds on bogus filings.

NEW AUDIT INITIATIVES
Marti Sartipi, International Policy Program Manager with Internal Revenue Service, announced that IRS now has 300 auditors trained in international compliance matters and are in process of training another 100.  These auditors will 1) automate processes to assist in identifying non-filers, 2) audit 10,000 tax returns with international issues (foreign nationals and U.S. citizens working abroad), 3) impose penalties for failure to submit required disclosure documents.  Disclosure documents include Form TD F90.22-1 - Report of Foreign Bank and Financial Accounts; Form 926 - Report of cash and other transfers to a foreign corporation; Form 3520 - Report of transactions to or from a foreign trust; Form 5471 - Report of U.S. shareholders of foreign corporations; Form 8833 - Report of income tax treaty claims; Form 8621 - Report of U.S. shareholders of a Passive Foreign Investment Company; Form 8865 - Report of transactions with Controlled Foreign Partnerships.

REPORTING REQUIREMENTS OF NON-RESIDENT ALIENS
The purpose of this alert is to remind you of IRS filing requirements related to withholding on U.S. source income of non-resident aliens (NRA) and to update you on the requirements to file and deposit, and on other tax compliance matters.

Penalties encourage filers to file income tax returns such as Form 1042 (PDF) and information returns such as Forms 1042-S (PDF), and 1042-T (PDF), in a timely, complete and accurate manner. This is important to the IRS's goal to treat taxpayers equitably, and to insure that any reporting discrepancies identified are based on accurate information.

The Internal Revenue Code requires the withholding of tax on non-resident aliens. Payments to foreign persons paid U.S. source income must be reported to the payee and IRS on IRS Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding. These forms are transmitted to IRS with Form 1042-T, Annual Summary and Transmittal of Forms 1042-S. If required to file Forms 1042-S, Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, must also be filed on an annual basis.

A nonresident alien is subject to tax only on U.S. source income. Every U.S. and foreign withholding agent must file Form 1042-S to report amounts paid to foreign persons from sources in the United States. This includes interest, dividends, rents, salaries, wages, payments to independent contractors, or other gains, profits or income unless specifically exempted under the Internal Revenue Code or a tax treaty. Residents of certain foreign countries having tax treaties with the United States may be entitled to reduced rates of, or exemptions from, tax under the applicable tax treaty. Payments to nonresident aliens which are exempt from U.S. tax under a tax treaty must still be reported on Form 1042-S.

WINDFALL ELIMINATION PROVISION
Legislation was signed into law that reduces the amount of Social Security American Expatriates can receive who have worked abroad.  The reduction depends on the number of years you worked stateside.  Social Security has a table that shows each level of reduction as number of years diminishes.

EXPATRIATION FILING REQUIREMENT
The Internal Revenue Service may impose a $10,000 penalty on anyone who has expatriated or terminated his U.S. residency status and who has failed to file Form 8854 - Initial and Annual Expatriation Information Statement.  Instructions for this form provide details about the filing requirements.  The expatriation tax provisions under IRC Section 877 apply to U.S. citizens who have renounced their citizenship and long-term residents who have ended their U.S. resident status for federal tax purposes; that is to avoid paying federal income taxes. 

THE TAX INREASE PREVENTION AND RECONCILIATION ACT OF 2005 (TIPRA).  The intention of this tax bil is to prevent a tax increase, primarily due otherwise to the expiration of reduced rates on long term capital gains and qualified dividends and increased exemption amounts for the Alternative Minimum Tax.  The bill extends the provisions of the Jobs and Growth Tax Relief Reconciliation Act of 2003 until the end of 2010. 

TIPRA also increases the Foreign Earned Income Exclusion from $80,000 to $82,400 for 2006 ($87,500 in 2007).  But for those American expats whose income exceeds this threshold, taxation will be applied at rates that would apply without the exclusion. 

ON REPORTING FOREIGN ACCOUNTS
Taxpayers are reminded to report the location and account numbers of any foreign financial accounts on Form TD F 90-22.1 by 30 June each year or else face the possibility of a $10,000 penalty.  This filing is not required as long as the total of foreign account(s) is below $10,000. But watch out! The exchange rate to the US dollar has recently exceeded $1.50 to €1.

E-MAIL SCAM
IRS issued a warning to taxpayers to watch out for a new e-mail scam using the Treasury Department's Electronic Federal Tax Payment System in order to induce individuals to disclose their personal information.  The scam presents a page that appears to replicate a legitimate page from IRS.gov.  The e-mail claims that someone has enrolled the taxpayer's credit card in an attempt to pay federal taxes.  Recipients are asked to go to a link that will help them recover their funds.  Unfortunately the site asks for personal information that then enable the perpetrators to steal the taxpayer's identity.  Taxpayers should understand that IRS does not solicit personal information via unsolicitated e-mails.

OWNERS OF FOREIGN TRUSTS
Form 3520-A reporting information on Foreign trust activities is due by the 15th day of the third month following the end of the trust's tax year.  Every foreign trust is also required to acquire an Employer Identification Number (EIN) by filing Form SS-4.

FOREIGN COUNTRY ATTRIBUTES INCOME TO EXPAT
Mary Smith is a professor at Silves University.  In 2005 a visiting professor she had invited with the university's permission gave a lecture to students in her department.  In the same way a U.S. based employee might incur business-related expenses, she paid the professor's $1,500 fee and then turned in the receipt for reimbursement.  In 2006 the university reimbursed her but filed a Declaration (similar to Form 1099) with the foreign tax authority, implying that the reimbursement was actually income to her.  As a result Mary has to report this "income" on her foreign tax return and pay taxes.  What to do?

Fortunately Mary Smith earns other income abroad.  On her Schedule C, she simply deducts this $1,500 as a legitimate business expense which has the affect of reducing her reportable income to the foreign country by the amount the university has attributed to her.

WHAT DO AMERICANS REALLY PAY IN TAXES?
According to MarketWatch, a single worker with an average wage in Belgium and Germany pays 42% to the taxman.  Sweden tops the list at 50%.  By contrast Americans living and working in the United States only pay on average 24%. 

FILING REQUIREMENTS FOR NONRESIDENT ALIENS
On 31 October the Internal Revenue Service announced a new procedure for determining the amount of income tax employers have to withhold from wages paid for services performed by nonresident alien employees.  Affective for wages paid after 1 January 2006, nonresident aliens will be unable to claim an exemption from withholding, will have to request withholding as if single, will claim only one allowance, and will write "Nonresident Alien" above the dotted line on line 6 of Form W-4.

EU TAX DIRECTIVE

Beginning 1 July 2005, foreign residents will have to report and be taxed on foreign bank transactions by their EU country of residence.  In other words, earnings derived from, say, Jersey Island or Gibraltar will be deemed taxable by the EU country wherein expatriates are considered residents. 

GREEN CARD HOLDERS ARE TAXED AND TAXED

According to Gilbert Wells, recently retired tax volunteer at the American Embassy in Lisbon, U.S. taxpayers holding Green Cards have been waging a decade long struggle with IRS Philadelphia to obtain tax refunds.  A Green Card holder is a foreign person who once worked in the United States.  Having qualified to receive Social Security at retirement age, they find that their pensions are taxed by 30%.  Because Green Card holders are considered lawful permanent residents of the United States, according to IRS Publication 519, they are entitled to obtain refunds of these taxes by filing Form 1040. 

However IRS Philadelphia has consistently denied these refunds by applying inconsistent procedures.  They have insisted that Green Card holders resubmit Form 1040 as Form 1040NR (which does not allow the refund), that they are not entitled to a refund according to tax treaty, that their names do not conform to that which is listed on their Social Security card, that they must refund any prior year refunds with interest and that they must provide a declaration claiming permanent residence status.  These changing pursuit policies have confused and discouraged many Green Card filers from pursuing their rightful claims to refunds. 

The nature of taxation is change.  Every year Congress enacts new legislation to modify existing tax laws and tax forms. 

Some of the major reforms in recent years are as follows:

    2004:  American Jobs Creation Act
    2004:  Working Families Tax Relief Act
    2003:  Jobs and Growth Tax Relief Reconciliation Act
    2002:  Job Creation and Workers Assistance Act
    2001:  Economic Growth and Tax Reconciliation Act
    1993:  Revenue Reconciliation Act
    1990:  Revenue Reconciliation Act
    1986:  Tax Reform Act