The TaxBarron Report
December 2006

The Christmas season is upon us.  Whether you commemorate this occasion with traditional gift giving, family reunions or quiet contemplation, we send to you our greetings, wish for you favorable outcomes and hope with you that a world in conflict may gradually change to one at peace. For previous issues of the TaxBarron Report, click here.

In This Issue

IRS to Pursue American Expatriates

Year-end Tax Savings Strategies

Property Scamming

Tax Filing Calendar

Recommended Articles

IRS to Pursue American Expatriates

Marti Sartipi, International Policy Program Manager for Internal Revenue Service, has recently said that her employer has between 300 and 400 auditors trained in international tax compliance.  The initiatives of these auditors are to include:  1) automating processes to identify non-filers, 2) auditing 10,000 tax returns of U.S. citizens and foreign nationals with international issues, 3) imposing penalties for failure to submit required disclosure documents.

Disclosure documents include but are not limited to Form TD F90.22.1 - Report of Foreign Bank and Financial Accounts; Form 5471 - Report of U.S. Shareholders of Foreign Corporations; Form 8621 - Report of U.S. Shareholders of Passive Foreign Investment Company; Form 8833 - Report of Income Tax Treaty Claims; and Form 8865 - Report of Transactions with Controlled Foreign Partnerships.

Civil penalties will apply to anyone who does not file a disclosure document:  $500 for negligence, $10,000 for non-willful violation, $50,000 for consistent negligence, $100,000 for willful failure.  Other penalties will be assessed for 1) filing the wrong tax return, 2) claiming the wrong filing status, 3) under-reporting of income, 4) claiming incorrect personal exemptions, 5) incorrectly claiming a tax treaty benefit, 6) claiming improper expense deductions, 7) excluding taxable capital gains stock as a non-resident alien, 8) failing to file a tax return, 9) failing to file a state income tax return.

The Service will also target accouints payable transactions in order to identify foreign national non-filers.  Companies under scrutiny are pharmaceuticals, publishing, high tech, law and accounting firms, and the entertainment industry, among others.

Year-end Tax Savings Strategies

Harold Gibson (name changed) is a stockbroker who works for one of those high-stress brokerage firms in New York City.  As a Single filer, he hired the services of a CPA firm in the Big Apple to prepare his annual tax return which they did for several years.

In 2002 Harold married a non-resident alien.  They set up housekeeping in Portugal for his wife's convenience while he commuted regularly to his job.  When the CPA firm did Harold's 2002 and 2003 tax returns, they filed him as Married Filing Separate.  Based on taxable income of $112,000 in 2002 and $121,000 in 2003, he was liable for some $30,000 in federal income taxes in 2002 and $32,000 in 2003.  Had he filed Married Joint, he would have saved $18,000 in taxes.  So based on our advice, Harold amended his 2002 and 2003 tax returns to recover those taxes.  His wife's income was excluded from U.S. taxation by Form 2555.

If you are contemplating marriage this year, do so before midnight on 31 December and like Harold you might get a substantial tax break when filing your 2006 tax return.

Besides getting married, consider selling stocks at a loss to offset any significant Capital Gains.  Defer income into 2007, particularly if such income will be taxed at a higher tax bracket.  If you are self-employed, incur necessary business expenditures before year end.  If you are contemplating the purchase of a mutual fund, be watchful lest you buy into a year end taxable account.  Give appreciated assets to someone in a lower tax bracket.  Begin gathering and organizing your tax papers.  Better organization will save time and anxiety later.

More on Some Relevant Tax Planning

Property Scamming

My friend is selling his villa in the Algarve.  It is being advertised on several websites and attracting some attention due to the quality of construction and reduced price.

Recently a prospective buyer identifying himself as Steve called to say he was very much interested in purchasing the villa.  Could my friend travel to Belgium to discuss the sale, he asked.  Now this was a strange request, especially as "Steve" had not seen the villa.  And more especially as he was merely representing the "buyer".

This subterfuge may well be connected to the latest "Nigerian 419" scams in which the "client" persuades the seller to accept a trunk of transported money that turns out not to be full in return for which he is asked to pay for the services of a security company.  Or the "client" gives the seller a check for a large sum of money, asking that he give back to the "client" the difference between the check amount and the property purchase price.  Later the check turns out to be worthless.

More on Nigerian Property Scamming

Tax Filing Calendar

Keeping up with tax filing deadlines can help avoid unpleasant surprises in the form of penalties and interest from the taxman.  So keep abreast of the following dates.  And be sure that your mailings allow enough time to reach IRS by the deadline.  Postmarks don't count from Europe.

01.17 - Fourth Estimated Tax Payment due with Form 1040-ES.

01.31 - Deadline to file 2006 tax return and payment if you did not make those Estimated Tax Payments.

04.16 - Individual tax return due for U.S. residents.  File Form 4868 for automatic 6 month extension.  Foreign residents must pay any taxes due.  First quarter Estimate Tax due.

06.15 - Second quarter Estimated Tax due.  Individual tax return due for foreign residents.  File Form 4868 for automatic 4 month extension.

09.17 - Third quarter Estimated Tax due.

10.15 - Individual income tax return due for those who extended the filing deadline with Form 4868.

06.16.08 - Fourth quarter Estimated Tax due.

Expanded IRS Tax Calendar

Recommended Articles

EU Court Ruling (no longer available)

Offshore Tax Shelter Examined

Congress Extends Tax Breaks

Money and Happiness