- About Us
- Our Services
- International Taxation
- Tax Publications
- Contact Us
37.8 million Americans watched the inauguration of President Barack Obama on 20 January. Upwards to 1.8 million actually attended. And around the world peoples in many countries and cultures also watched. Not since the Millennium celebrations have so many cultures and nations come together to commemorate an historic event. 'A new birth of freedom,' was clarion call of President Obama's inaugural address. May the American nation together with the world's family of nations come to embrace his vision. For previous issues of the TaxBarron Report, click here.
In This Issue:
RJ has been employed as a Consular Agent since 2003. As an American expatriate who qualified as a resident of a foreign country at the time of his being hired, RJ has never had diplomatic or consular rights in his employment. Nor does he receive any retirement benefits, vacation time or travel allowances. He lacks rights of tenure and can be discharged at any time.
Not certain whether he qualified for the Foreign Earned Income Exclusion in spite of his foreign residency, he consulted in 2003 with two agents of the Paris international IRS office. They replied that he did indeed qualify as his employment was 'impermanent and intermittent.' So for years 2003, 2004, 2005, 2006 and 2007, RJ claimed the Foreign Earned Income Exclusion on his tax returns.
In December 2008, he received an audit notice in which he was denied FEIE for years 2005, 2006 and 2007. Not only did this denial increase his tax liabilities for the three years but RJ was assessed a 20% accuracy penalty against the deficiencies. IRS stated in its audit notice: 'Per IRC 911(b)(1)(B)(ii), amounts paid by the United States or any of its agencies to its employees are not considered foreign earned income for the purposes of the foreign earned income exclusion.'
Accuracy penalties are assessed due to 1) negligence or disregard of rules or regulations, 2) substantial understatement of income tax, 3) substantial valuation misstatement, 4) substantial overstatement of pension liabilities, 5) substantial valuation misstatement in connection with gift or estate tax. RJ was penalized for substantial tax understatement per IRC Section 6662(d). 'If we increase your tax,' the audit notice further stated, 'and the increase exceeds 10% of the corrected tax and is also equal to or greater than $5,000, the law requires an accuracy-related penalty due to substantial understatement of tax. The penalty is 20% of your tax increase.'
Generally speaking, human error is affected by a variety of factors such as age, attitude, physical health, state of mind, emotional state and stressful events. To err is simply human. Accuracy errors in preparing a tax return are often attributed to missing tax documents, inexact records, mathematical mistakes, misinterpreting tax code or instructions, rush to meet filing deadlines, erroneous use of tax tables, etc.
IRS states that an Accuracy Penalty may only be decreased or waived if the taxpayer can 1) provide substantial authority (Internal Revenue Code, Regulations, Revenue Rulings, Revenue Procedures, etc.) used to treat disputed income or deductions; 2) show the facts supporting the treatment of disputed income or deduction; 3) submit a signed statement that outlines the facts supporting the treatment of understated income.
While RJ appeals his tax and penalty assessments, Americans whether at home or abroad must exercise due diligence in preparing their tax returns in order to avoid the nightmare of an IRS audit and the prospect of heavy- handed accuracy penalties.
'PRESIDENT Obama did not offer his patented poetry in his Inaugural Address. He did not add to his cache of quotations in Bartlett's. He did not recreate J.F.K.'s inaugural, or Lincoln's second, or F.D.R.'s first. The great orator was mainly at his best when taking shots at Bush and Cheney, who, in black hat and wheelchair, looked like the misbegotten spawn of the evil Mr. Potter in "It's a Wonderful Life" and the Wicked Witch of the West.
'Such was the judgment of many Washington drama critics. But there's a reason that this speech was austere, not pretty. Form followed content. Obama wasn't just rebuking the outgoing administration. He was delicately but unmistakably calling out the rest of us who went along for the ride as America swerved into the dangerous place we find ourselves now.
'Feckless as it was for Bush to ask Americans to go shopping after 9/11, we all too enthusiastically followed his lead, whether we were wealthy, working-class or in between. We spent a decade feasting on easy money, don't-pay-as-you-go consumerism and a metastasizing celebrity culture. We did so while a supposedly cost-free, off-the-books war, usually out of sight and out of mind, helped break the bank along with our nation's spirit and reputation. Read more . . .
ANSWER TO LAST MONTH'S QUIZ: Yes. Under Section 2042 and Reg. 20.2042-1(b)(1), the proceeds of life insurance policies receivable by or for the benefit of the estate, its executor or administrator, are includable in the insured's estate, no matter who took out the policy or who paid the premiums.
THIS MONTH'S QUIZ: James received a notice of proposed balance due for a 2005 tax return. He and his wife, Joyce, did not file a tax return in 2005, but based on Form W-2 information issued by James's employer, IRS prepared a substitute return (SFR). Joyce had no income in 2005. The SFR shows James as single. He wants to amend the SFR to refile as married filing joint with two dependent children. Can an amended return be filed to correct the filing status and exemptions?
Not every tax deadline applies to tax filers. But the following list should be kept, just in case:
March 16 - Deadline for filing calendar year-ending corporate tax returns.
April 15 - 2008 tax liability; first quarter 2009 estimated tax payment due; Form 1065 partnership returns due.
June 15 - Tax Return due date for US citizens and residents abroad; Form 4868 extends due date to October 15; Second quarter 2009 estimated tax payment.
June 30 - Report of foreign financial accounts, Form TD F 90- 22.1.
September 15 - Third quarter estimated taxes.
October 15 - 2008 individual tax return due for returns extended by Form 4868.
January 15, 2010 - Fourth quarter 2009 estimated tax payment.
Information Return Forms 5471 and 8865 due with individual tax return.
The United States has in place tax treaties with many foreign countries. Under these treaties, foreign residents are taxed at a reduced rate or else exempt from US income taxes on some US source income flows. Accordingly a US citizen or resident receiving income from a treaty country may therefore be taxed at a reduced tax rate in the foreign country wherein he/she resides.
For nonresident aliens, treaties limit or eliminate US taxes on certain personal services income as well as income from pensions, interest, dividends, royalties and capital gains. Many treaties limit the number of years you can claim a treaty exemption.
US citizens and residents generally cannot reduce their US tax based on treaty provisions. But those subject to treaty partner foreign taxes are entitled to certain credits, deductions, exemptions and reductions in the rate of taxes paid to that foreign country.
In the event you can claim treaty benefits that offset any provision of the Internal Revenue Code, Form 8833 - Treaty-Based Return Position Disclosure - must be filed with your tax return.
Foreign Trust Reporting Requirements
Regardless of one's motivation for forming a foreign trust, US persons are required by IRS to meet certain filing requirements. In general, US persons must file Form 3520 - Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts if the US person 1) creates or transfers money or property to a foreign trust, 2) receives (directly or indirectly) any distributions from a foreign trust, 3) receives certain gifts or bequests from foreign entities. Form 3520-A - Annual Information Return of Foreign Trust with a US Owner - may be required.
If you receive a distribution from, or were grantor of, or a transferor to a foreign trust, you must complete Form 1040, Schedule B, Part III. If you have financial interest in or signature authority over an account associated with a foreign trust, Form TDF 90-22.1 - Report of Foreign Bank and Financial Accounts - must be filed. A US person who transfers money or property to a foreign trust may also be required to file Form 709 - Gift Tax Return. Finally, a foreign trust that is not taxed to a US owner as a grantor trust, may be obliged to file Form 1040NR and pay US tax on certain US sourced income.
The study of law can be disappointing at times, a matter of applying narrow rules and arcane procedure to an uncooperative reality; a sort of glorified accounting that serves to regulate the affairs of those who have power - and that all too often seeks to explain, to those who do not, the ultimate wisdom and justness of their condition. - Barack Obama