TaxBarron Report
July/August 2008

The 2007 tax filing season finished for the majority of American expatriates in mid-June. For those who filed Form 4868 - Application for Automatic Extension of Time - the extended due date is 15 October 2008. But if those 2007 taxes were not paid by 15 April, interest and penalty are increasing the liability. The big news appears to be in offshore tax avoidance involving UBS, Switzerland and LGT, Liechtenstein. For previous issues of the TaxBarron Report, click here.

In This Issue:

Tax Scandal Alerts Senate

Early Withdrawal Penalty Regulations Trip Taxpayer

Tax Quiz

Deducting Meals and Entertainment Expenses

Registering to Vote

PONDERABLE

Recommended

Tax Scandal Alerts Senate

Lately UBS, the world's largest wealth manager, has fallen awry of the American tax authority for colluding with a Liechtenstein bank to help some 19,000 wealthy Americans evade billions of dollars in taxes, this according to Senate investigators. Their 114 page report claims that the US treasury is losing $100b annually to tax non-filers using foreign banks. The report states that Liechtenstein bank LGT fostered a "culture of secrecy and deception" while assigning code names to US clients. "UBS has opened thousands of accounts in Switzerland that are beneficially owned by US clients, hold billions of dollars in assets, and have not been reported to the US tax authorities." A US federal judge has ruled this month that the IRS can serve legal papers on UBS as part of an expanding probe of US taxpapers who have been using overseas accounts to hide assets and avoid taxes.

Meanwhile Mark Branson, CFO for UBS global wealth management, testified before a congressional hearing where he has handily assured that UBS is working with the government to identify those US clients who may be engaged in tax fraud. He said UBS regretted "any compliance failures that may have occurred." Nevertheless UBS and LGT allegedly flouted agreements to help IRS track down foreign assets of US clients. UBS has announced that it no longer provides offshore banking to US residents through its Swiss- based branches.

Apparently a former LGT employee decided he could profit by selling information on secret accounts. He has now been branded a thief by the government of Liechtenstein for violating bank secrecy laws.

UBS To Stop Offshore Banking

 

Early Withdrawal Penalty Regulations Trip Taxpayer

A 10% penalty applies against early withdrawals from qualified retirement plans (QRP). When a taxpayer retired at age 53, he read that a penalty exception applies once a retired person has become 55 and separated from his employment. Accordingly in his 55th year, he took $25,000 from his QRP and paid no penalty on the withdrawal.

IRS interpretation of the statute differed. The Service argued that a taxpayer must be separated from his employment after becoming 55. Therefore the taxpayer owed the 10% penalty. Subsequently a tax court ruled that the taxpayer had behaved intelligently and thoughtfully. But "in spite of his intelligence, in his attempt to be a good citizen and to pay the rightful share of tax, he was tripped up by the complexity and sometimes ambiguous nature of the tax law." - NATP

Tax Quiz

ANSWER TO LAST MONTH'S QUIZ: Probably not. If the taxpayer has not performed this type of work before and does not plan to do so again, then the activity is probably not self-employment income subject to self-employment tax. It will be considered a hobby with the income reported on Form 1040, page 1, as other income and the expenses reported on Schedule A as a 2% miscellaneous itemized deduction.

THIS MONTH'S QUIZ: A taxpayer owned and lived in his personal residence since March 1984. In January 2006, he was transferred by his employer to another state. He therefore rented his home out while awaiting its sale. The sale occurred on 1 February 2007 for a gain of $75,000. While he rented his home, he claimed the income and corresponding expenses on Schedule E. Does this taxpayer still qualify for the $250,000 exclusion of the gain from the sale of his home?

Deducting Meals and Entertainment Expenses

Until 1987, taxpayers could deduct 100% of any entertainment business-related costs. However, because Congress felt that these deductions were being abused, it reduced the amount allowable to 50%.

To qualify for deducting these expenses, IRS requires five questions be answered: 1) Who was entertained (name, occupation, title, etc.), 2) Where was the entertainment (describe nature and place), 3) When was the entertainment (dated in diary- type document), 4) Why was the entertainment (business purpose), 5) How much was spent. As long as the expenditure is under $75, IRS requires no receipt. But you must record your answers to these questions in a timely fashion, being sure to link the entertainment to a bonafide business discussion in a proper business setting. The entertainment can precede or follow the business discussion.

Meals and entertainment may be 100% deductible under certain situations. A professional music critic can deduct 100% of costs of concert tickets. Travel agents evaluating hotels or restaurants can fully deduct these costs. An in-home seminar in which the guests are fed can be another exception. The costs of country club or health club dues where business is fully conducted can also be 100% deducted. Finally if your employer pays for your meals under an accountable plan, these are treated as fully deductible to him.

Registering to Vote

Democrats Abroad is notifying its readers of a site for voter registration. The site invites you to become a member, but you do not have to do so. In fact, you can also register to vote at the American Citizens Abroad site by simply clicking voter registration and following the instructions.

PONDERABLE

Education is the great engine of personal development. It is through education that the daughter of a peasant can become a doctor, that a son of a mineworker can become the head of the mine, that a child of farm workers can become the president. - Nelson Mandela

Recommended

Former UBS Banker Pleads Guilty to Tax Evasion

IRS to Strenthen QI Program

IRS Counters Offshore Tax Avoidance

Scammers Pose as IRS