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Barron's International Tax Service

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The TaxBarron Report
June 2007

Don't forget to file Form TD F 90-22.1 - The Report of Foreign Bank and Financial Accounts - due 2 July 2007 this year. Any taxpayer who maintained over $10,000 in one or more foreign financial accounts at any time during the 2006 calendar year must file this Form with the US Department of Treasury in Detroit, MI. The form is available at the IRS website: www.irs.gov. Failure to file can result in a $10,000 penalty. For previous issues of the TaxBarron Report, click here.

In This Issue

Counting Your Vote

Have You Been Audited?

Tax Quiz

$39.4m Penalty Against Promoters of Abusive Tax Shelters

Tax Shelter Information Centre Expansion

Recommended

 

Counting Your Vote

If you are thinking that your vote in the upcoming presidential primaries will count, think again. According to an article dated 13 June in the New York Times, the Defense Department has spent more than $30m in the last six years to develop an efficient method whereby some 5m American soldiers and expatriates can vote in elections stateside. In an era where the Internet is being used by criminals to manipulate identities and records for unprecedented profit, security experts and congressional auditors claim that the system is vulnerable to vote tampering. The Election Assistance Commission is a long way from creating guidelines for secure Internet voting.

Traditional paper balloting is not without problems too. The process is tedious and uncertain as voters send paper forms across continents and oceans as they register to vote, request a ballot and then return the ballot before the polls close. Postal services being fickle, forms and ballots are often delayed if not lost in the mails. Voters create some delays as well due to their not understanding or having the patience to understand complex rules and deadlines that vary from state to state. Not surprisingly up to a half of overseas voters fail in their attempt to cast their ballots.

Mindful that a few disqualified ballots from overseas might otherwise have gotten Gore elected over Bush in 2000, the inability of American expatriates to cast their vote in 2008 can determine who does NOT get elected the next President of the United States, since only a few thousand votes from overseas may well make a difference.

Consider KD, a businessman living in New Zealand. He received his absentee ballot before the 2006 election. Inside were a piece of paper with instructions on how to fold the paper into an envelope for mailing the ballot. Careful to follow the instructions, he received a notice weeks after the election that his vote had not been counted because he had used an improper envelope. Under the current snail mail system, overseas ballots are often contested because they arrive late or lack postage or postmarks.

These uncertainties aside, American Citizens Abroad on their website indicate that the Federal Voting Assistance Program - www.fvap.gov - explains the procedure for voting in all federal elections in one's home state (or last place of US residency). The non-governmental Overseas Vote Foundation - www.ovf-rava.org - can assist registration abroad. The procedure is automated from their website for any state. Registerers should allow for receiving a ballot in time for the November Congressional election.

 

Have You Been Audited?

Some years ago, IRS audited Joe Bean. Joe received his audit notice in the mail. As one might expect, he was alarmed. At first glance, he couldn't figure out why he was being targeted. He had always filed his taxes on time and never sought to hide anything from the Infernal Revenue Service. As Joe got ready for the audit, he went over everything in his tax returns from three years before.

The audit actually went well and Joe made his way home after only a few hours at the local IRS office. Afterward, Joe's friend, Ralph, phoned to ask how did he come out? Joe replied that it went much better than expected. 'When it came out in the audit that I knew you, the auditor was willing to forgive everything for my testimony. Well naturally I agreed - anything to help out Uncle Sam!'

This humorous story reminds us how any clever prankster could unsettle his friends or foes with phony threats of IRS audits. In pre-Internet days, he could simply create an official looking IRS audit notice and send it to some intended victim for a laugh.

Nowadays, however, fake IRS tax audits have taken a more serious turn with the Internet. IRS is warning computer users about phony emails that convince recipients that they are under tax investigation. These notices come with an attached file with the result that the hapless victim in opening the file gives scammers access to his or her computer hard drive. Apparently in certain cases, scammers may ask for financial information. In other variations, email scammers have set up a fake IRS website which asks for the victim's bank acocunt numbers. Or a fake email informs the recipient that IRS is holding a refund but requires financial information for the payment to be made. Any such emails should be forwarded to phishing@irs.gov.

 

Tax Quiz

Married taxpayers who are US citizens are filing a joint tax return. The couple has a second home in Pau, France. The mortgage on the home is from a local bank and the home secures the loan. There is a remaining balance of $200,000 on the home, consisting entirely of home acquisition indebtedness. The couple's principle residence in the US has an outstanding loan balance of $325,000. Can the couple claim a home mortgage interest expense deduction on Schedule A for the second home?

 

$39.4m Penalty Against Promoters of Abusive Tax Shelters

IRS has announced that it assessed a $39.4m penalty against the law firm of Sidley Austin LLP. The penalty is the result of the firm's promoting abusive tax shelters to over 700 high net worth individuals and corporations. Some of the marketed shelters have been identified as a Bond & Option Sale Strategy, Currency Options Bring Reward Alternatives, Bond Linked Issue Premium Structures, Currency Option Investment Strategy, Foreign Leveraged Investment Program, Offshore Portfolio Investment Strategy, and Partnership Option Portfolio Securities.

Many expatriates reading this article will not identify with these tax shelters. But this penalty reminds us that not many months ago we reported that abusive offshore tax havens are costing IRS some $70b in lost tax revenues annually, with the result that the Service is seeking out abusive ones. So in view of this rather stiff penalty, now might be a good time for any readers invested in offshore tax shelters to re-read that article, and consider whether or not their offshore investment could come under scrutiny. Sidley Austin LLP has offices in Beijing, Brussels, Chicago, Dallas, Frankfurt, Geneva, Hong Kong, London, Los Angeles, New York, San Francisco, Shanghai, Singapore, Tokyo and Washington DC.

 

Tax Shelter Information Centre Expansion

IRS has recently reported that tax commissioners in the United States, Australia, Canada and United Kingdom are opening a second office of the Joint International Tax Shelter Information Centre in London this fall. Japan may be joining the group as well.

The commissioners of these countries claim that exchanging information in real-time is making significant inroads in tracking tax avoidance and abusive cross-border transactions. The members have identified and challenged what they consider artificial arrangements:

1. A cross-border scheme was marketed, involving hundreds of taxpayers and tens of millions of dollars in improper deductions and unreported income from retirement account withdrawals.
2. Highly structured financing transactions created by financial institutions in which taxpayers generated inappropriate foreign tax credit benefits.
3. Brokers provided made-to-order loses on futures and options transactions for individuals in other member jurisdictions, leading to a tax loss of more than $100,000,000.

 

Recommended

Overpaid CEOs

Controlled Foreign Corporation Tax Guide

Jacob's Report: Tax Avoidance on Foreign Corporation Income

IRS Audits to Increase