Anderson ZurMuehlen Blog

Foreign Account Tax Withholding Rules Update

Erin Stockwellby Erin Stockwell, CPA, senior manager

After June 30, 2014, Foreign Account Tax Compliance Act (FATCA) withholding rules came into effect.  These withholding rules apply to certain payments made to non-US entities, and are in addition to the withholding rules for payments to non-US persons (including entities) that have been in place for years.  FATCA withholding is 30% and is required when certain documentation is not in place at the time the payment to the non-US entity is made.  If you make payments to non-US entities, you may be considered a withholding agent, meaning it is your responsibility to obtain the required paperwork and withhold if necessary.  A withholding agent that is required to withhold with respect to a payment but fails either to withhold, or to deposit any tax withheld, is liable for the amount of tax not withheld and deposited.  In addition, payments and associated withholding must be reported to the IRS by the assigned due date, which varies depending on the form required.

We understand this is a new and confusing law.  If you have questions, please contact Erin Stockwell, senior manager, by email or at 406.727.0888.

Client Letter for the Foreign Account Tax Compliance Act FATCA

Foreign Account Tax Compliance Act-IRS webpage

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New Streamlined Offshore Procedures

Dana Cade

Dana Cade, manager

By Dana Cade, CPA, manager

At the end of June 2014, the IRS released changes to its 2012 Offshore Voluntary Disclosure Program (OVDP) and its 2012 Streamlined Program for Non-US taxpayers. These changes became effective July 1, 2014.  The good news is the IRS has recognized that many taxpayers who are out of compliance have not done so willfully.  To assist these taxpayers, the IRS has expanded the streamlined program to accept non-willful taxpayers residing in the US.  Penalties are greatly reduced, if not eliminated, for non-willful filers.

Streamlined Procedures

The new streamlined offshore procedures are limited to taxpayers who have been non-willfully out of compliance with US tax laws. The procedures are divided into two categories: one for non-resident US taxpayers, and the other for resident US taxpayers.  Taxpayers in either category are required to file amended (US) or missing (non-resident) returns (including but not limited to Forms 3520A, 352A, 5471, 5472, 8938, 926 and 8621) for the past three years and foreign account forms for six years (FBAR and 8938, as applicable).

Taxpayers who qualify to file under the new streamlined procedures will need to sign a certification to that effect. The certification must also include a statement that all of the FBARS are now filed.  The taxpayer must sign under penalty of perjury that his/her failure to meet US tax obligations was non-willful conduct and that the offshore penalties have been computed accurately.  A worksheet providing these calculations must be attached.

Before discussing the new program and procedures, it’s important to distinguish between non-resident US taxpayers and resident US taxpayers. “Non-resident US taxpayer” means a US citizen or green card holder who, for any of the most recent three years for which a US tax return was due, didn’t have a US abode and was physically outside the country for (this purpose) at least 330 days, or a non-US citizen or non-green card holder who doesn’t meet the substantial presence test for that same period.  There is no penalty for non-residents.  “Resident US taxpayer” means a US citizen, lawful permanent resident, and those meeting the substantial presence test.

Qualifying for the Procedures

To qualify for the Domestic Offshore Procedures, the taxpayer must meet the following requirements:

  1. Depending on filing status, one (single) or both (married) must fail to meet the non-residency requirement.
  2. Have previously filed (in a timely manner) a US return, if required, for each of the most recent three years for which the US tax return due date or extended due date has passed.
  3. Failed to report gross income from a foreign financial asset and pay tax as required by law. If the taxpayer reported gross income from the foreign asset and paid all taxes related to that asset, this requirement maybe satisfied if the taxpayer failed to file an FBAR and/or other international informational return, such as IRS forms , 3520, 3520-A, 5471, 5472, 8938, 926, and 8621.
  4. The failures enumerated in number three above must have resulted from non-willful conduct, which includes negligence, inadvertence, mistake, or conduct that is the result of a good faith misunderstanding of the requirements.

Some things to note:

  • A miscellaneous 5% penalty on the highest FBAR (FinCen) balance for the past six years will be assessed in most cases, plus tax and interest due with the returns.
  • Failure to file foreign informational forms leaves the statute of limitations open until the forms are filed.
  • If a taxpayer is already working on an OVPD under an older program, he/she might qualify for the miscellaneous 5% treatment under the new program but would still have to file additional tax returns and FBARS.
  • There may be other factors that preclude a resident US taxpayer from getting the favorable 5% penalty.

Changes to the Offshore Voluntary Disclosure Program (OVDP)

The objective of the new Offshore Voluntary Disclosure Program remains the same as the original program: to bring taxpayers who have used undisclosed foreign accounts and assets (including those held through undisclosed foreign entities) to avoid or evade tax into compliance with US tax and related laws. Some of the changes that have been made to the OVDP are significant. For example, under the 2012 OVDP, the noncompliance penalty was 27.5% of the highest balance of noncompliant foreign assets. Under the 2014 OVDP, the penalty could increase to 50%, depending on which banks held the taxpayer’s account.

So why should a taxpayer make the voluntary disclosure? Taxpayers holding undisclosed foreign accounts and assets, including those held through undisclosed foreign entities, should do it because it enables them to become compliant, avoid substantial civil penalties, and generally eliminate the risk of criminal prosecution for all issues relating to tax noncompliance and failing to file FBARs.  In contrast, taxpayers simply filing amended returns or filing through the Streamlined Filing Compliance Procedures risk criminal prosecution.  Making a voluntary disclosure also provides the opportunity to calculate, with a reasonable degree of certainty, the total cost of resolving all offshore tax issues.  Taxpayers who do not submit voluntary disclosure risk detection by the IRS and the imposition of substantial penalties, including the fraud penalty and foreign information return penalties.  They also face an increased risk of criminal prosecution.  The IRS remains actively engaged in identifying those with undisclosed foreign financial accounts and assets.  This information is increasingly available to the IRS under tax treaties, through submissions by whistleblowers, and from other sources, and it will become more available under the FATCA and Foreign Financial Asset Reporting (IRC § 6038D). For more information on International Tax issues, contact Dana Cade, Senior Manager, by email or by phone at 406.442.1040.

Source: http://www.irs.gov/Individuals/International-Taxpayers/Offshore-Voluntary-Disclosure-Program-Frequently-Asked-Questions-and-Answers-2012-Revise

Anderson ZurMuehlen’s International Tax Information

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Got a Canadian Retirement Plan? IRS Simplifies Procedures

Are you a taxpayer who holds an interest in one of Canada’s popular retirement plans? The IRS recently announced that it is making it easier to get favorable tax treatment and making reporting requirements simpler for eligible individuals with Canadian registered retirement savings plans (RRSPs) and registered retirement income funds (RRIFs). For more information select here, or contact Erin Stockwell, Senior Manager, by email or call 406.727.0888.

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IRS Simplifies Exemption Requests for Small 501(c)(3) Organizations

Shirley WalkerBy Shirlee Walker, CPA, Shareholder

It’s now easier to create a nonprofit organization since the Internal Revenue Service (IRS) issued the Form 1023-EZ in July 2014. This streamlined Application for Recognition of Exemption under Section 501(c)(3) of the Internal Revenue Code can be used by small tax-exempt organizations applying for tax exemption under IRC 501(c)(3). An organization that qualifies for exemption under 501(c)(3), normally has gross receipts of less than $50,000, less than $250,000 of assets and would be eligible to file an annual report on Form 990N can use this new Form 1023-EZ to apply for tax-exempt status.

The form itself is only three pages compared to Form 1023’s 12 page base form. The Form 1023-EZ user fee is $400 compared to the Form 1023’s $850. The applicant must attest they have completed the 15 question Eligibility Worksheet included in the instructions to Form 1023-EZ. This process has eliminated the need for IRS employees to review the documents and make an eligibility determination for the applicant.

In addition, the form 1023-EZ and the user fee must be electronically filed. The IRS will not accept printed copies and the turnaround time for the IRS to approve the tax-exempt status is around two months versus 18 months with the Form 1023. If the Form 1023-EZ is filed within 27 month after the organization was legally formed, the exemption will be retroactive to the date of formation. The applicant must be legally organized to operate as a tax-exempt organization with a mission, board members and documents that insure the assets will be used for its tax-exempt purpose.

If you are interested in learning more about the new streamlined nonprofit application process, please contact Shirlee Walker, CPA, Shareholder, by email or at 406.721.7800.

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Officially Abandon Your Green Card Or You May Have Tax Consequences

Erin Stockwellby Erin Stockwell, CPA, Senior Manager

One common misconception of people who are U.S. lawful permanent residents (commonly known as green card holders) is that tax law and immigration law follow suit.  Unfortunately this is not necessarily true, as demonstrated by the 2014 Tax Court case Gerd Topsnik v. Commissioner, 143 T.C. No. 12.  The issue involved was whether Mr. Topsnik was a U.S. permanent resident; he claimed he informally abandoned his status in 2003 while the IRS claimed that he remained a permanent resident until he officially abandoned his status in 2010.

Mr. Topsnik was a German citizen and received his U.S. green card in 1977.  He started a business in California and owned a residence in Hawaii.  In 2003, he sold his house in Hawaii and moved back to Germany.  In 2004, he sold his business for over $5 million.  He claimed that he informally abandoned his green card in 2003 and so he was no longer a U.S. resident.  As such, he was a nonresident under the U.S. – Germany Tax Treaty, and the gain on the sale of his business was not taxable by the U.S.  IRS claimed that he was still a permanent resident because he had not officially abandoned his status at the time of the sale.  As a permanent resident, the gain was taxable by the U.S. no matter where he lived in the world.  The courts sided with the IRS and Mr. Topsnik was considered a U.S. resident until 2010, and as such had to pay U.S. income tax on the sale of his business.

The U.S. Internal Revenue Code Section 7701 sets the requirements for abandoning permanent resident status for tax purposes.  In order to formally abandon permanent resident status, a green card holder must file either an application for abandonment (INS Form I-407) or a letter stating his or her intent to abandon his or her resident status.  The application or letter must be filed with the Immigration and Naturalization Service (INS) or a consular officer.  Enclosed with the application, the green card holder must also send in the Alien Registration Receipt Card (INS Form I-151 or Form I-551).  The green card holder should keep a copy of all documentation sent to the INS or consular officer.  Resident status is considered to be formally abandoned once the authorities issue a final administrative order of abandonment.

Until someone has officially abandoned his or her residency status, not only could he or she be held liable for U.S. tax, but could also be required to file annual U.S. income tax returns and foreign bank account reporting forms (FinCEN 114).  If the person dies without officially abandoning residency status, then his or her estate is considered a U.S. estate and must report worldwide assets if over the U.S. estate exemption amount.  This is the case even if INS no longer recognizes the green card and the person can no longer enter the U.S. as a resident.  Not an ideal situation, for sure.

If you find yourself in this situation, don’t let it overwhelm you.  We can help. Erin Stockwell, CPA, Senior Manager, can be reached by email or at 406. 727.0888.

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What’s New in the International Tax World?

By Dana Cade, Supervisor

Offshore Voluntary Disclosure Program

At the end of June, the IRS released changes to its 2012 Offshore Voluntary Disclosure Program (OVDP) and its 2012 Streamlined Program for Non-US taxpayers. These changes became effective July 1, 2014. The good news is the IRS has recognized that many taxpayers who are out of compliance have not done so willfully. To assist these taxpayers, the IRS has expanded the streamlined program to accept non-willful taxpayers residing in the US. Penalties are greatly reduced, if not eliminated, for non-willful filers.

The bad news is the IRS has upped the ante on penalties for willful filers. Under the 2012 OVDP, the noncompliance penalty was 27.5% of the highest balance of noncompliant foreign assets. Under the 2014 OVDP, the penalty could increase to 50%, depending on which banks held the taxpayer’s account(s). Fifty percent could still be a bargain, considering that recently the IRS assessed a 150% penalty on an undisclosed foreign account. Yes, the penalty was more than the total balance in the account.

The difficulty right now for practitioners is that the IRS hasn’t defined “willful.” New FAQs have been issued, but there are still more gray areas than black and white. We’re hopeful the IRS will clarify some issues in the coming weeks, but only time will tell.

Foreign Account Compliance Act

The IRS issued final Foreign Account Compliance Act (FATCA) regulations on January 17, 2013 that phase in the implementation of FATCA requirements over the period beginning January 1, 2014 and continuing through 2017. The Department of Treasury and the IRS subsequently provided revised timelines for implementing various requirements of FATCA.

The most recent phase of FATCA was rolled out in July 2014. FATCA requires foreign financial institutions to provide details of US citizens with accounts held internationally that have balances in excess of $50,000. Failure to provide the US Treasury Department and the IRS with this information creates serious complications for these financial institutions.

After foreign institutions identify US account holders, FATCA requires the institutions to impose a 30% tax on payments or transfers to any account holders who refuse to get into full US compliance. Foreign financial institutions (FFIs) must report account numbers, balances, names, addresses, and US taxpayer identification numbers. For US-owned foreign entities, they must report the name, address, and US taxpayer identification number of each substantial US owner.

To ease the burdens of FATCA implementation and compliance, two model intergovernmental agreements (Model 1 or Model 2 IGA) have been issued. These agreements are designed to increase reporting compliance by foreign financial institutions while addressing difficulties with implementation under the FATCA partner’s local law.

Here’s a link to a Treasury Department website that lists jurisdictions with signed agreements in place: . It’s expected that virtually all nations will eventually comply with FATCA requirements. Although there is opposition to these requirements, FATCA is almost surely here to stay.

Individual Tax Payer Identification Numbers 

There has been a change in policy on Individual Taxpayer Identification Numbers (ITINs). Here are the old and new policies.

Old Policy: Under the old policy, ITINs issued after January 1, 2013 would have automatically expired after five years, even if used properly and regularly by taxpayers.

New Policy: Under the new policy, ITINs will be evaluated using a five-year look-back period. An ITIN not used on a federal income tax return for any year during a period of five consecutive years will be deactivated. In other words, the IRS will not deactivate an ITIN that has been used on at least one tax return in the past five years.

To provide all interested parties adequate time to adjust and to allow the IRS to reprogram its systems, the IRS will not begin deactivating ITINs until 2016.

For more information on these and other international tax planning issues, please contact our international tax professionals.

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If You’ve Put Your Home on the Market, You Need to Know the Tax Consequences of a Sale

Summer is a common time to put a home on the market. If you’re among those who are following this trend, it’s important to be aware of tax consequences.

If you’re selling your principal residence, you can exclude up to $250,000 ($500,000 for joint filers) of gain — as long as you meet certain tests. Gain that qualifies for exclusion also is excluded from the Affordable Care Act’s 3.8% net investment income tax.

A loss on the sale of your principal residence generally isn’t deductible. But if part of your home is rented out or used exclusively for your business, the loss attributable to that portion may be deductible.

If you’re selling a home, be aware that it won’t be eligible for the gain exclusion. But if it qualifies as a rental property, it can be considered a business asset, and you may be able to defer tax on any gains through an installment sale or a Section 1031 exchange. Or you may be able to deduct a loss.

If you have a home on the market, please contact us to learn more about the potential tax consequences of a sale.

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Nonprofit Fraud: Yes, It Could Happen to You

Angie-Murdo-100By Angela Murdo, CPA, CFE, Senior Manager, Anderson ZurMuehlen

Most small nonprofits, especially in Montana, run with a lean staff. Working with donor funds and toward a “greater good,” they go to considerable lengths to stretch their dollars. Staff more closely aligned with the nonprofit’s mission tend to have greater job security during economic downturns, while the ranks of administrative support staff get thinner.

Small staffs make nonprofits ripe for fraud. Often, they don’t have the personnel to adequately segregate duties and maintain appropriate controls over cash and other assets susceptible to theft.

The 2008 recession forced many nonprofits to tighten their belts even more. Contributions and grants decreased, causing nonprofits to reduce staff. Existing controls were diminished, making organizations even more susceptible to fraud. Now that many nonprofits are seeing an upswing in donations and grants, this is also increasing their funds susceptible to theft, which seems to be causing an increase in fraud. According to the “Report to the Nations on Occupational Fraud and Abuse 2014 Global Fraud Study” issued by the Association of Certified Fraud Examiners, both the number of cases and median loss in each case have increased steadily from 2010 through 2014 for nonprofits.

Why are we seeing more fraud now? There are many theories. Many believe it’s because there’s more money flowing into nonprofits, and organizations that became accustomed to operating with reduced administrative personnel have not brought their staff back up. They feel they have adequate staffing and are not adding any employees to ramp their controls back up. Sadly, some employees who made it through the downturn—often with reduced salaries—are now seeing large funds flowing back into the organization, and are feeling they deserve a piece of the pie.

Here are some great ways to segregate duties and mitigate your risk of fraud:

  • Proper review of bank reconciliations. Make sure there are always two individuals with adequate financial knowledge reviewing the bank statements and looking at the monthly reconciliations.
  • Mandatory vacations. Annual vacations required by the organization can help flush out any possible lapping or kiting schemes that may be occurring. Mandatory time off may even deter the employee from starting the fraud in the first place.
  • Communication. Be sure to inform all employees that you will be looking at every area of the organization, possibly on a surprise basis. The knowledge that someone may be looking over your shoulder is a great deterrent.
  • External reviews. A small staff can make it difficult to properly segregate duties or perform all tasks that would help prevent or detect fraud. Another way to perform these functions—without having to hire another employee—is to utilize outside help.

Many nonprofits are starting to see issues crop up, and some have already experienced fraud. Now is the time to reevaluate controls and determine if your organization is susceptible. When addressing controls in your organization, it’s always better to be proactive than reactive. We can help. We can explain the options available and help you determine the controls you may need to put in place. We can also help you identify areas where you may have weaknesses and consult with you on potential solutions.

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Do I Have To Report My Foreign Bank Accounts?

By Erin Stockwell, Senior Manager

There’s been a lot in the news in the past few years about foreign bank accounts and big lawsuits. Most of what you’ve heard has probably been in relation to Swiss banks. Why? The Swiss have had unbreakable banking privacy laws for centuries – until now.

You may ask, “How does this apply to me?” By breaking the Swiss banks, the U.S. showed it had enough teeth to force other countries’ banks to report their U.S. account holders. The “teeth” are laws known as FATCA, and they will become effective July 1, 2014. Under FATCA, about 77,000 banks worldwide have registered with the U.S. and will share information about U.S. account holders. If you have a foreign financial account that holds $50,000 or more, chances are good the IRS will learn about it. If you’ve not already been reporting your foreign accounts on the annual FBAR form, this could mean trouble for you.

The FBAR (formally known as FinCEN 114) is required for all U.S. persons who have more than $10,000 in foreign accounts at any time during the year. In addition to your own accounts, you must include accounts for which you have signature authority or which are owned by an entity you control. The penalties for not filing are steep. The due date for the 2013 form is June 30, 2014, and no extensions are available.

Previously you could file a paper form but this year it must be e-filed. Filing isn’t as simple as popping your form in the mail. If you must file, we recommend you e-file as early as possible. We can help you prepare and e-file. If you’ve never filed and think you might need to, we can help you navigate the requirements and create a plan if you’re out of compliance.

For more information contact, Erin Stockwell, Senior Manager, at 406.727.0888.

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Retirement Plans for Tax-Exempt and Government Entities: Plenty of Choices

By Holly Bander, CEBS, APM, Shareholder, Employee Benefit Resources

If your organization is looking to establish a retirement plan for its employees, or if you already have a plan but wonder if it’s a good fit, it’s important to remember you have many choices. For a chart summarizing important characteristics of the most common retirement plans, click here. In reviewing the chart, here are some questions to ask yourself:

  • Do you want something simple or do you want as many bells and whistles as possible? IRA-based plans are simpler, but more limited.
  • Do you want to permit employee contributions? If so, do you want them to be as high as possible? SIMPLE plans have lower deferral thresholds. 403(b) plans have no nondiscrimination requirements for deferrals, but 401(k) plans do.
  • Are you willing to commit to an employer contribution or do you want it to be discretionary each year? SIMPLE plans, money purchase plans, defined benefit plans and safe harbor 401(k)/403(b) plans all have required contributions. Most other plan types have discretionary contributions.
  • Do you have highly compensated employees (those with compensation in excess of $115,000 a year, indexed)? If not, then you don’t need to be concerned about nondiscrimination testing.
  • Do you want to have a service requirement for an employee to be eligible? Different plan types permit different eligibility requirements.
  • Do you want to have an annual service or employment requirement to receive employer contributions? IRA-based plans don’t allow such requirements; most other plan types do.
  • Do you want to have a vesting schedule? They’re not permitted with IRA-based plans, but most other plans types can have them.
  • How much can you afford for contributions, plan document costs, annual administration costs, etc.? The more complex the plan, the more expensive it is to establish and administer.

With all of the choices available, it’s easy to feel overwhelmed. That’s where a professional advisor comes in handy. He or she can help you sort through the choices and choose the retirement plan that’s right for your organization. Contact Holly Bander, Shareholder, by email or at 406.449.5500 to make an appointment.

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