Overseas Bank Accounts Tax

The USA practices worldwide taxation which means all US citizens are to report their income earned regardless of where they earn it. This means even if you own an overseas bank account, you have to declare any taxable asset inside. You also need to tick “yes” in schedule B to the question, “Do you have an interest in a foreign bank or financial account?” And if your bank balance is at least $10,000 at any time during the year, you must file a Foreign Bank and Financial Account Report (FBAR) by June 30 each year.

Once upon a time, bank secrecy laws in tax haven countries like Switzerland could protect your assets there. But since 2009, this has ceased to be so. That was the year UBS Bank of Switzerland was fined $780 million for abetting wealthy Americans in hiding their taxable assets in UBS bank accounts. After UBS, other banks like Credit Suisse and HSBC have been similarly targeted as the IRS spread their net to cover other financial institutions in other countries like the Cayman Islands, Hong Kong, India and Singapore, among others.

If you have been hiding income in overseas bank accounts, moving your assets and closing the accounts is not the answer. The same goes for quiet compliance i.e. correcting past tax returns and FBARs without drawing attention to what you were doing. While it is not illegal, the IRS warns against it. You should not just start declaring your overseas bank accounts and file FBARs from now onwards without rectifying the past. You risk drawing attention to your past misdeeds and being punished for it.

Disclosing and paying the penalties is still the best move.

Not declaring your foreign taxable assets or filing your FBAR can be considered tax evasion and fraud. The criminal statute of limitations is six years. Plus, the statute of limitations never expires on civil tax fraud. The penalty for failing to file a FBAR is $10,000 if you did not willfully neglect to file. If the offence is willful, the penalty is the greater of $100,000 or 50% of the amount in the account for each violation. Each year you don’t file is considered a separate violation.

If you are convicted of tax evasion you face a jail term of up to five years and a fine of up to $250,000. If you falsely declare your foreign income, it carries a three year jail and a fine of up to $250,000. Failing to file a tax return can mean a one year prison term and a fine of up to $100,000. Failing to file FBARs can be punishable with fines up to $500,000 and prison for up to ten years.

If you owe Uncle Sam some back taxes that you cannot afford to pay, you can fi le a bankruptcy petition that discharges your tax debt if certain requirements are met. Furthermore, there are two types of bankruptcy that will eliminate or reduce your back taxes namely Chapter 7 and Chapter 13 bankruptcy. Let’s consider Chapter 7 first. So here are the requirements for wiping out your federal or state tax debt in a Chapter 7 bankruptcy.

1. The taxes you are seeking to discharge must have first become due more than 3 years prior to filing bankruptcy. You count three years from the time the taxes fall due. For example, 2008 taxes don’t come due until April 15, 2009. So you start counting the 3 years from April 15, 2009. However, if you requested a filing extension for your 2008 taxes, then you don’t start counting until later than April 15, 2009. Taxes that are too recent to be discharged in bankruptcy are called priority taxes.

2. Only taxes that you have personally filed may be discharged. And you must have filed your tax returns at least 2 years prior to your bankruptcy petition. If you did not file your taxes for any one year, the IRS would file one for you called an SFR (Substitute for Return). An SFR doesn’t count. So if you didn’t file a tax return, then your back taxes for that year cannot be discharged by Chapter 7 bankruptcy.

3. Your taxes must have been assessed over 240 days prior to filing bankruptcy.

4. You must not have committed any fraud or evaded taxes before. Filing a tax return but not being able to afford to pay is not fraud.

The taxes you are seeking to discharge must be personal 1040 taxes and not employee withholding taxes. Employee withholding taxes are never dischargeable in bankruptcy. There are some undischargeable tax-related liabilities such as a lien on your property.

Now let’s consider Chapter 13 bankruptcy and how it may discharge your back taxes. Chapter 13 bankruptcy is a court-ordered payment plan to discharge your back taxes over a period of 3 – 5 years. Chapter 13 bankruptcy is a great way to handle back due priority taxes. While it’s true that you must pay your priority taxes in full during the term of the Chapter 13 plan, the great thing is that interest and penalties don’t continue to build up, and you enjoy automatic stay against the IRS i.e. the IRS cannot harass you for any of your back taxes so long as your Chapter 13 plan is in force. That means no wage garnishment, no levies etc by the IRS.

Wrong Filing Status

What happens when you file your tax return under the wrong status? Well, it would certainly have broad ranging effects. For example, it can affect the tax benefits you receive, the amount of your standard deduction and the amount of taxes you pay. It may even impact whether you must file a federal income tax return in the first place. The IRS views a wrongly filed status very seriously, so you should be careful to ensure your filing status is correct.

Basically, there are 5 categories of statuses namely Single, Married filing Separately, Married filing Jointly, Head of Household or Qualifying Widow (or widower) with Dependent Child. In my experience, the one that is subject to the most abuse is Head of Household. The penalty for filing under a wrong status is one half of one percent every month that the tax is underpaid, up to a total of 25% of the additional taxes due. Interest is compounded daily and the interest rate is changed quarterly, but is generally running around 4 to 5% per year.

So how can you make sure you always file under the correct status? Here are the guidelines given by the IRS:

1. Marital Status. Should you file as Married or Single? For most people, this would be quite straightforward but to some others, it might not be. For instance, if you are separated from your spouse and have begun divorce proceedings, you may be tempted to file as a Single taxpayer but you are still legally married until your divorce is official. Generally, you determine your marital status for the entire year based on your status on the last day of the year.

2. Single Filing Status. As I mentioned above, the Single filing status would apply if you are not married, divorced or legally separated according to state law.

3. Married Filing Jointly. A married couple may file a return together using the Married Filing Jointly status. And if your spouse passed away last year, you usually may still file a joint return for that year.

4. Married Filing Separately. If you and your spouse decide to file their returns separately, each person’s filing status would be classified as Married Filing Separately.

5. Head of Household. The Head of Household status generally applies if you are not married and have paid more than half the cost of maintaining a home for yourself and a qualifying person.

6. Qualifying Widow(er) with Dependent Child. This status may apply if your spouse died during 2010 or 2011, you have a dependent child and you meet certain other conditions.

7. Finally, if more than one filing status fits you, you should choose the one that allows you to pay the lowest taxes.

 

IRS Reconsideration after Assessment

If you or your business has undergone an audit and you are dissatisfied with the result, you can make an appeal called an IRS reconsideration. This is allowed under Internal Revenue Code § 6404 (a). Furthermore, in Treasury Regulation 301.6404-1 it provides that the district director or the director of the regional IRS service center may abate any assessment, or unpaid portion thereof, if the assessment:

• is in excess of the correct tax liability
• is made subsequent to the expiration of the applicable period of limitations
• has been erroneously or illegally made

In the Internal Revenue Manual 4.13.1.4 it explains the procedures that must followed when evaluating an audit reconsideration request. According to the manual, the IRS must accept an audit reconsideration request if:

• The taxpayer has filed a tax return that shows the correct tax after the IRS had filed one for the taxpayer under Internal Revenue Code § 6020 (b)
• The taxpayer did not appear for an audit
• The taxpayer requests the abatement of an assessment based on information that was not previously considered that, if considered, would have resulted in a change to the assessment
• The taxpayer moved and did not receive the correspondence from the IRS
• The assessment remains unpaid or the IRS has reversed tax credits that the taxpayer is disputing
• The taxpayer has identified which adjustments is under dispute
• There was an IRS computational or processing error in assessing the tax

If you feel you have a valid cause to ask for reconsideration after your assessment, you should first obtain the auditor’s file (this is allowed under the Freedom of Information Act) to review how the auditor came to their decision regarding your tax debt. Next, you need to submit an audit reconsideration request in writing seeking the abatement of the excessive tax. In your request, specifically detail why you should be granted a reconsideration and appeal the original audit decision.

A reconsideration after assessment is given at the IRS’ discretion. Reconsideration requests will not be entertained if:

• the assessment was made as a result of a closing agreement under Section 7121 of the Internal Revenue Code or in which the tax liability was compromised under Section 7122 of the Internal Revenue Code;
• the assessment was made after final TEFRA administrative proceedings;
• the assessment was made as a result of the taxpayer entering into agreement on Form 870-AD, Offer of Waiver of Restrictions on Assessments and Collection of Deficiency in Tax of Acceptance of Overpayment;
• the assessment results from a final order of the United States Tax Court or other court. [IRM 5.1] 12.8 (06-17-1999)

 

In the latest twist in their long-drawn battle with the IRS, the Miccosukee Indians have been recently slapped with a $170 million tax lien for the tribe’s failure to report and make withholdings in their distribution of gambling profits to their members. At the same time, the IRS has also penalized hundreds of Miccosukee tribe members with a collective total of $58 million in fines for not paying individual income taxes for the years between 2000 and 2005.

The Miccosukee Indians, a West Miami Dade tribe who number only about 600 members, have been at odds with the IRS because of their refusal to pay taxes on the distribution of profits from its casino operation off the Tamiami Trail. Without the extras, the tribe’s withholding taxes alone for 2000 to 2005 totaled $45 million, and individual members’ taxes amounted to $30 million for that period, according to the tax liens. This taxable amount of the tribe and its members are set to increase significantly because IRS examiners also are auditing the Miccosukee’s gambling distributions for the years 2006-2010, when payouts to each member were as high as $160,000 annually.

The Miccosukee Tribe contends that they do not have to withhold taxes on the gaming distributions and that individual members do not have to pay taxes on the income derived from the tribe’s bingo-style slot machines and poker. This is because the tribe consider themselves a sovereign nation within the United States. As the tribe’s chairman Colley Billie said, “The Miccosukee people will continue to pay all applicable lawful taxes, as they always have, and we will continue our efforts to find a fair and workable solution to this dispute. The Miccosukee people, however, will not be intimidated or coerced by these tax liens into surrendering tribal sovereignty or principles for which so many of our ancestors have paid a very high price in blood, lives, and tears.’’

In 2011, the tribe’s legal counsel wrote to the IRS that “the distributions at issue are not subject to federal income taxation and therefore not subject to federal reporting and withholding under applicable Supreme Court precedent.”

But most legal experts say that although the Miccosukee Tribe’s status as a sovereign nation means the entity itself is not subject to taxes, once the tribe distributes profits from its casino to members, they are individually responsible for reporting and paying income taxes on their annual tax returns, several legal experts say. In addition, the tribe itself must withhold taxes on the income and turn those deductions over to the IRS. These experts say those requirements are spelled out clearly in the 1988 Indian Gaming Regulatory Act and in the IRS tax code.