The Internal Revenue Service has announced significant changes to its programs that encourage taxpayers to voluntarily disclose unreported foreign financial accounts. The changes liberalize a streamlined disclosure program first provided in 2012 that was criticized as too cumbersome and restrictive. The changes include eliminating a requirement that the taxpayer have $1,500 or less in unpaid taxes each year, eliminating a required “low risk” questionnaire, and expanding the program to include for the first time U.S. taxpayers who reside in the United States. The revised program will allow Worldwide ERC® members who inadvertently failed to report overseas accounts to come into compliance without the risk of prosecution or the full range of applicable penalties.
The Full Story:
It is no secret that the U.S. tax authorities have for several years been aggressively pursuing taxpayers who hold assets overseas and do not report them or pay U.S. tax on income they generate. New reporting regimes have been implemented to supplement the required Foreign Bank Account Report (FBAR) due each June 30 for foreign financial accounts aggregating over $10,000 during the year, and the FBAR itself has been expanded. Such accounts must also be reported on Schedule B of the Form 1040, and some taxpayers must also file Form 8938, “Statement of Foreign Financial Assets.” In addition, this year the Foreign Account Tax Compliance Act (FATCA) goes into effect, under which foreign financial institutions themselves are required to report accounts owned by U.S. taxpayers.
In addition to the reporting requirements, the IRS has vigorously sought information from foreign sources and prosecuted large numbers of U.S. taxpayers revealed to have hidden assets overseas.
As a supplement to all of these initiatives, since 2009 the IRS has provided a series of programs under which taxpayers may come forward to voluntarily disclose unreported assets. If taxpayers meet the disclosure criteria, and fully disclose, they can avoid criminal prosecution and also limit the amount of civil penalties owed. Since 2009, the three programs (2009, 2011, and 2012, the latter of which is a permanent program) have resulted in more than 45,000 voluntary disclosures from individuals who have paid about $6.5 billion in back taxes, interest, and penalties, according to the IRS.
As a part of the 2012 revisions to the disclosure program, the IRS provided a “streamlined” program that was intended to facilitate disclosures by taxpayers who owed relatively small amounts of taxes and whose non-compliance was inadvertent or non-willful. However, the program was limited to persons residing abroad, and who had $1,500 or less in unpaid tax for each year of their disclosure. It also required considerable paperwork in completing a “risk” questionnaire that was designed to demonstrate that the taxpayer was a low risk for further non-compliance. Although some 12,000 taxpayers have taken advantage of the streamlined program, it also drew numerous complaints that it was overly restrictive.
After considering the results of the program, the IRS has relaxed it considerable, and it is well worth consideration by Worldwide ERC® members and their employees who have inadvertently failed to report foreign assets.
Of great importance is that for the first time the program is available to taxpayers residing within the U.S. who for some reason failed to adequately report their foreign assets. The requirement that taxes owed be less than $1,500 per year has been eliminated, as well as the burdensome risk questionnaire. For taxpayers who reside outside the U.S., all penalties will be waived. For U.S. residents, penalties will be limited to 5% of the unreported assets.
As noted, this program is well worth consideration by taxpayers who may have failed to report foreign assets and wish to assure themselves that they will not face substantially greater penalties, or possible prosecution, if their failure is discovered independently by the IRS.
Posted by Peter K. Scott
Did you know that Generally Accepted Accounting Principles (“GAAP”), in use in the US since 1934, were in the process of going away? What will this mean to your company and more importantly, your client base? In an ongoing project that is beginning to reach conclusions, U.S. and International accounting authorities have been working for years to harmonize accounting principles worldwide. That project may require companies to alter some of their accounting treatments.
The Full Story:
Starting just after the Great Depression, the newly formed Securities and Exchange Commission (“SEC”) required US publicly-traded companies and many other businesses to use GAAP accounting for reporting their financial results to investors. These “principles” started out as broad and became more and more focused as time progressed. The global financial community today sees GAAP as more “rules” driven. European and Asian companies gradually evolved and came to rely on a set of standards called the International Financial Reporting Standards (“IFRS”). These “standards” were and continue to be more principle based.
In the past, to mesh the two standards, US entities with some global operations, typically took the books of their global entities (which were stated according to IFRS) and adjusted them to meet GAAP so that their reporting responsibilities were met in the US. The European and Asian companies did the reverse for their subsidiary US companies to meet the IFRS reporting principles of their countries.
As more and more of the US, European and the Asian companies came to do business globally, this function of converting from one standard to another has become more and more cumbersome. Small and midsize companies began to struggle with the need and the cost to convert from one standard to another. This two standard system also left investors and those in the financial community perplexed as to how to compare two companies reporting on two different standards.
Understanding this need to establish a single set of high-quality accounting standards to be used internationally prompted the US Financial Accounting Standards Board of the SEC (“FASB”) and the International Accounting Standards Board (“IASB”) to begin in 2006 (and revised in 2008) with a memo of understanding to “converge” the differences of the two systems. They set out a plan that divided topics into categories and kept it flexible. They recognized that this would not be a quick fix – it will and has taken time. The FASB and IASB, however, are committed and continue to set goals and meet them, tackling what they felt were easier topics that had a parity of treatment (short-term projects) and then the long-term projects that will require much more discussion, comments from companies and practitioners and a reasoned solution. Finally, the longest-term projects will encompass new emerging issues such as derivatives, futures and other newly invented instruments. Canada and Japan have now required (Canada) or permitted (Japan) the use of IFRS since 2010 and other countries plan to either adopt the IFRS or converge toward it. The IFRS Foundation stated in 2012 that “all major economies” planned to move toward adopting the new IFRS standards or converge towards it “in the near future”.
The IASB and FASB issued a joint report in 2012 stating that most of the short-term projects outlined in the 2006/2008 memo of understanding had been completed and that their focus was turning more toward the long-term projects. They stated that items such as segment reporting and joint venture reporting were completed. Income tax reporting was given a lowered priority and a joint exposure draft was issued on that topic in 2009. The long-term projects such as derecognition, fair value measurement and revenue recognition have been completed. For example, revenue recognition under IFRS will generally occur before GAAP would have allowed companies to recognize revenue on their books. The long-term project of financial instruments with the characteristics of equity was lowered in its priority and move forward in time.
While there have been criticisms such as principle-based accounting standards leave too much room for interpretation, fair value measurement could be difficult and costly and just the time it will take to implement a new system of accounting standards across countries is costly, the benefits are seen to outweigh these criticisms. Benefits such as transparency, comparability, possible simplification, and increased capital flow between markets will be of great benefit to the global business community.
So, how will this convergence of GAAP and IFRS impact those in the relocation industry? While, at first glance, it does not appear to be something that directly applies to RMC’s, movers, appraisers, real estate brokers/agents and others, it will affect what they need to provide in terms of reporting, invoicing, and back up to those global companies who are directly impacted. Perhaps a global company will now need to have costs categorized differently or costs related to certain expenses treated differently than they had been in the past.
Reporting systems that global companies are using to meet their full accounting responsibilities will need to be updated to accommodate the persistent, on-going convergence. This will result in a trickle-down requirement to the service providers in the relocation industry to adapt their current systems to meet their client’s evolving requirements.
The march to global convergence in accounting standards has been persistent and relentless. It is not going away. With the accomplishment of the short-term goals, the FASB and IASB are moving ever closer to reaching agreement on a full set of international accounting standards. You should be aware that this is occurring so you are able to respond to your clients’ needs and keep up with a major change in the accounting world.
Posted by Debra Keith, NEI Global Relocation.
A new report from the Government Accounting Office (GAO) says that IRS efforts to catch taxpayers who hide money overseas are resulting in substantial recouped taxes. Four IRS voluntary disclosure programs over recent years have resulted in some 39,000 taxpayers coming forward, and more than $5.5 billion in additional taxes and penalties. In addition, the number of people reporting foreign accounts to the IRS nearly doubled from 2007 to 2010, to 516,000. However, GAO’s analysis of data from the 2009 program suggests that many additional taxpayers are not entering the amnesty programs, but are making so-called “quiet disclosures” by filing amended returns or by beginning to report foreign account proceeds on newly filed returns, and avoiding the associated penalties and interest that would result from taking advantage of the amnesty program.
The Full Story:
Today’s tax quote: “Tax day is the day that ordinary Americans send their money to Washington, DC, and wealthy Americans send their money to the Cayman Islands.” Jimmy Kimmel
In recent years, however, this strategy has become fraught with risk of punishment, as the IRS has cracked down on U.S. taxpayers who avoid U.S. taxes by hiding money overseas. Required reporting of foreign accounts has been emphasized with increased enforcement, new reporting regimes (e.g., new Form 8938 which is required to be filed with the U.S. tax return) have been imposed, a new law (FATCA) requires foreign financial institutions to report accounts maintained by U.S. taxpayers, the IRS has succeeded in extracting information from Swiss bank UBS and others identifying U.S. accountholders, and a number of miscreants have been successfully prosecuted under the criminal tax laws.
Along with these actions, IRS has also encouraged taxpayers with these accounts who have not reported either the accounts or the associated income in the past to come forward voluntarily and disclose them. Taxpayers who do so will avoid criminal prosecution, and will limit the amount of civil penalties that might otherwise be due. There have been four of these programs, beginning in 2003, the latest of which is still available. These programs accelerated beginning in 2009, when the large Swiss bank UBS AG agreed to pay a $780 million fine and turned over details of thousands of accounts to U.S. investigators.
In an April 26, 2013, report, GAO examined these programs and praised the IRS for its diligence and success in seeking and collecting back taxes in these programs. For the report, go to http://www.gao.gov/products/GAO-13-318
. However, GAO also suggested that some taxpayers are avoiding the voluntary disclosure program by quietly filing amended returns, or by beginning to report the accounts on new returns without amending prior returns, and that IRS is missing out on substantial additional back taxes by not doing more to identify such taxpayers and pursue them.
According to the GAO data, some 39,000 taxpayers who participated in the voluntary disclosure programs paid more than $5.5 billion in back taxes and penalties. The study focused on data from the 2009 disclosure program, finding that of more than 10,000 cases closed so far under that program, the median unreported account balance was $570,000. Some 6% of those accounts suffered penalties greater than $1 million.
In addition, reports of offshore accounts have risen significantly. Reports of foreign bank accounts on Schedule B of the Form 1040 tax return nearly doubled, to 516,000, between 2007 and 2010, which was even before the new law requiring a separate Form 8938 to be filed with the return, and the number of Reports of Foreign Bank Account (the FBAR) filed with Treasury showed a similar increase. While GAO acknowledged that some of this increase may simply reflect increased awareness of the reporting requirement by taxpayers who were paying their taxes but failing to report the accounts, GAO also cited data suggesting that a large share of the increase reflects taxpayers engaging in “quite disclosure,” as noted above.
The GAO report emphasizes that there are many legitimate reasons for maintaining financial accounts overseas; however, taxpayers who do so must adhere to the requirements to report those accounts, and to pay taxes due.
As Worldwide ERC® has pointed out on numerous occasions during recent years, increased IRS enforcement of reporting and tax requirements for Americans maintaining financial accounts overseas may put expat employees assigned to jobs in foreign countries at risk unless they are regularly made aware of reporting and tax requirements, and encouraged to adhere to them.
Posted by Peter K. Scott
President Obama and congressional leaders failed to reach an agreement to prevent sequestration so the federal spending reduction trigger officially took effect just before midnight on March 1. However, the full effect of sequestration absent a deal will likely not be realized for a majority of Americans until April or even later. The President met with congressional leaders on March 1 in one last attempt to address sequestration before the official deadline but as widely anticipated the negotiations did not produce significant progress. As a result, $85 million in spending reductions for the remainder of Fiscal Year 2013 will be spread across a majority of federal government departments, agencies and programs.
The President and Congress need to find offsets to the $85 billion through spending reductions, additional revenue or a combination of both to delay sequestration through the end of the fiscal year. Presently, the President and congressional Democrats are calling for a combination of spending reductions and revenue increases to offset sequestration with congressional Republicans stating they will only agree to spending cuts. Due to the impasse, President Obama on the evening of March 1 issued an Executive Order directing federal department and agency heads to implement the reductions. The Office of Management and Budget (OMB) sent a report that evening to Congress noting the specific reductions to each federal agency and program.
What is Sequestration?
Under the Budget Control Act of 2011, President Obama and congressional Republicans and Democrats reached an agreement to temporarily raise the debt ceiling as well as implement a structure to reduce the deficit by $1.2 trillion over ten years. The legislation established a bipartisan committee, known as the “Super Committee”, of members of the House and Senate to develop the details on deficit reduction. In the event the Super Committee did not reach an agreement, the legislation established a trigger known as “sequestration” to automatically cut spending for a majority of government departments, agencies and programs in order to reduce the deficit.
The Super Committee failed to reach an agreement but as part of the American Taxpayer Relief Act of 2012 Congress delayed the initial implementation date of sequestration from January 1, 2013 until March 1, 2013. Now that sequestration is in effect, it means a 7.9% cut in nonexempt mandatory defense funding, 7.8% cut in nonexempt discretionary defense funding, 5.1% cut in nonexempt nondefense mandatory funding, 5.0% cut in nonexempt nondefense discretionary funding and a 2.0% cut in Medicare provider payments. According to OMB, since the reductions are over the seven months remaining in FY2013 which ends on September 30, the percentage reductions will be approximately 13% for non-exempt defense programs and 9% percent for non-exempt nondefense programs. The Budget Control Act did specifically exempt several federal agencies and programs from reductions including Social Security benefits, Medicaid, military personnel pay and veteran benefits and several agencies including the U.S. Postal Service and Amtrak will not see budget reductions.
At this point, much of the specific impact of sequestration is still yet to be determined and speculation. Sequestration was developed as a fallback position because neither political party ever thought it would actually happen. The trigger inflicts reductions to both domestic programs traditionally favored by Democrats and robust national defense funding long supported by Republicans. Thus, many officials in the Administration and Congress until recently had not been forced to give serious consideration to or analyzed the full implication of the cuts if sequestration actually occurred. What is troubling now for many lawmakers is that the cuts are across-the-board and thus government officials have very little discretion as to what areas within their department or agency can be cut to spare higher priority budgetary items. While many of the particulars of the cuts still remain uncertain, some details are now emerging.
Federal Employees and Contracting
Those most affected by sequestration will be federal employees and contractors. Spokespersons for the Department of Defense and the Federal Bureau of Investigation have stated that they plan to issue notices shortly to thousands of federal civilian and contracted employees for furloughs starting in early April. Many Cabinet Secretaries and federal agency heads with more discretion in their budgets have stated that furloughs are a last resort. Instead, they are scaling back on planned spending on new technology, not filling open positions and cutting in other areas of their budget including on travel. OMB has granted agencies wide leeway in implementing the reductions but did state that “sequestration will inevitably affect agency contracting activities and require agencies to reduce contracting costs where appropriate.” The potential impact on federal transferees and contractors therefore varies greatly by agency.
Fannie Mae, Freddie Mac and the Federal Housing Finance Agency (FHFA) are all spared from reductions under sequestration. This is due to the fact that Fannie Mae and Freddie Mac are quasi government agencies and the FHFA is funded by fees collected by the federal home loan banks. The Federal Reserve and other financial oversight agencies are also not subject to sequestration since they are also either quasi government and/or funded by fees. One agency that is subject to sequestration is the new Consumer Financial Protection Bureau (CFPB) which will see a reduction of 5.1% or 23 million of its $448 million budget.
It is unlikely that the decrease in its budget will impact the new Bureau as it is still expanding to reach its staffing goals. It could have an impact on future hires but the agency presently has sufficient staff to carry out much of its current activities and directives. So it is unlikely that we will see a delay as a result of sequestration to proceeding on regulations dealing with quality mortgages, quality residential mortgages and the proposed new closing and settlement forms. The impact on the mortgage industry is also expected to be minimal at this time but long-term reductions could impact various aspects of every industry.
Immigration and Travel
The budget for U.S. Customs and Border Protection is being reduced by $294 million and the Transportation Security Administration (TSA) by $276 million. In a letter dated January 31 to Senator Barbara Mikulski, Chairwoman of the Senate Appropriations Committee, Secretary of Homeland Security Janet Napolitano stated that these reductions would likely result in the furlough of U.S. Customs and TSA employees causing longer wait times for customs and security checks at airports. In a similar letter from Secretary of State John Kerry, the new Secretary stated that reduced funding would undermine progress made toward timely processing of visas. Finally, the letter from Secretary of Transportation Ray LaHood to Senator Mikulski warned of that the $232 million reduction to the budget of the Federal Aviation Administration would likely result in furloughs of air traffic controllers as well as aviation safety inspectors causing slower safety inspections and approvals and a disruption in air travel.
When will Sequestration End?
Even though an agreement was not reached by March 1, the President and Congress can still develop a deal at any point that retroactively prevents the reductions and/or stops future cuts. However, it could be days, weeks or even longer for leaders to come together as both sides wait for the effects of sequestration to be grasped by their constituents and politicians determine which political party is blamed most for letting the spending trigger actually take effect. The next significant date is March 27 which is days before Administration officials have stated much of the impact of sequestration will be realized and when the current temporary Continuing Resolution funding the federal government for FY 2013 expires. Speaker of the House John Boehner stated on March 1 that he and the President are in agreement that the Continuing Resolution should be extended to avoid a government shutdown. The two had also previously agreed though that sequestration should not take effect.
If an agreement is reached to end sequestration, it will likely only address reductions for FY2013. Congress will then need to address the remaining approximately $1.1 trillion in cuts scheduled under sequestration for the next nine years.
Posted by Tristan North
Recommendations by Worldwide ERC® and the Canadian Employee Relocation Council (CERC) to improve cross border access and facilitate the relocation of employees between the U.S. and Canada continue to be implemented. In early 2011, President Obama and Canadian Prime Minister Harper announced a collaboration to improve perimeter security and economic competitiveness between the U.S. and Canada. In December 2011, the U.S. and Canada released an action plan on their shared cross border vision which included many recommendations suggested by Worldwide ERC® and the CERC. Since then, additional recommendations by Worldwide ERC® and CERC have been implemented and representatives of Worldwide ERC® have attended key stakeholder functions.
The Full Story:
In February 2011, President Obama and Canadian Prime Minister Harper issued a declaration to improve economic competitiveness and perimeter security for the two countries. The declaration, entitled Beyond the Border: A Shared Vision for Perimeter Security and Economic Competitiveness, created the Beyond the Border Working Group to address the issues identified by the two leaders. A key component of the declaration was to streamline business activity and promote better mobility of individuals between the U.S. and Canada. In November 2011, Worldwide ERC® and the Canadian Employee Relocation Council (CERC) sent a joint letter to the Beyond the Boarder Working Group calling for improving consistency in inspections and adjudications, removing operational impediments and improving policies that unnecessarily limit access to skilled workers.
Worldwide ERC® and CERC had convened a working group in July of 2011 to discuss the submission of comments to the Beyond the Border Working Group. Worldwide ERC® and CERC developed recommendations on how best to address the administrative and legal challenges facing organizations relocating employees based in part on a survey of CERC members with experience with the mobility of employees between the two countries. The survey was conducted from June 23 to July 22, 2011 and included the participation of 75 organizations.
On December 7, 2011, President Obama and Prime Minister Harper released the "Perimeter Security and Economic Competitiveness Action Plan - Beyond the Border: A Shared Vision for Perimeter Security and Economic Competitiveness." Numerous recommendations made in the November letter submitted by Worldwide ERC® and CERC were contained in the Action Plan. For a copy of the specific recommendations made by Worldwide ERC® and CERC and the corresponding response in the Action Plan, please go to: http://www.cerc.ca/LinkClick.aspx?fileticket=iMMuc5pEqus%3d&tabid=36.
Since the release of the Action Plan, Worldwide ERC® President and CEO Peggy Smith represented the Association at a reception in February at the Embassy of Canada for the U.S.-Canada Regulatory Cooperation Council (RCC). The RCC was created as part of the Beyond the Border declaration.
Worldwide ERC® was then asked as a private sector partner to participate in an intergovernmental roundtable discussion in May regarding the Beyond the Border initiative. Peggy Smith again represented Worldwide ERC® at the roundtable which led to a follow up letter from the private sector partner, including Worldwide ERC®, to the Canadian Minister for Citizenship, Immigration and Multiculturalism and The Assistant Secretary for Policy at the U.S. Department of Homeland Security. The letter provided an outline of ways to reduce the barriers hindering the transfer of employees between the U.S. and Canada. The creation of a private sector-governmental work group to address cross-border challenges with the relocation of employees was one of the recommendations of the November 2011 Worldwide ERC® and CERC letter. To access a copy of the letter, please go to: http://www.cic.gc.ca/english/pdf/submission-observations/CERC.pdf.
The latest action on a recommendation contained in the November 2011 Worldwide ERC® and CERC letter was announced on September 28. Worldwide ERC® and CERC had recommended that TN applicants be able to pre-file their applications instead of having to file at the point of entry. Effective October 1, I-129 forms may now be pre-filed with the U.S. Citizenship and Immigrations Services on behalf of Canadian citizens with respect to a TN nonimmigrant classification. This will allow Canadian business travelers to know in advance whether they will be eligible for the TN classification instead of having to wait to learn at the point of entry if they eligible. Applicants still have the option of applying to the U.S. Customs and Border Protection for the TN classification.
The implementation of the recommendations by Worldwide ERC® and CERC is very encouraging. Especially since the agencies of jurisdiction have so far adhered to the deadlines for when the recommendations would be met as directed in the Beyond the Borders Action Plan. In the case of the private-governmental working group, the plan stated a March 31 deadline for initiating such a group. In the case of the pre-filing of TN applications, the Action Plan listed a September 30 date to improve current processes. Worldwide ERC® will continue to monitor the implementation of the recommendations and participate in work group discussions to address the administrative and legal challenges facing organizations relocating employees, but so far so good.
Posted by Tristan North
New procedures designed to encourage “low compliance risk” taxpayers residing overseas to come forward and file delinquent income tax returns or Reports of Foreign Bank Accounts (FBARs) have been provided by IRS, but fall somewhat short of expectations. Analysis suggests that the most likely beneficiaries are Canadians who have failed to make U.S. elections to defer tax on Canadian retirement accounts.
The Full Story:
Today’s tax quote: “The best measure of a man’s honesty isn’t his tax return. It’s the zero adjust on his bathroom scale.” Arthur C. Clarke
In the absence of access to bathroom scales, however, the IRS persists in insisting upon honesty on tax returns. In recent years, it has focused intently on the returns and reports of Americans who live or have assets overseas.
Following through on promises made in June, the IRS on August 31, 2012, announced streamlined compliance procedures for use by some taxpayers residing overseas with unreported foreign accounts who, according to IRS, represent a “low compliance risk.”
The intent of the new procedures was to allow taxpayers overseas who had failed to file tax returns or Foreign Bank Account Reports (FBARs) to avoid penalties by coming forward under the IRS’s existing voluntary disclosure program without undergoing the intense scrutiny or extensive documents required under the general program. However, in general practitioners were disappointed with the streamlined procedure, largely because it will likely apply to so few people.
To take advantage of the program, taxpayers will have to file any delinquent tax returns (with appropriate backup information such as Forms 3520 or 5471) for the past three years, as well as delinquent FBAR’s for the past six years. Full payment of any tax and interest owed is also due with the returns.
However, taxpayers are not eligible for the streamlined program unless they meet rather stringent criteria included in the IRS announcement and on the Questionnaire that must be submitted. According to IRS, if the returns and Questionnaire do not reveal any “high compliance risk” factors, then the taxpayer is eligible for the streamlined process if tax due is less than $1,500 in each of the delinquent years. Not only is this a rather low threshold, but “high risk” factors that will disqualify the taxpayer include: (1) any return claims a refund; (2) there is material economic activity in the U.S.; (3) the taxpayer has not declared all income in the country of residence; (4) the taxpayer is under audit or investigation; (5) FBAR penalties have previously been assessed against the taxpayer; (6) the taxpayer has a financial interest or authority over accounts outside the country of residence; (7) the taxpayer has a financial interest in an entity located outside the country of residence; (8) there is U.S. source income; or (9) there are “indications of sophisticated tax planning or avoidance.”
Given these criteria, it is likely that a large majority of residents of the EU, for example, will not qualify, if only because they are likely to have financial accounts or assets in countries other than the country of residence, or have U.S. source income. The only taxpayers who appear clearly to benefit are Canadians who have failed to elect to defer tax on funds in Canadian retirement plans. (For a full discussion of the issue faced by Canadians with retirement plans, see the Mobility LawBlog post of March 12, 2012, at http://www.worldwideerc.org/Blogs/MobilityLawBlog/Lists/Posts/Post.aspx?ID=128
The easy availability of voluntary disclosure is important because of the overwhelming emphasis IRS has recently placed on bringing taxpayers with money overseas into compliance with U.S. tax laws, and because of its increasingly vigilant enforcement of the requirement to file FBAR’s.
For example, it was recently announced that the IRS has paid a whisteblower award of $104 million to a former UBS banker for information leading to collection of more than $5 billion in unpaid taxes from banks and individuals involved with Swiss banking. The UBS investigation led to collection of information about several thousand U.S. taxpayers with Swiss accounts, and agreements with Switzerland and other Swiss banks to allow the IRS access to information about formerly secret accounts.
Also, a recent report from the Tax Justice Network says that wealthy individuals have secreted between $21 and $32 trillion in unreported financial wealth in tax havens around the world, leading to a worldwide tax shortfall of $190 to $280 billion per year. Given numbers like these, it is hardly surprising that IRS is devoting enormous resources to finding offshore tax cheats.
The stakes for failing to file FBAR’s have also become somewhat higher with a government victory in a case in which it was successful in imposing the maximum civil penalty for “willful” failure to file the FBAR even though the taxpayer was already under audit and had admitted to avoiding tax on foreign accounts. The case is United States v. Williams, No. 10-2230, 4th Cir. Court of Appeals, July 20, 2012, http://www.ca4.uscourts.gov/Opinions/Unpublished/102230.U.pdf
With high stakes, and intense IRS focus on this area, it is imperative that companies make sure that their expat employees are made aware of their U.S. tax and reporting responsibilities. As discussed above, if those employees have previously failed to comply, there may be significant difficulties, including penalties, involved in becoming compliant after the fact.
Posted by Peter K. Scott
Canadians who are working in the United States for long enough to be considered “residents” under U.S. tax law will be taxed on the earnings of Canadian retirement plans unless they file Form 8891 to report the plans, and make an election to defer tax on the earnings. They must also file Foreign Bank Account Reports (FBAR’s) with the U.S. Treasury Department if the value of those accounts is at least $10,000 during the year, check a box on Schedule B of the U.S. tax return whether or not those accounts exceed $10,000, and file Form 8938 with the U.S. tax return reporting those accounts if the value exceeds $50,000 at the end of the year or $75,000 at any time during the year. Companies with Canadian employees in the U.S. should make sure those employees understand these requirements, as failure to comply can result in substantial tax liabilities and penalties.
The Full Story:
Today’s tax quote: “The trick is to stop thinking of it as ‘your’ money.” Anonymous tax auditor
As discussed in detail below, Canadians who are resident workers in the U.S. need to be very careful in dealing with their Canadian retirement plans if they wish to continue thinking of those accumulated funds as “their” money.
As has been discussed previously in this space (see the blog entry “U.S. and Canada Issue Border Action Plan,” January 24, 2012, by Tristan North) Worldwide ERC and the Canadian Employee Relocation Council (CERC) have worked jointly to assist their respective governments to address cross-border issues in order to facilitate movement of employees between the two countries.
While this important and worthy effort has not focused on taxes, citizens of either the U.S. or Canada moving to the other country to work also face tax questions, some of which can lead to quite unfortunate results if not properly understood. One of these concerns the treatment of Canadian retirement plans left behind in Canada.
Canada treats Registered Retirement Income Funds (RRIF’s) and Registered Retirement Savings Plans (RRSP’s) the same as IRA’s and 401k plans are treated in the United States. That is, tax on the earnings is deferred until the earnings are withdrawn or the beneficiary reaches a certain age. Unfortunately, U.S. tax law does not allow for this deferral for U.S. citizens or residents who maintain RRIF’s or RRSP’s. Owners of those accounts would be taxed on the earnings without some form of relief.
Relief is provided under the United States-Canada Income Tax Convention (“Treaty”). Under the Treaty, an individual who is a beneficiary of a Canadian retirement plan that is exempt from Canadian income tax may elect to defer U.S. tax on the accrued but undistributed income of the plan until the income is actually distributed.
IRS implementation of this provision over the years has been somewhat confusing. A series of IRS Revenue Procedures and Notices beginning with Rev. Proc. 89-45, and including Rev. Proc. 2002-23 and Notices 2003-25, 2003-57, and 2003-75, addressed how and when to make the required election, and for a time IRS was insisting that beneficiaries of these accounts not only make the required election, but also file Forms 3520 reporting the ownership of “foreign trusts.” Eventually, however, IRS issued Form 8891, which currently must be filed by any U.S. citizen or resident who is a beneficiary of a Canadian retirement plan, and is also used to make an election to defer tax on earnings of those plans.
A separate Form 8891 must be filed for each retirement plan, and attached to the Form 1040 U.S. income tax return. If spouses are each beneficiaries of a plan, each must file a separate Form 8891. And if the beneficiary elects on the Form 8891 to defer tax on the earnings of the plan, that election is irrevocable.
Canadians moving to the United States to work, and who remain in the United States long enough to be considered a “resident,” (ordinarily, more than 183 days during the year), must file Form 8891 to report any Canadian retirement plans they still own, and unless they want to pay U.S. tax on the accrued income, must make the election to defer tax. Unfortunately, sometimes these workers are not aware of the requirements, and that lack of awareness can create major problems.
If the Form 8891 is not filed, and no election is made, the deferred income from the retirement plan should have been reported on the Form 1040, and tax paid. Failure to do so will lead to an underpayment of tax, interest on the underpayment, and potential penalties for negligence and failure to pay. Moreover, if the Canadian has been a resident for several years without the required filing and election, IRS may go back and assert tax for at least three of those prior years under the normal statute of limitations on assessment of tax, or six of them if the omission of income was substantial, or all of them if the omission was due to fraud.
Nor is the taxpayer ordinarily permitted to go back and make a retroactive election, unless the taxpayer obtains specific permission to do so from the IRS by filing a private letter ruling request asking for relief under section 301.9100-1(c). Doing so is difficult, costly, and will not be successful unless done before IRS itself discovers the failure to report and elect.
As if these unfortunate results were not enough, there are also two other reporting requirements for beneficiaries of Canadian retirement plans, with substantial penalties for failure to comply.
Owners of foreign financial accounts exceeding $10,000 in value during the year must file a Foreign Bank Account Report (FBAR), Form TD F 90-22.1, with the Treasury Department by June 30 of each year. Generally, a Canadian RRIF or RRSP worth $10,000 or more would require such a report. There are substantial penalties even for an inadvertent failure to file the FBAR. Such accounts also require that a box be checked on Schedule B of Form 1040, revealing that the taxpayer has foreign accounts, even if the accounts do not exceed the $10,000 FBAR reporting threshold. And, beginning for the 2011 tax year, a new Form 8938 is required to be filed with the U.S. tax return reporting foreign assets whose value exceeded $75,000 at any time during the year, or $50,000 at the end of the year, which is a threshold that many existing Canadian retirement accounts would no doubt exceed.
Consequently, for companies moving a Canadian to the U.S. to work, the U.S. requirements concerning retained Canadian retirement plans simply must be a part of the instruction and planning for that assignment. The employees should be informed and counseled as to the requirements to make sure that they do not incur costly U.S. tax liabilities and penalties for failing to report the accounts.
Posted by Peter K. Scott
The Internal Revenue Service has provided new limitation amounts for the foreign earned income and housing exclusions under section 911. The maximum foreign earned income exclusion for 2012 is $95,100, up from $92,900 in 2011, and the maximum foreign housing exclusion is $28,530 (less a non-excludable floor of $15,216). However, in the new Notice the IRS has provided higher allowable housing amounts in dozens of high-cost locations. The foreign housing exclusion, along with the foreign earned income exclusion, is claimed by most employees of U.S. companies who are assigned overseas, and is a key component in determining pay and benefits for such employees, usually called “expats,” during their assignments, and in tax normalization calculations.
The Full Story:
Today’s tax quote: “Our tax code is so long it makes War and Peace seem breezy.” Steven LaTourette
One of the more valuable portions of the tome that is the Code is section 911, which is hidden near the middle and is hardly breezy to read, but provides significant benefits to employees of U.S. companies assigned overseas, and to their employers.
The Internal Revenue Service on February 13, 2012, provided new limitation amounts for the foreign housing exclusion under section 911. See Notice 2012-19. The foreign housing exclusion, along with the foreign earned income exclusion, is claimed by most employees of U.S. companies who are assigned overseas, and is a key component in determining pay and benefits for such employees, usually called “expats,” during their assignments, and in tax normalization calculations.
Both the foreign income and housing exclusions are limited in amount. However, the limitations are adjusted each year for inflation.
According to the IRS, for 2012, the foreign earned income limitation is $95,100 for the full year. That is the maximum earned income in the foreign country that may be excluded from tax on the U.S. tax return. (For 2011, the limit was $92,900).
The maximum foreign housing exclusion is calculated as a percentage of the earned income limit, in a two-step process. First, a “floor” is calculated, and only costs that exceed the floor are excludable. The floor is 16% of the maximum earned income exclusion, or $15,216 for 2012. Then a maximum exclusion is calculated, which is 30% of the earned income exclusion, or $28,530 for 2012. The result of this exercise is that no matter how much the actual housing cost is for an expat in 2012, the maximum that the expat may exclude is $13,314 ($28,530 minus the $15,216 floor).
However, the law gives the Treasury Department the authority to provide higher maximum housing amounts for high cost locations, and the Treasury has exercised this authority in a series of issuances, of which Notice 2012-19 is the latest. In the Notice, Treasury provides some 17 pages of locations and housing amounts in those locations that are allowable, beginning with Angola at $84,000 and ending with Ho Chi Minh City in Vietnam, at $42,000. In many countries, there are many different cities listed. The Notice also provides daily amounts that can be used by expats not in the locale for an entire year.
As in years past, the highest amounts listed are for Tokyo at $128,000 and Hong Kong at $114,300. Moscow also exceeds $100,000, coming in at $108,000, while Paris is $84,800 and London is $83,600.
For all of the cities and localities listed, the maximum amount an expat may exclude is determined by subtracting the floor amount of $15,216 from the amount listed for the particular location.
Of course, in the tax law nothing is ever simple. In 2006 Congress made a fundamental change in the way U.S. tax liability is calculated for those claiming the foreign earned income or foreign housing exclusions. Although the amounts excluded under section 911 are not taxable, they are added back to U.S. taxable income for purposes of calculating the tax on other income that remains taxable, such as spouse income, interest, dividends, or foreign income in excess of the section 911 exclusion amount, and the Alternative Minimum Tax. This has the effect of increasing the taxpayer’s tax rate by moving his or her other income into a higher bracket. For example, if a taxpayer would only be in the 15% tax bracket after the 911 exclusion, but would be in the 28% bracket if the amount excluded under section 911 was taxable, then the taxpayer’s tax is calculated at 28%, not 15%.
Companies with employees assigned overseas must become familiar with these rules, and will want to incorporate the increased earned income and housing exclusion limits, including the special rates listed in Notice 2019-12, into their salary, benefits, and tax normalization calculations for 2012. The Notice may not be a breeze to read, but doing so will prove to be highly rewarding.
Posted by Peter K. Scott
Worldwide ERC® and the Canadian Employee Relocation Council (CERC) have been advocating that the U.S. and Canada address cross-border issues in order to better facilitate that relocation of employees between the two countries. In December, the U.S. and Canada released an action plan to improve economic competiveness and perimeter security which included many of the recommendations suggested by Worldwide ERC® and the CERC. Since then, the Obama Administration has issued an Executive Order to further facilitate entry into the U.S. In this most recent case, improved entry is for travel and tourism.
The Full Story:
On February 4, 2011, President Obama and Canadian Prime Minister Harper issued a declaration to improve economic competitiveness and perimeter security for the two countries. The declaration, entitled Beyond the Border: A Shared Vision for Perimeter Security and Economic Competitiveness, created the Beyond the Border Working Group to address the issues identified by the two leaders. A key component of the declaration and an objective of the Working Group was to streamline business activity and promote better mobility of individuals between the U.S. and Canada.
To access a copy of declaration, Beyond the Border: A Shared Vision for Perimeter Security and Economic Competitiveness, please go to: http://www.whitehouse.gov/the-press-office/2011/02/04/declaration-president-obama-and-prime-minister-harper-canada-beyond-bord
In November, Worldwide ERC® and the Canadian Employee Relocation Council (CERC) sent a joint letter to the Beyond the Boarder Working Group calling for improving consistency in inspections and adjudications, removing operational impediments and improving policies that unnecessarily limit access to skilled workers. The letter contained a series of recommendations developed by Worldwide ERC® and CERC which were based in part on a survey of CERC members with experience with the mobility of employees between the Canada and the U.S. Prior to the declaration, Worldwide ERC® and CERC had convened a working group in the fall of 2010 to address many of the border issues identified by the two organizations. The organizations submitted a letter on their findings and recommendations in April of last year to the U.S. Department of Commerce.
On December 7, 2011, President Obama and Prime Minister Harper released the “Perimeter Security and Economic Competitiveness Action Plan - Beyond the Border: A Shared Vision for Perimeter Security and Economic Competitiveness.” Numerous recommendations made in the November letter submitted by Worldwide ERC® and CERC were contained in the Action Plan.
The joint letter focused on three areas which are as follows:
- Improve consistency in inspections/adjudications
- Remove operational impediments
- Improve policies that unnecessarily limit access to skilled workers
The Action Plan addressed all three areas by stating that enhanced training of border personnel will be provided, current processes and regulations would be reviewed and improved and stakeholders would be further consulted on immigration matters.
For a copy of the specific recommendations made by Worldwide ERC® and CERC and the corresponding provision in the Action Plan addressing the recommendation, please go to: http://www.cerc.ca/LinkClick.aspx?fileticket=iMMuc5pEqus%3d&tabid=36
A complete copy of the Beyond the Border Action Plan can be found at: http://photos.state.gov/libraries/canada/303578/pdfs/us-canada-btb_action_plan.pdf
Executive Order on Travel and Tourism Promotion
Along the same lines as the efforts to improve economic competitiveness for the U.S. with Canada, on January 19, President Obama issued an Executive Order to increase tourism to the U.S. To accomplish this objective, the Executive Order would improve the processing of visas for foreign visitors and create a task force on travel and competitiveness.
The Executive Order identifies four specific actions which are as follows:
(1) Increase nonimmigrant visa processing capacity in China and Brazil by 40 percent over the coming year;
(2) Ensure that 80 percent of nonimmigrant visa applicants are interviewed within 3 weeks of receipt of application, recognizing that resource and security considerations and the need to ensure provision of consular services to U.S. citizens may dictate specific exceptions;
(3) Increase efforts to expand the Visa Waiver Program and travel by nationals of Visa Waiver Program participants; and
(4) Expand reciprocal recognition programs for expedited travel, such as the Global Entry program.
The Executive Order would also establish the Task Force on Travel and Competitiveness which would develop a strategy to further improve and promote domestic and international travel opportunities to increase tourism in the United States.
To access a copy of the Executive Order, please go to: http://www.whitehouse.gov/the-press-office/2012/01/19/executive-order-establishing-visa-and-foreign-visitor-processing-goals-a