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Welcome to the Worldwide ERC® Mobility LawBlog, where Tax Counsel Pete Scott and Government Relations Adviser Tristan North share breaking tax and legal news, as well as compliance and risk management information of interest to global workforce mobility professionals concerned with U.S. domestic and worldwide assignments. Sign up to receive e-mail alerts so you don't miss an entry, or subscribe to the RSS feed for immediate delivery.

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IRS Simplifies Reporting Requirements for Canadian Retirement Plans
In Short:
Canadians who are working in the United States for long enough to be considered “residents” under U.S. tax law, and U.S. citizens, are taxed on the earnings of Canadian retirement plans unless they make an election to defer tax on the earnings until the earnings are actually distributed.  Elections were previously made on Form 8891, which was required to be filed with the U.S. tax return.  However, in Announcement IR-2014-97, October 6, 2014, http://www.irs.gov/uac/Newsroom/IRS-Simplifies-Procedures-for-Favorable-Tax-Treatment-on-Canadian-Retirement-Plans-and-Annual-Reporting-Requirements, the IRS has eliminated Form 8891 and simplified the required reporting. Companies with Canadian employees in the U.S. should make sure those employees understand the revised requirements, as failure to comply can result in substantial tax liabilities and penalties.
 
The Full Story:
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 avoid running afoul of the U.S. tax rules.
 
As discussed in detail in a Mobility LawBlog post on March 12, 2012 (available at http://www.worldwideerc.org/Blogs/MobilityLawBlog/Lists/Posts/Post.aspx?List=c020aee5%2D48ad%2D47b2%2D8295%2Da4cf71ba9e34&ID=128) 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  That is, tax on the earnings is deferred until the earnings are withdrawn or the beneficiary reaches a certain age.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. 
 
Since 2004, the required election has been made on Form 8891, which must be filed by any U.S. citizen or resident who is a beneficiary of a Canadian retirement plan.  A separate Form 8891 must be filed for each retirement plan, and attached to the Form 1040 U.S. income tax return.
 
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), were required to file Form 8891 to report any Canadian retirement plans they still owned, and unless they wanted to pay U.S. tax on the accrued income, had to make the election to defer tax.  Unfortunately, sometimes these workers were not aware of the requirements, and that lack of awareness could create major problems. 
 
If the Form 8891 was not filed, and no election made, the deferred income from the retirement plan should have been reported on the Form 1040, and tax paid.  Failure to do so could lead to an underpayment of tax, interest on the underpayment, and potential penalties for negligence and failure to pay.  Moreover, if the Canadian had been a resident for several years without the required filing and election, IRS could 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 was the taxpayer ordinarily permitted to go back and make a retroactive election, unless the taxpayer obtained 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 was difficult, costly, and would not be successful unless done before IRS itself discovered the failure to report and elect. 
 
However, in Rev. Proc. 2014-55, (http://www.irs.gov/pub/irs-drop/rp-14-55.pdf) and the Announcement cited above, the IRS has eliminated the requirement to elect deferral by filing Form 8891.  The form is obsolete as of December 31, 2014.  Rather, any individual who has satisfied the requirements for filing a U.S. tax return for each year the individual was a citizen or resident and who has reported any distributions from a Canadian retirement plan as income but has not reported as income the accrued but undistributed balance in the plan will be considered to have validly elected deferral, regardless of whether Form 8891 was ever filed.  These are referred to as “eligible individuals.” 
 
If a taxpayer does not meet the requirements for an eligible individual, the taxpayer must continue to report and pay tax on accrued but undistributed income of the plan, and can elect not to do so only by seeking the consent of the IRS Commissioner, by way of a private letter ruling, as in the past.
 
Nor is there any relief for U.S. citizens or residents who simply did not file U.S. returns, or failed to report the Canadian plan at all, either by filing Form 8891, or by reporting and paying tax either on the distributed or undistributed income.  And other reporting requirements, discussed below, remain in place.
 
There are two 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 114 which must be filed electronically 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, although the procedure for electing to defer tax on undistributed income from Canadian retirement plans has been made considerably simpler, a number of traps remain.  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
Alabama Proposes to Move W-2 Filing Deadline
In a notice filed September 15, 2014, the state of Alabama is proposing to move the date copies of Form W-2 must be filed with the state from the end of February to the end of January.  See Rule No. 810-3-39-09, at http://www.alabamaadministrativecode.state.al.us/UpdatedMonthly/AAM-SEPT-14/810-3.pdf
This new rule would be effective for 2014 Forms W-2, which would now be due to the state by January 31, 2015. 
 
The proposed change will put Alabama in a very small group of similar states that have departed from the federal rule.  Under federal law, the government copy of the W-2 is not due to the IRS until the end of February each year, although the copy for the employee is due to the employee by January 31.  
 
Other jurisdictions requiring an earlier W-2 filing with the government are the District of Columbia, Kentucky, Pennsylvania, and Wisconsin.
 
The stated reason for the change is to combat refund identity fraud.  With an earlier due date, the Department of Revenue can verify refunds for e-filed returns before issuing the refund.  Refund fraud typically relies upon the fact that both federal and state systems are programmed to issue immediate refunds when returns are filed, with verification of the identity of the filer and entitlement to the claimed refund done after later receipt of the official W-2’s from employers. Scammers include a bogus W-2 with early-filed returns, before the official government copy is received by the IRS or the state.
 
Although the Internal Revenue Service, and some state governments, have put in place systems designed to identify fraudulent refund returns before issuance of the refund (IRS reported preventing some $24.2 billion of such refunds in fiscal 2013), many such refunds escape the filters ($5.2 billion federal in fiscal 2013).  IRS and Treasury do not have the authority to advance the required filing date for the federal copy of the W-2, which is statutorily mandated as the end of February.  Although legislation has been sought to do so, it is not likely to be addressed any time soon.
 
Alabama, however, has the authority to advance the due date by regulation, and is proceeding in that direction.  Comments on the proposal are due by November 5, 2014.
 
States that require the state copy of the W-2 earlier that the federal government and other states do create some additional burden for company payroll processing, which must accommodate the earlier deadline for those states.  However, the significance of the additional burden is not clear, inasmuch as the W-2 process for employees must already be completed by the end of January, and gross-up reconciliation and other such items must be done by then. 
 
Posted by Peter K. Scott
CBO Releases Cost Estimate on Freddie and Fannie Dismantle Bill
In Short:
The CBO has estimated a net savings of $58 billion to the federal government from legislation (S. 1217) passed by the Senate Banking Committee to dismantle Freddie Mac and Fannie Mae and move the secondary mortgage market closer toward privatization. The score by CBO is significant because it bolsters the case of supporters for passage of the legislation. The likelihood Congress will further address S. 1217 this year still remains low.
 
The Full Story:
On September 5, the Congressional Budget Office (CBO) released its score or cost estimate on the Housing Finance Reform and Taxpayer Protection Act (S. 1217). The CBO determined the bill would reduce federal spending by $60 billion between 2015 and 2024 and federal revenue would decrease by $1.5 billion between 2020 and 2024.
 
The Housing Finance Reform and Taxpayer Protection Act would repeal the government sponsored enterprise (GSE) charters for the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) and establish in their place the Federal Mortgage Insurance Company (FMIC). The FMIC would be an independent federal agency responsible for establishing the standards, oversight and partial guarantee through the Mortgage Insurance Fund of the secondary mortgage market.
 
The Congressional Budget Office in its estimate anticipates the new fees charged by the FMIC on issuers of mortgage-backed securities would be more than the costs of the guarantees as calculated under the Federal Credit Reform Act. Under the bill, Fannie Mae and Freddie Mac would no longer offer guarantees on mortgage-backed securities and private capital would absorb some of any losses prior to payments from the FMIC. The changes and less risk under the FMIC would result in the savings of $60 billion over ten years.
 
CBO also estimates a reduction in revenue to the Federal Housing Finance Agency, the federal regulator overseeing Fannie Mae and Freddie Mac, from no longer assessing fees of the two GSEs to cover administrative costs. This would result in the $1.5 billion over ten years in reduced federal revenue netting a total savings of $58 billion for the bill. CBO also estimated the “fair-value” of the bill that yielded a lower $7 billion net savings to the federal government. Several economists believe “fair-value” to be the more accurate approach to estimating the cost or savings of changes in federal spending. The CBO also noted interest rates would likely increase 10 to 20 basis points.
 
The Senate Banking Committee had approved S. 1217 on May 15 of this year with bipartisan support by a vote of 13 to 9. The bill also has the support of the Obama Administration. Senator Lamar Alexander (R-TN) introduced the bill in June 2013. The Senate Banking Committee held several hearings on the legislation between September and December of last year with an initial mark-up held on April 29 and then approval on May 15. During mark-up of the bill, the legislation was amended with a substitute proposal authored by Committee Chairman Tim Johnson (D-SD) and Ranking Member Mike Crapo (R-ID).
 
The bill faces an uncertain future as several Senate Democrats are concerned about ending the current system and some Senate Republicans believe the federal government would still have too large of a role. While Congress is unlikely to enact S. 1217 this year, the passage of the bill by the Senate Banking Committee is the furthest a proposal to restructure the housing finance system has made it through the legislative process.
 
Efforts to restructure the current system stem from the collapse of the housing finance system and the placement of Fannie Mae and Freddie Mac into receivership in September 2008. The federal government made an infusion of $187.5 billion into Fannie and Freddie Mac. With the improvement in the housing market, Fannie Mae and Freddie Mac have repaid the funds as well as additional returns and thus decreased the pressure on Congress to act. The net savings estimated by CBO from the bill could, however, alter that dynamic.
Mississippi Homestead Exemption Creates Notification Issue
In Short:
The state of Mississippi allows an exemption from property tax up to $300 for “homesteads,” defined in general as property owned by an individual and used as a residence.  Recently, state officials have threatened to impose penalties on relocation management companies (RMCs) that acquire property from a transferee in one year and dispose of it in another without insuring that the existing homestead exemption is removed.  The trigger for these examinations is records of a deed from transferee to RMC in one year, with a deed from RMC to an outside buyer in another, although it would appear that any relocation homesale transaction, even if the deeds are dated in the same year, could create the same problem.  RMCs or Worldwide ERC member companies acquiring homes in Mississippi should consider promptly notifying the County Tax Assessor when they acquire the property.
 
The Full Story:
Mississippi has a very complicated and document-intensive system of granting homestead exemptions.  The exemptions, which cover property taxes on the first $7,500 of assessed value of an eligible property, but are limited to a total of $300, are partially reimbursed to localities by the state government. 
 
Only individual taxpayers resident in Mississippi who are heads of household and who own the property in question are eligible.  In order to qualify for the exemption, the homeowner must file an application between January 1 and April 1 of year for which exemption is sought.  However, the facts necessary to determine eligibility are determined as of January first.  The application is filed with the County Tax Assessor.  Once granted, a roll is maintained of properties receiving the exemption.  The exemption is a year-to-year benefit that apparently does not change during the year.  If events occur during the year that would change eligibility for the exemption, the exemption is removed for the next year.
 
As reported to Worldwide ERC® by Fidelity Residential Solutions, there have been recent cases in which Mississippi authorities have alleged possible homestead exemption fraud when an RMC accepted a deed from a Mississippi transferee dated in one year, and executed a deed to an outside buyer in a subsequent year without informing the County Tax Assessor that ownership had changed so that the homestead exemption could be removed from the property. 
 
Note that this position apparently relies on the deed dates, rather than actual transaction or recording dates.
 
However, it would appear that the same issue could arise any time there is a transaction involving purchase by an RMC and subsequent disposition of the property, regardless of the dates of the deeds or, indeed, whether or not two deeds were used.  The use of two deeds seems only to make the transaction easier for the authorities to identify.  The crux on the matter is that disposition of the property by the homeowner to a non-eligible purchaser should trigger a notification to the Tax Assessor that the property is no longer eligible for a homestead exemption, unless the new owner timely applies for one.  A letter to the Tax Assessor is acceptable.
 
Although the amount of the homestead exemption is relatively small, with penalties and interest the cost could be considerably higher.  Consequently, RMCs or Worldwide ERC® companies acquiring homes in Mississippi would be well advised to adopt a standard practice of notifying the County Tax Assessor when they acquire the property. 
 
Worldwide ERC® appreciates the assistance of Fidelity Residential Solutions in identifying this issue.
 
Posted by Peter K. Scott
Changes to IRS Voluntary Offshore Compliance Program Will Benefit Many
In Short:
 
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 a part of the program revision, the IRS released an expanded and revised set of Frequently Asked Questions.  It is available at http://www.irs.gov/Individuals/International-Taxpayers/Offshore-Voluntary-Disclosure-Program-Frequently-Asked-Questions-and-Answers-2012-Revised.  In addition, the IRS released a document explaining the transition to the new program, which may be viewed at http://www.irs.gov/Individuals/International-Taxpayers/Transition-Rules-Frequently-Asked-Questions-FAQs
 
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
IRS Finalizes Truncation of Tax ID Numbers
In Short:
The Internal Revenue Service has issued final regulations that permit truncation of ID numbers included on payer information returns.  The final regulations expand the concept to include employer EIN numbers, as well as other information returns.  The IRS, supported by the tax preparer community, has been working for some years to permit the “truncation” (shortening) of ID numbers used on tax information returns in order to combat identity theft tax fraud.  It published proposed regulations in January of 2013, expanding a pilot program from 2009, and has now finalized those regulations.  It has also sought legislation to permit truncation of Social Security numbers on Forms W-2. 
 
The Full Story:
As a part of efforts to fight rampant ID theft, IRS has worked for several years to put in place a program that would allow companies filing information returns to “truncate” the social security numbers of individuals on the payee statements (generally, Forms 1099).  “Truncation” refers to the practice of including only the last four digits of a longer number, and is routinely used by credit card companies.  For tax information returns, IRS published proposed regulations in January of 2013 under which a pilot program it had had in place since 2009 would be made permanent.  It has now finalized, and expanded, those proposed regulations. See T.D. 9675, http://www.gpo.gov/fdsys/pkg/FR-2014-07-15/pdf/2014-16464.pdf
 
Under the program, filers of most information returns are permitted (but not required) to truncate the taxpayer’s social security number on the copy of the statement sent to the payee.   (Note that the return sent to the IRS must still contain the full ID number)  For example, the truncation program would apply to real estate reporting forms (Form 1099-S) and to cancellation of debt reporting (Form 1099-C).  The truncated number is referred to as a “TTIN.”  The proposed regulations were allowed to be utilized by payors prior to finalization, but will now be fully effective for 2014 information returns. 
 
The final regulations were also expanded to include additional information returns, and also to include employer identification numbers (EINs).  Moreover, truncation is permitted on electronic as well as paper statements.
 
One remaining problem, however, is that the IRS would need statutory authority to expand the program to Forms W-2, the basic wage statement given to all employees.  The Social Security number is required on that form, and IRS has no authority to allow a shorter version.  A bill was introduced in the House of Representatives last year to allow truncation in wage reporting, but has gone nowhere so far and future action is uncertain.  H.R. 1560 (Garcia, D-FL).  The AICPA, which has long supported truncation, has recommended such legislation to Congress, and reiterated that position in a release on May 1, 2013.
 
Nevertheless, with release of the final regulations, truncation should become the rule rather than the exception in payer copies of information returns, including, as noted, some that are common in the mobility industry.  Worldwide ERC® members issuing such returns will want to take advantage of this new development.
 
Posted by Peter K. Scott
Worldwide ERC Provides New State-by-State Blank Deed Information

Use of one deed, rather than two, to complete relocation home sale transactions has long been standard practice in the industry.  Doing so facilitates efficient completion of two-sale transactions, saves a set of document costs, and often saves money on transfer taxes or recording fees. 

In such transactions, the employer or relocation management company (RMC) obtains a deed from the selling employee that is completed except for the name of the person to whom the property is being transferred (a “blank deed”).  When it sells the property, the employer or RMC adds the name of the eventual buyer to the deed, and it is recorded.

The Internal Revenue Service has accepted the blank deed as consistent with favorable tax treatment of properly structured home sale programs.  However, there are a number of issues that arise in various states that prompt many employers or RMCs to use two deeds in those jurisdictions.  This subject has been covered extensively in the Worldwide ERC® MasterSource Tax & Legal Library for many years under the article heading “Blank Deed: State Issues and Rev. Rul. 2005-74.”

Recently, however, the Worldwide ERC® Real Estate & Mortgage Forum, and the Worldwide ERC® Tax Forum, undertook to take a new look at state-by-state factors that are relevant in considering whether to use one deed or two in each state, and to reduce that research to an easily-used table.  The table, which also contains citations to the relevant laws in each state, is reproduced below.  Members should find it to be a very useful reference tool in considering whether to use one deed or two in particular states.  The two Forums intend to keep the document up to date, and it will be accessible on the Worldwide ERC® website.

Worldwide ERC® members should note, however, that the table is not a recommendation by Worldwide ERC® as to what action is appropriate in any state, but is provided for the information of members.  As always, members should consult their own tax and legal advisors in making decisions on this issue.

 

SINGLE vs DUAL DEED INFORMATION

 

This document presents an overview of factors commonly reported by Worldwide ERC® membership as influencing their decisions on whether to use one or two deeds in a particular jurisdiction.  It is provided for general information purposes only, and Worldwide ERC® makes no representations regarding its accuracy or completeness.  Worldwide ERC® strongly suggests consulting with your tax and legal advisors to determine the appropriate policies for your organization.

Last Revised – May 30, 2014

 

Minimal Costs for Dual Deed
Alabama
Alaska
X
Challenge to Notarization of Blank Documents possible¹
Arizona
X
Challenge to Notarization of Blank Documents possible¹
Arkansas
California
Challenge to Notarization of Blank Documents possible¹; County recorder practices vary, with some questioning date of Deed vs date of recording for property tax evaluation.
Colorado
X
Transfer tax is minimal (.01% of sales price)
Connecticut
X
If the second deed is recorded within 6 months of the first deed, it is exempt from seller paid transfer tax.
Delaware
False Claim / Qui Tam²
District of Columbia
False Claim / Qui Tam² for recordation tax
Florida
Challenge to Notarization of Blank Documents possible¹
Georgia
Guam
Hawaii
False Claim / Qui Tam²
Idaho
X
Illinois
False Claim / Qui Tam²
Indiana
X
False Claim / Qui Tam²
Iowa
Kansas
X
Kentucky
A Statement of Consideration attesting to the accuracy of the sales price must accompany each deed when presented for recording.  If the sales price between the Transferee and Company is different from the sales price between the Company and the Buyer, the use of the blank deed may expose the Transferee and/or the Company to penalty.
Louisiana
X
Only New Orleans Parish has transfer tax ($325.00 per deed)
Maine
Maryland
The recording of deeds and administration of transfer taxes is the responsibility of the County Clerk.  Not all County Clerks apply the same rules.  In some instances the Clerk may ask for a copy of the HUD, which will show a different seller than the Transferee, and assess an additional set of transfer taxes. 
Massachusetts
Michigan
Challenge to Notarization of Blank Documents possible¹
Minnesota
Mississippi
X
Missouri
X
Montana
X
Nebraska
Nevada
False Claim / Qui Tam²
New Hampshire
State views a relocation sale as two separate, taxable transactions
New Jersey
New Mexico
Challenge to Notarization of Blank Documents possible¹
New York
State views a relocation sale as two separate, taxable transactions; False Claim / Qui Tam²
North Carolina
North Dakota
X
Ohio
Oklahoma
An agreement between the relocation industry and Oklahoma eliminates that state’s requirement that companies (and their employees) buying and selling transferee homes in the state must be licensed as Oklahoma real estate agents, but only if companies take title to the homes.
Oregon
Pennsylvania
State views a relocation sale as two separate, taxable transactions
Puerto Rico
X
Notary law requires parties to a deed to execute on the same day.
Rhode Island
False Claim / Qui Tam²
South Carolina
South Dakota
Tennessee
Texas
X
In Texas, lenders require that the deed and the security interest instrument (the deed of trust) have the same date.
Utah
X
Vermont
Virginia
Washington
State views a relocation sale as two separate, taxable transactions
West Virginia
Wisconsin
Wyoming
X

Additional Factors:

FHA Anti-Flipping Rules - The Federal Housing Administration’s mortgage insurance program is increasingly popular among potential borrowers, particularly first time homebuyers and those looking for minimal down payment options. The “FHA Anti-Flipping Rules” are most commonly known for restricting a mortgage’s eligibility for the FHA program if the seller has owned the property for less than 90 days. Properties sold by an employer or relocation company in connection with the relocation of an employee are exempt from this restriction. However, the regulation also provides that a mortgage will be ineligible for the program if the seller of the property is not the owner of record. The relocation company may be required to take title to the property if the buyer is attempting to secure FHA-insured financing.

Lender Requirements - There has been a considerable increase in the number of transactions where the buyer’s lender requires the relocation company to take title to the property as a condition of financing the purchase. The most common rationale is the perceived risk of fraud when the seller is not the record owner of the property. It may be possible on a case by case basis to overcome these objections by explaining the purpose and structure of a relocation home sale transaction, particularly if the concern is addressed early in the loan underwriting process. However, this is not always possible; it may be necessary for the relocation company to take title to the property if the buyer is unable to find alternative financing.

Footnotes

  1. In some states notary statutes or guidelines prohibit a notary from notarizing an “incomplete” document (i.e. a deed-in-blank, with no buyer). However, there is an argument that a blank deed is complete because it contains the name and signature of the transferee and is a “negotiable” instrument, like a check missing a payee’s name.
  2. False Claim laws, particularly in states with “Qui Tam” statutes, might allow private citizens to seek redress for transfer taxes or recording fees avoided by use of the blank deed. Whether the statute applies to taxes or transfer tax on a deed, the interpretation of the law in each state is not always absolutely clear. Such a statute in Florida led to litigation that was costly to resolve for the industry and the companies involved.

Citations

Connecticut
Transfer Taxes - General Statutes of Connecticut § 12-498(a)(18).

Delaware
False Claims - Delaware Code § 1201.

District of Columbia
False Claims - D.C. Code § 2-381.02

Hawaii
False Claims - Hawaii Revised Statutes §661-21

Illinois
False Claims - Illinois Compiled Statutes § 740 ILCS 175/3.

Indiana
False Claims – Indiana Code § 5-11-5.5-2

Kentucky
Statement of Consideration - Kentucky Revised Statutes § 382.135

Nevada
False Claims - Nevada Revised Statutes § 357.040.

New Hampshire
Transfer Taxes - New Hampshire Revised Statutes 78-B:1

New York
Transfer Taxes - Consolidated Laws of New York – Tax § 1401-1402 False Claims - Consolidated Laws of New York – State Finance § 189

Oklahoma
Oklahoma Real Estate Commission’s Q2 2000 “Commission Comment” Source - http://www.state.ok.us/~orec/pdf/comment2.pdf

Pennsylvania
Transfer Taxes - Pennsylvania Code § 91.170. Rhode Island False Claims - State of Rhode Island General Laws § 9-1.1-3

Washington
Transfer Taxes –

  1. Attorney General Opinion – AGO 1957 No. 70 – May 23, 1957 Source - http://www.atg.wa.gov/AGOOpinions/opinion.aspx?section=topic&id=10136
  2. Washington Administrative Code § 458-61A-110(4).
Deadline Approaches for Filing Reports of Foreign Accounts
In Short: 
The annual report of foreign bank and financial accounts, known as the FBAR and made on Form 114, which has replaced Form TD F 90-22.1, is due to the Treasury Department on June 30, 2014.   Reports are required if the aggregate value of all reportable foreign financial accounts exceeded $10,000 at any time during the calendar year 2013.  Reports are required even for some individuals who have signature authority, but no personal interest, in corporate or other foreign accounts.  Stiff penalties apply for failure to report.  Worldwide ERC member companies should make sure that employees assigned abroad understand the applicable rules.
 
The Full Story:
The United States has for many years required its citizens and residents to report their interests in foreign bank accounts or other financial accounts.  In recent years, however, with the government focused sharply on finding and taxing people who hide foreign assets and income from the IRS, much more attention has been devoted to whether or not those reports are being properly filed.  As a result, failure to file has become far more dangerous, and far more likely to be discovered.
 
Reports are due from all “U.S. persons,” which means not only U.S. citizens but foreigners who are resident in the U.S, as well as entities such as corporations or partnerships organized in the U.S. 
 
A reportable financial account is broadly defined.  It includes savings accounts, demand deposits, checking accounts, securities, security derivatives, debit cards and pre-paid credit cards, certain insurance or annuity policies, and pension funds.  If any of such accounts is maintained outside the U.S. it is a “foreign financial account” and must be reported.  This includes accounts maintained in foreign branches of U.S. financial institutions, but does not include accounts in U.S. branches of foreign financial institutions.  A U.S. person who is the owner of record or holds legal title to a reportable account must report even if the account is for the benefit of someone else.
 
In addition, in recent years Treasury added a requirement that individuals who have signature or other authority over any foreign financial account file reports, even if the individual has no personal interest in the account.  Consequently, if a corporate employee has the authority, alone or in conjunction with another individual, to control the disposition of assets in a foreign financial account by direct communication to the financial institution, such as by writing a check, the individual must file an FBAR and report the account (assuming that aggregate values of all reportable accounts exceeds $10,000). 
 
FBARs must be filed electronically through the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) on Form 114.  Here is a link to the online form and instructions.  http://bsaefiling.fincen.treas.gov/main.html
 
The penalty for failing to file a report is up to $10,000, unless the failure is “willful,” which generally means intentional.  The penalty for willful failure to file is the greater of $100,000 or 50% of the aggregate value of the taxpayer’s foreign accounts.  With the current stringent enforcement environment noted above, it is extremely important that those with a filing obligation do so. 
 
Worldwide ERC® members should insure that all employees assigned overseas are aware of these requirements, as well as foreign citizens working for the company in the United States.

Posted by Peter K. Scott
IRS Provides 2014 Foreign Housing Cost Limits
In Notice 2014-29, April 14, 2014, http://www.irs.gov/pub/irs-drop/n-14-29.pdf, the Internal Revenue Service has provided adjustments to the limits on excludable foreign housing costs for a large number of high-cost foreign locations.
 
U.S. workers stationed overseas remain taxable in the U.S. on all income received, whether it comes from the U.S. or a foreign country. However, if certain conditions are satisfied section 911 of the Internal Revenue Code allows those workers an election to exclude from their U.S. income some of their "foreign earned income," and some of their reimbursed expenses for foreign housing.
 
To qualify for the foreign earned income exclusion (section 911(a)(1)) and the foreign housing exclusion (section 911(a)(2)) the worker must have income received for working in a foreign country, have a tax home in a foreign country, and meet a bona fide residence or physical presence test in that country.
 
Assuming that those requirements are met, the law also limits the amount of income excludable, and the amount of the excludable housing expense.  Those limits are indexed for inflation.  For 2014, the amount of foreign earned income that is excludable is $99,200.
 
Prior to 2006, the housing exclusion was unlimited to the extent it exceeded a base amount. The base amount was 16% of the salary of a federal employee at salary grade GS-14, step 1, or about $12,500 in 2005. So, if housing costs were $40,000 in 2005, then $27,500 would generally have been excludable (the amount by which actual costs exceeded the base amount).
 
However, the 2006 law amended these provisions to change the calculation of the base amount, and to limit the maximum amount of the exclusion. The new law changed the calculation of the base to 16% of the foreign earned income exclusion amount.  For 2014, that is $15,872 ($99,200 x .16).  The new law then imposed a maximum on the costs that may be taken into account in computing the exclusion. The maximum is 30% of the earned income exclusion, or $29,760 for 2014 ($99,200 x .30).  The result is that in general the maximum housing exclusion for any location is $13,888 for 2014 ($29,760 minus $15,872).
 
The new law, however, also gave the Treasury Department the authority to provide higher maximum housing cost limits for areas in which it determined housing costs to be high.  IRS has regularly exercised that authority in a series of publications, of which Notice 2014-29 is the latest.
 
The Notice provides a lengthy table of foreign locations, and replaces the $29,760 general limitation with one specific to the locale.  Beginning with Luanda, Angola at $84,000, and ending with Ho Chi Minh City in Vietnam at $42,000, the table visits nearly every country in the world, and should always be consulted by Worldwide ERC® members calculating the foreign housing exclusion.  A few highlights: Hong Kong remains the highest cost city at $114,300, followed, as usual, by Moscow at 108,000, Geneva at 100,800, and Tokyo at 96,000.  European capitals such as Paris and London remain in the high-cost group as well, at $86,000 and $88,700, respectively.
 
Finally, as it did last year, the IRS provides a welcome option for taxpayers in locations where housing costs are higher in Notice 2014-29 than they were in Notice for 2013-31 applicable to 2013.  If the taxpayer resided in one of those locations in 2013, he or she is allowed to use the higher 2014 amount in calculating the 2013 exclusion.
 
Posted by Peter K. Scott
 
Impact of Immigration Reform on Home Sales
In Short:
The enactment of comprehensive immigration reform legislation would have a direct and profound impact on the workforce mobility industry as more high-skilled foreign workers would gain entry into the U.S. Immigration reform would have a significant impact on another key component of our industry– real estate. Approximately 11 million undocumented immigrations currently reside in the U.S. According to estimates by the National Association of Hispanic Real Estate Professionals, 3 million of those 11 million individuals would likely purchase homes if they were given a path to citizenship driving $500 billion in real estate transactions and $233 billion in related commissions, fees and consumer spending. However, while Congress has never been closer to passing comprehensive immigration reform, it is still unlikely legislation will be enacted this year.
 
Full Story:
In June of 2013, the Senate passed the Border Security, Economic Opportunity, and Immigration Modernization Act of 2013 (S.744). The “Gang of Eight” comprised of Senators Charles Schumer (D-NY), Michael Bennett (D-CO), Dick Durbin (D-IL), Jeff Flake (R-AZ), Lindsey Graham (R-SC), John McCain (R-AZ), Robert Menendez (D-NJ) and Marco Rubio (R-FL) developed the bipartisan comprehensive immigration reform proposal. The primary provision of the proposal is a path to citizenship for those undocumented immigrants currently residing in the United States. The bill also would reduce the employment-based green card backlog and increase the number of high skilled employment-based visas.
 
Under S. 744, family members of foreign workers with green cards would no longer be counted toward the annual limit on green cards. Thereby freeing tens of thousands of green cards to other foreign workers and subsequently their families. The number of H-1B visas available each year to high skilled foreign workers would increase from a current base of 65,000 to 115,000, and possibly as high as 180,000 in the first year and higher in subsequent years if the limit is exceeded.
 
With a large block of House Republicans against a path to citizenship, the House Republican leadership has chosen to not move a comprehensive proposal but instead several smaller bills on the respective aspects of immigration reform. Last June, the House Committee on Judiciary passed the SKILLS Visa Act (H.R. 2131) which would increase the number of H-1B visas available each year to high skilled foreign workers to 155,000 and increase the separate cap for advanced degree visas to 40,000. The bill would also allow 25,000 green cards for family members of foreign workers.
 
Under H.R. 2131, the individual country cap for green cards would also be eliminated. Up to 55,000 green cards would be allocated for foreign graduates of U.S. universities and colleges in the field of STEM or Science, Technology, Engineering and Mathematics. Finally, the bill would allocate 10,000 entrepreneur green cards and make changes to the investor visa program among other changes to visa programs.
 
The increases under S. 744 or H.R. 2131 in the number of foreign employees entering the U.S. alone would result in more demand for housing. Both rentals for those transferred to the U.S. on a temporary basis and ownership by those coming to the U.S. or are already in the country who would stay longer and be more willing to actually purchase a home. However, the largest impact on home sales would not be from high-skilled foreign workers but the more controversial provision of providing amnesty to millions of undocumented immigrants already living in the U.S.
 
According to the Pew Hispanic Center, as of March 2010 there were 11.2 million undocumented immigrants living in the U.S. Of these 11.2 million individuals, the National Association of Hispanic Real Estate Professionals (NAHREP) estimates that 6 million undocumented immigrants would seek a pathway to citizenship under S. 744. Using past housing purchase trends of immigrants, NAHREP approximates that as many as 3 million would pursue home ownership once they have achieved legal status. Based on household incomes of $40,000 and the national home median sales price of $173,600, NAHREP calculates the possibility of an additional $500 billion in new mortgages. They also estimate $25 billion in mortgage origination and refinance income, $28 billion in real estate commissions, and $180 billion in additional consumer spending relating to the purchase of a new home and initial home ownership. These estimates are over a five-year period following a path to citizenship being in place. To access more information from NAHREP, go to: http://nahrep.org/immigration-reform.
 
The NAHREP analysis was focused on the potential impact of immigration reform on home sales. The housing focus of the Bipartisan Policy Center (BPC) report was on new housing construction resulting from immigration reform. The October 2013 report by the BPC entitled “Immigration Reform: Implications for Growth, Budget and Housing” determined that the increase in demand for homes would spur spending on new residential construction at an average of $68 billion per year over the next twenty years. The BPC report did not estimate the additional amount generated from mortgages, fees, commissions are related spending from the new construction. To access a copy of the BPC report, go to: http://bipartisanpolicy.org/sites/default/files/BPC_Immigration_Economic_Impact.pdf.
 
While the NAHREP and BPC estimates make several assumptions and the actual impact on housing from enactment of immigration reform could be much lower, nearly all economists concur that reform would result in a significant boost to the recovering real industry. The much less certain question is whether Congress will act on comprehensive reform before the end of this congressional session. The House has not made significant progress on any pieces of its reform package since last summer and statements by House Republican leaders suggest no further action will be taken before this summer. If Congress does not act by the end of this year, new legislation will need to be filed and the process to passage will have to begin over again.
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