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Expat Tax Blog
Swiss banks may be sounding more bullish now after the cat of Swiss bank secrecy is irretrievably out of the bag. Nowadays some—like the CEO of UBS AG—are saying the IRS and others have put 20,000 Swiss jobs at risk.
The mess started when the IRS backed UBS into a corner and broke the back of Swiss bank secrecy like a twig. That was followed by several successive IRS amnesty programs, first in 2009, second in 2011, and finally in early 2012.
About 30,000 taxpayers came forward over the last 2 years to disclose Swiss and other accounts.
The more traditional route to getting details is to make banks disclose. With UBS and HSBC, the IRS and DOJ compelled the banks to cough up the data.
The Supreme Court ruled today that the IRS took too long to get back taxes from Home Concrete & Supply LLC in the company’s tax shelter case. Home Concrete & Supply LLC was company formed in order to create the infamous Son of Boss abusive tax shelter scheme. Obviously, they eventually got caught and were slammed with a $1 Billion tax bill.
So, how long is too long? Well, in this case, the Supreme Court ruled that the statute of limitations to collect this hefty (…and might I add U.S. deficit lowering) tax debt clearly brought on by shady activity…was three years. The IRS wanted to extend it to six years…but the Supreme Court was firm on its ruling. Home Concrete & Supply LLC is ecstatic, of course.
For the year of 2011, we all worked to earn our wages, and we all worked just as hard to get our tax return filed for the April 17th deadline, so what should you do now?
Since the IRS has the right to audit your tax return several years after it is filed, you should keep your W-2, 1090s and all of your financial documents for a minimum of four years. If you own property, you should keep all of your paperwork and documentation related to the property for as long as you are the owner of that property.
It is possible for the IRS to audit after these dates if certain things occur:
- For up to six years after the filing deadline, the IRS can audit you if you underreport your gross income by 25% or more
- If youfile a fraudulent tax return or fail to file at all, the IRS has no limit of time for when they might decide to audit you.
The IRS and Justice Department cooperate to catch tax scofflaws, including having notorious ones arrested if they land on U.S. soil. These days discussion is focused on more mundane tax debts and the other end of travel: when can the IRS prevent you from leaving?
At the moment stopping a U.S. citizen from traveling because of tax debts is a proposed law not yet enacted.
Some people figure the IRS needs all the help it can get to collect taxes. Some civil libertarians seem outraged this restriction could be considered, much less enacted.
After all, if you’re a U.S. citizen or permanent resident, you must report your worldwide income to the IRS even if you’re paying tax on it somewhere else.
Moreover, you must file an FBAR every year disclosing your bank accounts if their aggregate value exceeds $10,000 at any time during the year. It’s important to know if you are a mere signatory on an account without a beneficial interest in it.
How do you know if you meet this fact pattern or how these accounts are evaluated?
With foreign accounts the stakes are particularly high. With a foreign bank, there will be no IRS Form 1099 to alert the holders about the income and its reporting.
Those who acquire US permanent residency and/or US Citizenship often are caught by surprise when it comes time to sell assets (property or stocks or ?) owned before they became US taxpayers.
Under US tax law including Court Decisions, even though an asset was acquired many years before becoming a US taxpayer (Citizen or tax resident) the tax basis for determining gain or loss is the original cost basis of the property (or if inherited the fair market value of the property when it was inherited).
What to do? Before becoming a US taxpayer, consider selling your highly appreciated assets to avoid paying US taxes on the gain that occurred prior to that date.
Situation
You are a nonresident of the United States. Thirty years ago you bought a piece of land in your home country for US$10,000. Now it is worth US$200,000.
You immigrate to the United States, then sell the land for its current value — US$200,000.
Question
Do you pay U.S. capital gain tax on the entire $190,000 of capital gain?
Answer
Yes.
Why
Just because you change status from nonresident to resident of the United States, you don’t change the U.S. tax laws that apply to your transaction. Unfortunate but true. You calculate your U.S. tax results using U.S. tax law, despite the fact that you were a nonresident when you bought the property.
DOJ Tax has announced the conviction of one Artistotle “Rick” R. Matsa, an attorney, on 22 counts “for numerous tax fraud and obstruction of justice related offenses, including witness tampering and making a false statement.” The DOJ Tax press release is here.
The Government’s summary of the convictions in the press release is (with bold face for the FBAR information):
According to the indictment, which was returned on June 23, 2010, and the evidence admitted at trial, Rick Matsa, who in addition to being an attorney was also an architect, a real estate broker, and a licensed minister in Ohio, created and operated several nominee entities in order to disguise and conceal his income and assets from the IRS.
Here are five more tax return amendment tips:
6. Amend each year separately. If you are amending more than one tax return, prepare a separate Form 1040X for each.
7. Amended returns are more likely to be audited. Few tax returns are actually audited, but tax lawyers must advise clients based on the assumption every tax return will be examined.
8. Refunds can be applied to estimated taxes. If you file an amended return asking for considerable money back, the IRS may review the situation even more carefully.
9. Beware special statute of limitations rules. Normally the IRS has three years to audit a tax return.
10. Don’t forget interest and penalties. If your amended return shows you owe more tax than you originally reported and paid, you’ll owe additional interest and probably penalties. Interest is charged on any tax not paid by the due date of the original return, without regard to extensions.
Even the IRS has limits. If you’ve everbeen audited by the IRS, you may think going back three years is bad enough.
The tax code generally allows the IRS to audit three years back, and six in some cases.
However, the IRS gets double time for a “substantial understatement of income”—where you omit 25% or more. The debate is over what it means to omit 25% or more of your gross income. The IRS argues for six years on basis over-statements.
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