Archive for June, 2014

IRS Reminds Those with Foreign Assets of U.S. Tax Obligationsby kyoffelaw

Reminder from the IRS:

“WASHINGTON — The Internal Revenue Service reminds U.S. citizens and resident aliens, including those with dual citizenship who have lived or worked abroad during all or part of 2013, that they may have a U.S. tax liability and a filing requirement in 2014.

The filing deadline is Monday, June 16, 2014, for U.S. citizens and resident aliens living overseas, or serving in the military outside the U.S. on the regular due date of their tax return. Eligible taxpayers get one additional day because the normal June 15 extended due date falls on Sunday this year. To use this automatic two-month extension, taxpayers must attach a statement to their return explaining which of these two situations applies. See U.S. Citizens and Resident Aliens Abroad for details.

Nonresident aliens who received income from U.S. sources in 2013 also must determine whether they have a U.S. tax obligation. The filing deadline for nonresident aliens can be April 15 or June 16 depending on sources of income. See Taxation of Nonresident Aliens on

Federal law requires U.S. citizens and resident aliens to report any worldwide income, including income from foreign trusts and foreign bank and securities accounts. In most cases, affected taxpayers need to fill out and attachSchedule B to their tax return. Certain taxpayers may also have to fill out and attach to their return Form 8938, Statement of Foreign Financial Assets.

Part III of Schedule B asks about the existence of foreign accounts, such as bank and securities accounts, and usually requires U.S. citizens to report the country in which each account is located.

Generally, U.S. citizens, resident aliens and certain nonresident aliens must report specified foreign financial assets on Form 8938 if the aggregate value of those assets exceeds certain thresholds. See the instructions for this form for details.

Separately, taxpayers with foreign accounts whose aggregate value exceeded $10,000 at any time during 2013 must file electronically with the Treasury Department a Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts (FBAR). This form replaces TD F 90-22.1, the FBAR form used in the past. It is due to the Treasury Department by June 30, 2014, must be filed electronically and is only available online through the BSA E-Filing System website. For details regarding the FBAR requirements, see Report of Foreign Bank and Financial Accounts (FBAR).

Taxpayers abroad can now use IRS Free File to prepare and electronically file their returns for free. This means both U.S. citizens and resident aliens living abroad with adjusted gross incomes (AGI) of $58,000 or less can use brand-name software to prepare their returns and then e-file them for free. A second option, Free File Fillable Forms the electronic version of IRS paper forms, has no income limit and is best suited to people who are comfortable preparing their own tax return. Check out the e-file link on for details on the various electronic filing options.

A limited number of companies provide software that can accommodate foreign addresses. To determine which will work best, view the complete Free File Software list and the services provided. Both e-file and Free File are available until Oct. 15, 2014, for anyone filing a 2013 return.

Any U.S. taxpayer here or abroad with tax questions can use the online IRS Tax Map and the International Tax Topic Index to get answers. These online tools assemble or group IRS forms, publications and web pages by subject and provide users with a single entry point to find tax information.”

IRS Foreign Disclosure Requirements: Form 5472by kyoffelaw

Foreign corporations engaged in a U.S. trade or business and U.S. corporations with more than 25% foreign ownership are required to file Form 5472 with the IRS. The purpose of Form 5472 is to provide certain information to the IRS when a “reportable transaction” occurs (such as sales, rents, royalties, interest) between a reporting corporation and a related party. This disclosure requirement is not limited only to transactions between a reporting corporation and its 25% foreign shareholder but also extends to transactions with foreign entities that are related to the foreign 25% shareholder.

A separate Form 5472 is filed for each foreign or domestic related party with which the reporting corporation engaged in a reportable transaction during the year.

The 25% ownership requirement is generally applied to a  foreign person owning 25% of a US corporation either directly or indirectly (via other entities). If certain conditions are met Form 5472′s disclosure requirements may not apply to multiple foreign persons owning 25% of a US corporation in the aggregate. Form 5472 is often overlooked when a foreign owner of a U.S. company is a silent partner. It is important to keep in mind that if such foreign ownership exists it does not matter what role the foreign owner has in the US company.

Form 5472 must be filed with a reporting corporation’s annual tax return. It is extremely important that a 5472 be filled out properly. As of 2013 the IRS is now assessing an automatic $10,000 penalty for failing to file the form on time and an additional $10,000 for every subsequent year that the form is not filed. A substantially incomplete Form 5472 may be considered by the IRS as constituting failure to file.  Furthermore, the IRS uses Form 5472 as a starting point for inquiring into transfer pricing. Forms filed correctly and in a timely manner not only ensure that reporting corporations avoid penalties but also aids in reducing IRS audit risk.

IRS Foreign Disclosure Requirements: Form 5471by kyoffelaw

Form 5471 is an information return that allows the IRS to tax foreign profits prior to their distribution as dividends (known as Subpart F income).

U.S. citizens, residents and entities such as LLCs, corporations, trusts, or partnerships (U.S. “persons”) serving as officers, shareholders or directors in certain foreign corporations may be required to file Form 5471 under the following circumstances:

1. A U.S. person becomes a director or officer of a foreign corporation

2. a U.S person acquires an ownership interest in a foreign corporation in excess of certain authorized limits

3. a U.S. person disposes of stock in a foreign corporation that reduces its interest in the foreign corporation to less than certain authorized limits

4. a U.S. person is in control of a foreign corporation for an uninterrupted period of at least 30 days in a year

5. a U.S. person is a 10% or more shareholder in a foreign corporation that is a ‘controlled foreign corporation’ for an uninterrupted period of at least 30 days in a year and that person owns that stock on the last day of the year. CFC is defined as a foreign corporation that has U.S. shareholders (counting only those with a 10 percent or more interest) that own on any day of the tax year of the foreign corporation more than 50% of the total combined voting power of all classes of its voting stock, or the total value of the stock of the corporation.

The rules governing determination of ownership interest are complex and include not only direct but also indirect and constructive ownership.  5471′s are required under circumstances beyond the direct purchase or sale of an interest in a foreign corporation by a U.S. person.

A $10,000 penalty is imposed for each form per year for failure to submit the form to the IRS.  Additional penalties of up to $50,000 are charged for instances of continued failure.  A U.S. person in default is also subject to a reduction of 10% of the foreign taxes available for credit.  Additional reductions may be applied to cases in which a U.S. person continues to fail to file. A $10,000 penalty is applied in the event that a U.S. person fails to report certain types of specific transactions.  Criminal penalties may also apply for failure to properly file the 5471.

For more information please visit the IRS instruction page or contact us with any questions.

The Foreign Earned Income Exclusion and Housing Deductionby kyoffelaw

Are you a United States citizen or permanent resident working abroad? If so, it is important to keep in mind that the United States taxes you on your worldwide income. However, there are a number of important tax benefits that may be available for you, such as the foreign earned income exclusion, foreign housing exclusion and foreign housing deduction. Subject to certain rules, you may currently qualify to exclude up to $97,600 from your 2013 income.  Additionally, it is possible to exclude or deduct certain payments for foreign housing.

If your foreign source employment income falls below the excluded amount you still must file an annual tax return.

Generally if you are self employed abroad the foreign earned income exclusion only applies to income taxes and does not apply to self-employment taxes. Therefore even if your foreign earned self employment income falls below the exclusion amount you must still pay self employment taxes at the rate of 15% on your net foreign source self employment income.

The foreign earned income exclusion and the foreign housing exclusion/deduction are all based on foreign earned income. Foreign earned income is defined by the IRS as salaries, wages, commissions, bonuses and self-employment income for services performed in a foreign country. Foreign earned income must received for services  performed during a period that your tax home is in a foreign country and during which you meet either the “bona fide residence test” or the “physical presence test”.

Tax Home

Your tax home is the location in which you are permanently or indefinitely (you expect to remain in such location for more than one year) located for work. It is the location of your main place of employment regardless of your family home.

Bona Fide Residence Test

The Bona Fide Resident Test is met if you are a U.S. citizen or resident (who is a citizen of a country with which the U.S. has a tax treaty with non-discrimination provisions) and a bona fide resident of a foreign country for at least one full tax year. If you are a U.S. resident and citizen of a foreign country without a non-discrimination clause in its tax treaty with the U.S. you may use the physical presence test.

The IRS will determine whether you qualify as a bona fide resident based on your individual circumstances. Factors used to evaluate bona fide residence include:

-Residence (i.e. a purchase or rented home, employer provided housing, hotel)

-Whether family members reside with you overseas or in the U.S.

-Whether you pay taxes to a foreign government

-The terms of your employment

-Foreign visa type and duration

-Maintenance of U.S. home

Establishing bona fide residence is based on a careful evaluation of an individual’s particular circumstances. No single factor determines whether or not an individual meets the bona fide residence test.

Physical Presence Test

To meet the physical presence test an individual must be physically present in a foreign country/countries for 330 days in a period of 12 consecutive months. Or, to put it differently, an individual must have been physically present in the United States no more than 35 days during any 365 day period.

Katya Yoffe’s Lecture on Basics of Business Immigration is Now Onlineby kyoffelaw

Katya Yoffe’s recent Continuing Legal Education lecture on the Basics of Business Immigration is now online. To preview or purchase the course please visit

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