Pre-Immigration Tax Planning

It is becoming easier for people and money to move across international borders. Most of the time, this movement will not have an impact on a person’s tax situation, and a nonresident of the United States would have few, if any, interactions with the Internal Revenue Service (“IRS”). But upon becoming a “resident” of the U.S. for tax purposes, the rules change dramatically, and if not planned for, the tax consequences can be severe. 

In our Pre-Immigration Tax Planning Guide we discussed two tax systems that an individual considering spending more time in the United States should plan for: The Federal Income Tax and the federal “Wealth Transfer” taxes, comprised of the Estate & Gift taxes and the Generation-Skipping Transfer tax. 

We also discuss Pre-Immigration Planning including:

Residency Starting Date. Pre-immigration tax planning and restructuring is usually done with the understanding that the individual is not yet subject to U.S. federal income tax in connection with such planning and restructuring. Accordingly, a clear understanding of the residency starting date of an individual that qualifies as a U.S. person in a particular year is crucial. If an alien is classified as a resident alien for the year and was not a resident alien at any time in the previous year, Code § 7701(b)(2)(A) provides “residency starting date” rules to determine on which day in the year the alien’s residency begins. 

Gift and Estate Tax Purposes. Pre-immigration tax planning also requires an understanding of whether (and if so, when) the individual who is seeking to immigrate into the United States will become a resident of the United States for U.S. estate and gift tax purposes. 

Residence/Domicile. For U.S. estate and gift tax purposes, the term “residency” means “domicile.” Although the U.S. income tax concept of residency relates only to physical presence in a place for more than a transitory period of time, domicile relates to a permanent place of abode. For U.S. estate and gift tax purposes a person can have (and must have) only one place of domicile, while for U.S. income tax purposes a person may have more than one place of residence, or none. 

Although an alien may be classified as a resident alien for U.S. income tax purposes, such classification is not determinative of the alien’s domicile for U.S. estate and gift tax purposes.

The concept of domicile is subjective, focusing on the intentions of the alien as manifested through certain lifestyle-related facts. Treas. Regs. §§ 20.0-1(b)(1) and 25.2501-1(b) offer only limited guidance, stating: “A person acquires a domicile in a place by living there, for even a brief period of time, with no definite present intention of later removing therefrom. Residence without the requisite intention to remain indefinitely will not suffice to constitute domicile, nor will intention to change domicile effect such a change unless accompanied by actual removal.”

 Accordingly, to be domiciled in the United States physical presence must be coupled with the requisite intent to remain indefinitely.

 Pre-Immigration Planning Strategies. Prior to an alien becoming a U.S. person for U.S. income and/or estate and gift tax purposes, various strategies can be implemented to minimize or even eliminate various U.S. tax consequences. Below is a summary of some techniques to be considered by practitioners in the pre-immigration tax planning context. 

• Step up cost basis in appreciated assets
• Transfer assets to US estate tax exempt trusts
• Make advance, completed lifetime gifts
• Accelerate gain recognition on appreciated assets
• Defer recognition of losses on depreciated assets
• Dispose of PFICs (passive foreign investment companies)
• Plan for future foreign tax credits from foreign activities
• Convert and/or check the box on foreign eligible entities, if recommended.
• Maintaining Non-domiciliary Status.
•  U.S. Estate and Gift Tax Pre-Immigration Planning. 

Even this brief introduction to the U.S. income tax and the wealth transfer taxes shows the varied rules, exceptions, requirements, and exemptions that apply to both U.S. residents and nonresidents. These rules are complicated and present many traps for the unwary. 

Pre-Immigration Tax Planning Is Needed
To Avoid These US Tax Traps For The Unwary!

   Contact the Tax Lawyers at

Marini & Associates, P.A. 

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com
or Toll Free at 888 8TAXAID (888-882-92

Another Taxpayer Denies That Their Failure To File an FBAR Was Willful

In U.S. v. Vettel, case number 4:21-cv-03099, in the U.S. District Court for the District of Nebraska, a Nebraska resident denied the U.S. government's claims that his failure to report holdings in a Swiss bank account that received money from a sham corporation in Belize constituted willful failure to file, according to filing in Nebraska federal court.

David L. Vettel's attorney admitted his client did not file a report of foreign bank and financial accounts for 2006 through 2011, but he should not be liable for almost $637,000 in penalties, interest and fees resulting from the maximum penalty being assessed, the attorney told the court.

Vettel also denied the allegations that he set up a corporation in Belize for the sole purpose of holding his account at the Swiss bank BSI SA, which U.S. attorneys in their complaint claim received deposits totaling more than $1.6 million from 2006 through 2010.

During the years in question, Vettel employed a certified public accountant to prepare his federal income tax returns but didn't disclose the bank account to the CPA, nor any of the money deposited into the account on his federal returns for those years, according to the government.  LOTS OF LUCK with this defense!!!

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TIGTA Reviews of Appeals Identified Processing Errors In 16 (20 Percent) of 81 Sampled Taxpayer Cases

The Treasury Inspector General for Tax Administration (TIGTA) has completed its annual review of IRS compliance with requirements of the Code when taxpayers exercise their rights to appeal the filing of a Notice of Federal Tax Lien or the issuance of a Notice of Intent to Levy. (Audit Report No. 2021-10-049)

The IRS Independent Office of Appeals (Appeals) properly provided taxpayers with only one hearing for the tax period(s) related to the unpaid tax and an impartial hearing officer for Collection Due Process and Equivalent Hearings. Appeals hearing officers verified applicable law or administrative procedures were met and allowed taxpayers to raise issues at the hearing related to the unpaid tax. They also made a determination on the proposed levy and/or filing of the Notice of Federal Tax Lien after considering whether the action(s) balanced efficient tax collection against the taxpayer’s concern that the action(s) be no more intrusive than necessary.

Similar To Prior Audits, TIGTA Identified Processing Errors
In 16 (20 Percent) of 81 Sampled Taxpayer Cases.

Processing errors related to proper classification of hearing requests and incorrect Collection Statute Expiration Dates (CSED) on the taxpayer’s accounts. For example, taxpayer accounts had CSED errors due to incorrectly input CSED suspension start and stop dates. 

• In some cases, the IRS incorrectly extended the time period, allowing the IRS additional time to collect delinquent taxes. 
• In other cases, the IRS incorrectly decreased the time to collect delinquent taxes. 

Based on our sample results, TIGTA estimates that Appeals misclassified 302 Collection Due Process or Equivalent Hearing cases, and 3,623 and 1,510 taxpayer accounts had their CSED overstated and understated, respectively, during Fiscal Year 2020. 

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In 2022 Tax Court Announces Return to In-Person Trials

According to Procedurally Taxing on August 27, 2021, the Tax Court issued a press released stating that it anticipates returning to in-person proceedings starting with the winter trial sessions for 2022.  In the announcement, the Tax Court also states that it will continue to hold trials remotely where appropriate.

All of the Tax Court calendars scheduled for the Fall 2021 calendars are remote. 

Until the August 27 announcement it was unknown when Tax Court judges would begin holding in-person trials again.  

It was also unknown if the Tax Court would continue to offer remote proceedings as an option.  In issuing Administrative Order 2021-1 the Tax Court terminated Administrative Order 2020-2 which replaced in-person proceedings with remote proceedings and set a path forward for post-pandemic trials at the Tax Court.  

By adopting a rule that allows for both in-person and remote proceedings, the Tax Court follows another Article 1 court, the Court of Veterans Appeals, and provides maximum flexibility for the parties and itself to conduct future proceedings.

Have IRS Tax Problems?

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or Toll Free at 888 8TAXAID (888-882-9243) 

TIGTA Report on Efforts to Address the Compliance Risk of Underreporting of S Corporation Officers’ Compensation Are Increasing, but More Action Can Be Taken

In TIGTA's Report on IRS' efforts to address the compliance risk of underreporting of S Corporation officers’ compensation indicated that the audit was initiated because some S corporation owners may be motivated to underpay or not pay themselves in order to avoid paying employment taxes.

What TIGTA Found was that the issue of S corporations not paying salaries to officers and avoiding employment taxes has been reported for many years. IRS revenue agents have the opportunity to assess the issue when examining Forms 1120-S, U.S. Income Tax Return for an S corporation, in the field; addressing the issue more directly by examining it in the IRS’s Employment Tax function; or through Compliance Initiative Projects. 

The IRS is selecting less than 1 percent of all S corporations for examination. When the IRS does examine S corporations, nearly half of the revenue agents do not evaluate officer’s compensation during the examination even when single-shareholder owners may not have reported officer’s compensation and may have taken tax-free distributions in lieu of compensation. 

TIGTA’s analysis of all S corporation returns received between Processing Years 2016 through 2018 identified 266,095 returns with profits greater than $100,000, a single shareholder, and no officer’s compensation claimed that were not selected for a field examination. 

The Analysis Found That The Single-Shareholder Owners Had Profits Of $108 Billion And Took $69 Billion In The Form of
A Distribution, Without Reporting They Received
Officer’s Compensation For Which They Would
Have To Pay Social Security And Medicare Tax.

TIGTA estimated 266,095 returns may not have reported nearly $25 billion in compensation and may have avoided paying approximately $3.3 billion in Federal Insurance Contributions Act tax. 

Finally, TIGTA identified 151 S corporations with nonresident alien shareholders. S corporations are not permitted to have nonresident aliens as shareholders. If the IRS had identified these 151 S corporations and their 424 returns, it may have converted them to C corporations and assessed $5 million in corporate income taxes.

Have IRS Tax Problems?

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Marini & Associates, P.A. 

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or Toll Free at 888 8TAXAID (888-882-9243) 

Equitable Innocent Spouse Relief Given To Spouse Who Knew Taxes Weren't Paid

The Tax Court in Grady, TC Summary Opinion 2021-29, held that both for a tax year with respect to which a wife didn't know her joint return taxes weren't being paid by her husband, and for several years with respect to which she did know her joint return taxes weren't being paid, the wife was entitled to equitable innocent spouse relief.

IRC § 6015 provides that a spouse who has made a joint return may elect to seek relief from joint and several liability. IRC § 6015(f) provides for equitable innocent spouse relief under procedures prescribed by IRS if, taking into account "all the facts and circumstances," it is inequitable to hold the individual liable for any unpaid tax or any deficiency.

The IRS's guidelines for determining whether to grant IRC § 6015(f) relief are found in Rev Proc 2013-34, 2013-43 IRB 397. If certain threshold conditions are met, then the IRS will relieve the requesting spouse of liability if either (1) three additional conditions for so-called “streamlined” relief are met, or (2) relief is justified upon consideration of multiple equitable factors. 

The requesting spouse is eligible for streamlined relief under Rev Proc 2013-34, sec. 4.02, only in cases in which that spouse establishes that: (1) on the date the IRS makes its determination, the requesting spouse is no longer married to, or is legally separated from, the nonrequesting spouse; (2) the requesting spouse will suffer economic hardship if relief is not granted; and (3) on the date the joint return was filed, the requesting spouse did not know or have reason to know the nonrequesting spouse would not or could not pay the underpayment.

The multiple factor test looks at, but is not limited to: (a) marital status, (b) economic hardship, (c) knowledge or reason to know of understatement or underpayment, (d) legal obligations to pay the tax, (e) significant benefits reaped from the understatement, (f) subsequent compliance with income tax laws, and (g) mental or physical health.  A single factor is not determinative. (Rev Proc 2013-34, sec. 4.03(2)) 

The taxpayer, Ms. Gans, was married to Mr. Dickey for the years at issue, 2006-2011. 

Mr. Dickey took charge of filing and paying taxes due with the couple's joint tax returns. However, for each of the years at issue, he either filed late or didn't file at all. Mr. Dickey repeatedly told Ms. Gans that he would file their tax returns and pay their tax debts, and she should not worry about it. He set up multiple installment agreements for the couple's Federal income tax liabilities. He made intermittent payments between September 2008 and June 2015, but none after that. Although Ms. Gans had access to the couple's joint bank accounts, she did not check them to see whether Mr. Dickey made the required installment agreement payments.

The couple divorced in 2015. Thereafter, Ms. Gans moved in with her parents. Later, she married Mr. Gans.

In concluding that Ms. Gans qualified for streamlined relief in 2006, the Court noted:

Ms. Gans was no longer married to Mr. Dickey when the IRS issued its final determination. 

Ms. Gans would suffer economic hardship if relief was not granted. A requesting spouse will suffer economic hardship if payment of part or all of the tax liability "will cause the requesting spouse to be unable to pay reasonable basic living expenses." The determination as to what constitutes a reasonable amount for basic living expenses may vary with the circumstances of the individual taxpayer but will not include the maintenance of an affluent or luxurious lifestyle.  (Rev Proc 2013-34, sec. 4.03(2)(b)) 

Ms. Gans testified that she was employed and had earned $14,190.52 in 2018 at the time of the trial. The Court has taken judicial notice that the poverty level for one person in 2018 was $12,140. She did not own a car or a house. Rather, she lived with her elderly and sick parents and then her new husband, Mr. Gans, who owned the house she lived in and the cars she used.

Ms. Gans did not have reason to know that Mr. Dickey would not pay the 2006 joint Federal income tax liability. When the couple filed their 2006 joint Federal tax return, Mr. Dickey requested an installment agreement within 30 days after the return was filed that would apply to the 2006 tax liability. Therefore, when Ms. Gans signed the 2006 joint Federal income tax return, she did not know or have reason to know that the underpayment would not be paid.

As to the other tax years in question, the Court held that each of the factors weighed in favor of relief other than the knew-or-had-reason-to-know factor. 

For example, the Court looked to the same factors noted above in determining that the wife met the economic hardship test. And the Court noted that the "significant benefits" test weighed in her favor—she did not receive a significant benefit from the failure to pay the outstanding tax liabilities.

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Your Joint IRS Tax Problem? 

  
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US Contends Engineer Owes $4.3M In Willful FBAR Penalties

An engineer and business owner owes more than $4.3 million in foreign bank account reporting penalties for willfully failing to disclose overseas accounts to the Internal Revenue Service, the U.S. government told a California federal court Friday.

In the case of U.S. v. Laura Kim, case number 2:21-cv-06746, in the U.S. District Court for the Central District of California the US stated that Kim willfully failed to disclose some of her foreign bank accounts on the Reports of Foreign Bank and Financial Account she filed for 2009 through 2012, the U.S. told the California federal court in a complaint. While she filed forms for those four years reporting some accounts, she failed to report all her accounts at Woori Bank, a financial institution in South Korea, according to the complaint.

Kim, an ecological engineer who immigrated to the U.S. in 1968, had up to 29 accounts in those four years, and her combined balances at one point averaged more than $8 million. She reported two to four of those accounts every year from 2009 through 2012 on her FBARs but failed to report others, the U.S. said.

Kim agreed in 2018 to extend the government's deadline for assessing the FBAR penalties, and the government assessed around $1 million in penalties for each year, bringing the total to around $4 million, according to the complaint. The government is seeking $4.3 million, which includes the FBAR penalties, interest and late payment penalties for her failure to pay the assessment, according to the complaint.

Tax returns filed with the IRS for Kim's 2009 through 2012 tax years also understated her individual tax liabilities in failing to report interest income she earned on her foreign accounts, the government said. It did not specify the total tax understatement for those years.

People with foreign bank accounts have several U.S. reporting requirements for those overseas activities, including the FBAR. Those forms generally need to be filed for accounts with balances exceeding $10,000 and, for years before 2017, needed to be filed by June 30 for the previous tax year, according to the U.S.

Penalties for failing to abide by these reporting requirements differ on whether the violation was willful or nonwillful. Penalties for intentional violations are either $100,000 or half of the account balance, whichever is greater, according to the complaint. Kim had indicated on some of her returns that she did not have interests in or authority over foreign bank accounts, the U.S. said.

Do You Have Undeclared Offshore Income?

 

Want to Know Which
Voluntary Disclosure Program
is Right for You? 

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Marini & Associates, P.A.   

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