Blog

New Reporting Requirement for Individuals with Foreign Financial Assets

Each U.S. person who has a financial interest in or signature or other authority over foreign bank accounts, securities accounts or other financial accounts must file a Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts or FBAR) if the aggregate value of the accounts exceeds $10,000 at any time during the calendar year.

A “foreign financial account” is a financial account located outside the U.S. An account maintained with a branch of a U.S. bank that is physically located outside of the U.S. is a foreign financial account. A financial account includes a securities, brokerage, savings, demand, checking, deposit, time deposit, or other account maintained with a financial institution. A financial account also includes a commodity futures or options account, an insurance policy or annuity policy with a cash value, and shares in a mutual fund or similar pooled fund. In addition, a debit card account is a financial account, and a credit card account may be treated as a financial account under certain circumstances.

The FBAR is due by June 30 following the calendar year for which it applies. Thus, FBARs for the 2011 calendar year must be filed on or before June 30, 2012.

The penalties for failure to file a FBAR are onerous. The civil penalties for a non-willful violation may not exceed $10,000 per violation. Civil penalties for a willful violation may not exceed the greater of $100,000 or 50% of the amount in the account at the time of the violation. The criminal penalty for willful violations is a fine of not more than $250,000, or imprisonment for not more than five years, or both.

In addition and new for 2011, is a requirement for any individual who, during the tax year, holds any interest in a “specified foreign financial asset” to complete and attach Form 8938 to his or her income tax return if a reporting threshold is met.

The reporting threshold varies depending on whether the individual lives in the U.S. and files a joint return with his or her spouse. For example, someone who is not married and doesn’t live abroad will need to file Form 8938 for 2011 if the total value of his or her specified foreign financial assets was more than $50,000 as of December 31, 2011, or more than $75,000 at any time during 2011. For married taxpayers filing a joint return and living in the U.S., the threshold amounts are doubled, $100,000 or $150,000, respectively. The thresholds also are higher for taxpayers residing abroad.

For purposes of the reporting requirement for individuals with foreign assets a “specified foreign financial asset” is:

1. Any “financial account” maintained by a “foreign financial institution” or

2. Any of the following assets which are not held in an account maintained by a “financial institution”:

a. Any stock or security issued by a person other than a U.S. person,
b. Any financial instrument or contract held for investment that has an issuer or counterparty that is other than a U.S. person, and
c. Any interest in a “foreign entity”.

What is interesting is any interest in a “foreign entity” is subject to reporting. Therefore, one could imply, that if you own a business or real estate in a foreign country through a foreign entity, it needs to be reported.

However, no disclosure is required for interests that are held in a custodial account with a U.S. financial institution.

The penalty for failing to report specified foreign financial assets for a tax year is $10,000. However, if this failure continues for more than 90 days after the day on which the IRS mails notice of the failure to the individual, additional penalties of $10,000 for each 30-day period (or fraction of the 30-day period) during which the failure continues after the expiration of the 90-day period, with a maximum penalty of $50,000.

To the extent the IRS determines that the individual has an interest in one or more foreign financial assets but he or she doesn't provide enough information to enable the IRS to determine the aggregate value of those assets, the aggregate value of those assets will be presumed to have exceeded $50,000 (or other applicable reporting threshold amount) for purposes of assessing the penalty.

No penalty will be imposed if the failure to file the 8938 is due to reasonable cause and not due to willful neglect. The fact that a foreign jurisdiction would impose a civil or criminal penalty on the taxpayer (or any other person) for disclosing the required information isn't reasonable cause.

In addition, if it is shown that the individual failed to report the income from the foreign financial account on his or her income tax return, a 40% accuracy-related penalty is imposed for underpayment of tax that is attributable to an undisclosed foreign financial asset.

Furthermore, if you have received a large gift or bequests during the tax year from “non-U.S. persons” you also have a reporting requirement.

If the value of aggregate foreign gifts that you receive during any tax year exceeds a threshold amount, you must report each foreign gift to the IRS. A foreign gift is any amount you receive from a non-U.S. person which you treat as a gift or bequest. A non-U.S. person is any person other than a citizen or resident of the U.S. or a U.S. partnership or corporation. The term non-U.S. person also includes a foreign estate. Foreign gifts don't include qualified tuition or medical payments made on behalf of the recipient, or gifts which are otherwise properly disclosed on a return under the separate requirements applicable to amounts received from foreign trusts.

For purposes of determining whether the receipt of a gift from a foreign person is reportable, different reporting thresholds are applied for gifts received from nonresident alien individuals, and foreign estates, and for gifts from foreign partnerships, and foreign corporations.

So, a U.S. person is required to report the receipt of gifts from a nonresident alien or foreign estate only if the total amount of gifts from that nonresident alien or foreign estate is more than $100,000 during the tax year. Once the $100,000 threshold has been met, the one who receives the gift must separately identify each gift which is more than $5,000, but doesn't have to identify the donor.

A U.S. person must report the receipt of purported gifts from foreign corporations and foreign partnerships if the total amount of purported gifts from all such entities during the tax year is more than $14,723 for tax years beginning in 2012 and $14,375 for tax years beginning in 2011. Once the threshold has been met, the gift recipient must separately identify all purported gifts from a foreign corporation or foreign partnership, and provide the name of the donor.

If you fall within these reporting rules, you have to file Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. The form is due on the date that your income tax return is due, including extensions. The form must be sent to the IRS at the address shown on the IRS website (irs.gov).

Where appropriate, I may be able to recommend planning approaches which may allow you to avoid the reporting requirements. For example, if you are expecting a gift of $120,000 from a nonresident alien individual or foreign estate, it may be possible to arrange for the gift to be paid over two years, so that in neither year does the gift exceed $100,000. If the split gift is the only foreign gift you receive each year, you will avoid the reporting requirement. Alternatively, if we can arrange for part of the gift to be made in the form of qualified tuition or medical payments, the rest of the gift may be reduced enough to avoid the reporting requirement.

The penalty for not reporting a foreign gift that must be reported is 5% of the amount of the gift for each month the failure to report continues, up to a maximum of 25%. The penalty will be excused if reasonable cause for the failure to report can be established.

Finally the gift that you receive is not income to you. There is no federal or state tax liability associated with it. Therefore, you should report it.

The above technical reference is provided as a courtesy to the reader by David Silkman, CPA, Silkman & Associates Accountancy Corporation and SilkRoad Realty, Inc. The information is technical in nature, may not include all the details on a particular subject and may require review of the reader’s circumstances by a professional. You should consult with your tax advisor.

David S. Silkman is a CPA, has a Masters in Taxation (MST) and is a licensed real estate broker. He specializes in real estate tax laws and accounting. If you have any questions, please do not hesitate to call him at 310.479.7020 x301, email him atdavid@saacpa.com or visit www.saacpa.com or www.SilkRoadRealtyInc.com. Thank you.

1099 Filing Requirement

The 1099s for 2012 must be provided to the independent contractor no later than January 31 of 2013. We can issue the 1099s for you.

The following are the exceptions to the above rule:

1. You do not need to issue a 1099- MISC. to a corporation unless the service provider/corporation is either an attorney or a medical practitioners.

Example 1: If your engineer is incorporated, you do not need to issue him or her a 1099- MISC. However, if he or she is not incorporated, then you do.

Example 2: Whether your attorney or your medical practitioner is incorporated or not, it doesn’t matter, you still need to issue a 1099- MISC. to your attorney and/or medical practitioner if you paid them $600 or more during 2012.

Furthermore, the IRS is now matching 1099-MISC. issued by third parties to attorneys and medical practitioners against the attorney’s or medical practitioner’s gross income that he or she reports on his or her income tax return. If the total of the 1099-MISCs. reported on behalf of the attorney or medical practitioner is more than the gross income reported by the attorney or medical practitioner, an audit may be in the works.

2. Landlords are not required to issue any service provider that they use a 1099- MISC. However, if the landlord is a real estate professional, then he or she is required to issue a 1099- MISC. to the service provider unless the service provider is incorporated.

Example 3: Raymond is a dentist and owns three rental properties. He is not a real estate professional. He does not need to issue a 1099- MISC. to the service providers that he uses during the year for his rental properties such as the gardener, plumber, etc. However, as a dentist, he is required to issue a 1099- MISC. to those service providers that provide a service to his dental practice that are not incorporated and received $600 or more during the year.

Example 4: Danny owns three rental properties and that is all he does. He is considered a real estate professional. He does have to issue a 1099-MISC. to every unincorporated service provider that he uses during the year that he paid $600 or more to.

It is not uncommon to have a repairman out early in the year, pay him less than $600, and then use his services again later and have the total for the year exceed the $600 limit. As a result, you overlook getting the information needed to file the 1099s for the year.

Therefore, it is good practice to have individuals who are not incorporated complete and sign the IRS Form W-9 the first time you use their services. Having a properly completed and signed Form W-9s for all independent contractors and service providers eliminates any oversights and protects you against IRS penalties and conflicts.
IRS Form W-9 is provided by the government as a means for you to obtain the data required to file the 1099s for your vendors. It also provides you with verification that you complied with the law should the vendor provide you with incorrect information. We highly recommend that you have a potential vendor complete the Form W-9 prior to engaging in business with them. The form can either be printed out or filled onscreen and then printed out.

Furthermore, there are other 1099 filing requirements such as Form 1098, Form 1099-INT, Form 1099-DIV, Form 1099-S and etc. that you may be required to file.

Failure to file returns or to include correct information can result in a fine of up to $100 per information return to a maximum of $500,000 for a small business.

To avoid the fines/penalties, information returns are to be given to payees by January 31, 2013, and copies are to be mailed to the IRS by February 28, 2013. The IRS due date is extended to April 1, 2013, for electronically filed returns.

If you need help in determining who needs to be issued a 1099, what kind of 1099 needs to be issued or need help filing 1099s, please contact us. We can do it for you.

The above technical reference is provided as a courtesy to the reader by David Silkman, CPA, MST, Broker, Silkman & Associates Accountancy Corporation and SilkRoad Realty, Inc. The information is technical in nature, may not include all the details on a particular subject and may require review of the reader’s circumstances by a professional. You should consult with your tax advisor.

David S. Silkman is a CPA, has a Masters in Taxation (MST) and is a licensed real estate broker. He specializes in real estate tax laws and accounting. If you have any questions, please do not hesitate to call him at 310.479.7020 x301, email him atdavid@saacpa.com or visit www.saacpa.com orwww.SilkRoadRealtyInc.com. Thank you.

Preparing for the New Surtax

As part of the Affordable Care Act (the new health care legislation), a new tax kicks in this year. The official name of this tax is the Unearned Income Medicare Contribution Tax, and even though the name implies it is a contribution, don’t get the idea that it is voluntary or that you can deduct it as a charitable contribution. It is actually a surtax levied on the net investment income of taxpayers in the higher income brackets. And although it is perceived as an additional tax on higher-income taxpayers, it can affect even those who normally don’t have higher income if they have a large income from the sale of real estate, stocks, or other investments.

The surtax is 3.8% on whichever is less: your net investment income or the excess of your modified adjusted gross income (MAGI) over a threshold based on your filing status. Net investment income is your investment income reduced by investment expenses; MAGI is your regular AGI increased by income excluded for working out of the country.

The filing status threshold amounts are:

· $250,000 for married taxpayers filing jointly and surviving spouses.

· $125,000 for married taxpayers filing separately.

· $200,000 for single and head-of-household filers.

Example: A single taxpayer has net investment income of $100,000 and MAGI of $220,000. The taxpayer would pay a Medicare contribution tax only on the $20,000 amount by which his MAGI exceeds his threshold amount of $200,000, because that is less than his net investment income of $100,000. Thus, the taxpayer’s Medicare contribution tax would be $760 ($20,000 × 3.8%).

Investment income includes:

· Interest, dividends, annuities, and royalties,

· Rents (other than derived from a trade or business),

· Capital gains (other than derived from a trade or business),

· Home-sale gain in excess of the allowable home-gain exclusion,

· A child’s investment income in excess of the excludable threshold if, when eligible, the parent elects to include the child’s investment income on the parent’s return,

· Trade or business income that is a passive activity with respect to the taxpayer, and

· Trade or business income with respect to trading financial instruments or commodities.

Investment income does not include distributions from IRAs or qualified retirement plans.

Planning Note: For surtax purposes, gross income doesn’t include interest on tax-exempt bonds. Thus, one can avoid or reduce the net investment income surtax by investing in tax-exempt bonds.

Investment expenses include:

· Investment interest expense,

· Investment advisory and brokerage fees,

· Expenses related to rental and royalty income, and

· State and local income taxes properly allocable to items included in Net Investment Income.

Do you think you will never get hit with this tax because your income is way under the threshold amounts? Don’t be so sure. When you sell your home, the gain is a capital gain, and to the extent that the gain is not excludable using the home-gain exclusion, it will add to your income and possibly push you above the taxation thresholds. And, since capital gains are investment income, you might be in for a surprise. The same holds true for gains from selling stock, a second home, or a rental. So when planning to sell a capital asset, be sure to consider the impact of this new surtax.

The surtax also applies to the undistributed net investment income of trusts and estates, and there are special rules applying to the sale of partnership and Sub-S Corporation interests.

Example: A taxpayer has owned a residential rental property for a number of years, planning to use the rental’s increased value to help fund his retirement. The taxpayer normally has income well below the threshold for this new tax. The taxpayer sells the rental and has a substantial gain. The gain from the rental sale gives the taxpayer a one-time windfall that pushes his income above the threshold for the new tax, and he ends up having to pay the regular capital gains tax plus an additional 3.8% tax on the appreciation that is attributable to the increase in value that occurred over several years.

If this surtax will apply to you in 2013, you may need to increase your income tax withholding or estimated tax payments to cover the additional tax so you can avoid or minimize an underpayment of estimated tax penalty when you file your 2013 return.

Example: A taxpayer has owned a residential rental property for a number of years, planning to use the rental’s increased value to help fund his retirement. The taxpayer normally has income well below the threshold for this new tax. The taxpayer sells the rental and has a substantial gain. The gain from the rental sale gives the taxpayer a one-time windfall that pushes his income above the threshold for the new tax, and he ends up having to pay the regular capital gains tax plus an additional 3.8% tax on the appreciation that is attributable to the increase in value that occurred over several years.

If your income normally exceeds the threshold for this new tax, or you have or are contemplating a large capital gain and would like to explore options to mitigate the impact of the tax, please give us a call.

The above technical reference is provided as a courtesy to the reader by David Silkman, CPA, MST, Broker, Silkman & Associates Accountancy Corporation and SilkRoad Realty, Inc. The information is technical in nature, may not include all the details on a particular subject and may require review of the reader’s circumstances by a professional. You should consult with your tax advisor.

David S. Silkman is a CPA, has a Masters in Taxation (MST) and is a licensed real estate broker. He specializes in real estate tax laws and accounting. If you have any questions, please do not hesitate to call him at 310.479.7020 x301, email him atdavid@saacpa.com or visit www.saacpa.com orwww.SilkRoadRealtyInc.com. Thank you.

Maximizing Qualified Tuition Program Contributions

Qualified Tuition Programs, commonly referred to as Section 529 plans (named after the section of the IRS Code that created them), are plans established to help families save and pay for college in a tax-advantaged way and are available to everyone, regardless of income. These state-sponsored plans allow you to gift large sums of money for a family member’s college education, while you maintain control of the funds. The earnings from these accounts grow tax-deferred and are tax-free if used to pay for qualified higher education expenses. 529 plans can be used as an estate-planning tool as well, providing a means to transfer large amounts of money without gift tax. With all these tax benefits, 529 plans are excellent vehicles for college funding.

Tax Benefits: There is no federal tax deduction for making a contribution, but taxes on the earnings within a 529 plan are not only tax-deferred while they are held in the account, but are tax-free when withdrawn to pay for qualified education expenses. This allows you to accumulate money for college at a much faster rate than you can with an account where you have to pay tax on the investment gains and earnings.

How Much Can Be Contributed? Unlike the Coverdell Education Savings Accounts that limit the annual contribution to $2,000, Section 529 plans allow you to put away larger amounts of money. There are no income or age limitations for the Section 529 plans. The maximum amount that can be contributed per beneficiary is based on the projected cost of a college education and will vary between state plans. Some states base their maximums on an in-state, four-year education, while others base theirs on the costs of the most expensive schools in the U.S., including graduate studies. Most have limits in excess of $200,000. Generally, once an account reaches the plan-imposed cap, additional contributions cannot be made, but that doesn’t prevent the account from continuing to grow through investment earnings and growth.

How Much Should You Contribute? Although there is no contribution limit other than the plan’s limit based on the cost of the education, there are some gift tax limitations that may influence the amount of your contribution. Contributions to Section 529 plans are considered completed gifts and are subject to the gift tax rules. Under these rules, individuals can annually give away (gift) money to another individual, only up to an annual limit (double for a married couple), without triggering gift taxes or reducing their lifetime gifts and inheritance exclusions. The gift exclusion amount is inflation adjusted. For 2014, the gift tax exclusion is $14,000 per recipient.

Five-Year Option: Where contributions to a qualified tuition program exceed the annual gift exclusion amount, a donor may elect to take certain contributions to a QTP into account ratably over a five-year period in determining the amount of gifts made during the calendar year. The provision applies only for contributions of up to five times the annual exclusion amount available in the calendar year of the contribution. Any excess may not be taken into account ratably and is treated as a taxable gift in the calendar year of the contribution. Thus, for 2014 an individual could contribute up to $70,000 (five times the 2014 annual exclusion amount), while a married couple could contribute twice that amount ($140,000) to the same individual. The gift would reduce the donor’s estate by the full amount of the gift by the end of the five-year period. Should the donor die before the five-year period elapses, any amount in excess of the allowable annual exclusions would revert back to the donor’s estate.Note: A gift tax return must be filed for the year of the contribution if it exceeds the annual gift tax exclusion and to claim this special exemption.

Don’t Overlook Additional Contribution Opportunities During The Five-Year Period: If in any year after the first year of the five-year period the annual exclusion amount is increased, the donor may make an additional contribution in any one or more of the four remaining years up to the difference between the exclusion amount as increased and the original exclusion amount for the year or years in which the original contribution was made.

If you have previously utilized the five-year option, you may have the opportunity to make additional annual contributions since the annual exemption amount has increased in the past few years (see table below).

 

Year 2009 to 2012 2013 to 2014
Annual Gift Exemption $13,000 $14,000

The above technical reference is provided as a courtesy to the reader by David Silkman, CPA, MST, Broker, Silkman & Associates Accountancy Corporation and SilkRoad Realty, Inc. The information is technical in nature, may not include all the details on a particular subject and may require review of the reader’s circumstances by a professional. You should consult with your tax advisor.

David S. Silkman is a CPA, has a Masters in Taxation (MST) and is a licensed real estate broker. He specializes in real estate tax laws and accounting. If you have any questions, please do not hesitate to call him at 310.479.7020 x301, email him atdavid@saacpa.com or visit www.saacpa.com orwww.SilkRoadRealtyInc.com. Thank you.

Are You In Danger of An Audit

During fiscal year 2013, the IRS collected almost $2.3 trillion in taxes (net of refunds) and processed more than 240 million returns. More than 118 million individual income tax return filers received tax refunds that totaled $312.8 billion. In fiscal year 2013, the IRS spent an average of 41 cents to collect each $100 of tax revenue.

So what are your chances of being audited?A total of $1,404,931 individual income tax returns were audited, out of a total of $145.8 million individual returns that were filed in the previous year. This is about 0.8% of all individual returns filed, down from the previous year. This downward trend is expected to continue for the foreseeable future because of IRS budget reductions. Only 24.5% of the individual audits were office audits conducted by revenue agents, tax compliance officers, and tax examiners; the bulk of the audits (about 75.5%) were correspondence audits. These percentages are about the same as they were in the prior year. The IRS is pretty savvy at selecting which returns to audit, since approximately 85% of the audits result in the taxpayer owing additional taxes.

What issues are the audits focusing on? Here is a roundup of selected audit rates:

 

Earned Income Tax Credit (EITC) – EITC continues to be an area of high taxpayer fraud so it stands to reason these returns were and will be the subject of high audit rates. Of the total number of returns audited, 538,562 (34.6%) were selected on the basis of an earned income tax credit claim.
Schedule F (Individual Farm Returns) - About 1.3 million individual returns included farm returns. Of this group, only 5,044 (0.4%) were audited.
Individual returns can include additional business related schedules that can increase the odds of an audit. Among those are Schedule C (non-farm sole proprietorship), Schedule E (supplemental income and loss from rentals, partnerships and S-corporations), or Form 2106 (employee business expenses). The following statistics apply to non-EITC returns including these schedules:

Individual Returns without a Schedule C, E, F, 2106 –0.4%

Individual Returns with a Schedule E or 2106 – 1.0%

Individual Returns with a Schedule C – These are categorized by size of gross receipts reported on the return:
Under $25,000 – 1.0%
$25,000 to $100,000 – 2.3%
$100,000 to $200,000 – 3.0%
$200,000 or more – 2.7%
The IRS also focuses their audits on higher-income returns, as evidenced by the following statistics based on total positive income (TPI):

Non-business returns with a TPI of at least $200,000 and under $1 million – 2.5%

Business returns with a TPI of at least $200,000 and under $1 million – 3.2%

All returns with a TPI of $1 million or more – 10.8%
For returns other than individual returns, the audit rates by type were:

Estate and trust income tax returns - 0.1%
Corporations with less than $10 million of assets - 1.0%
Corporations with $10 million or more of assets - 15.8%
S corporations - 0.4%
Partnerships - 0.4%
Estate tax returns - 11.6%
Gift tax returns - 1.1%
Thus S corporations and partnerships have the least chance of being audited. If you’re self-employed or thinking about starting a business, it’s worthwhile to either incorporate or create a partnership such as an LLC. If anything, you’ll reduce the chance of being audited.

In fiscal year 2013, the IRS assessed 29.07 million civil penalties against individual taxpayers, of which 58.3% were for failure to pay and 26.8% were for underpayment of estimated tax. There were also 731,696 assessments for accuracy and negligence penalties.

The IRS received 74,000 offers in compromise in fiscal year 2013 (up from 64,000 in 2012). An offer in compromise is a proposal by a taxpayer to the federal government that would settle a tax liability for payment of less than the full amount owed. Absent special circumstances, an offer will not be accepted if the IRS believes the liability can be paid in full as a lump sum or through a payment agreement. In 2013, the IRS accepted 31,000 offers for an acceptance rate of about 42%.

Because of the IRS’s high success rate for their audit programs, it is probably not wise for a taxpayer to represent themselves during an audit. This is best left to those who understand the audit process and can address potential issues that may arise.

The above technical reference is provided as a courtesy to the reader by David Silkman, CPA, MST, Broker, Silkman & Associates Accountancy Corporation and SilkRoad Realty, Inc. The information is technical in nature, may not include all the details on a particular subject and may require review of the reader’s circumstances by a professional. You should consult with your tax advisor.

David S. Silkman is a CPA, has a Masters in Taxation (MST) and is a licensed real estate broker. He specializes in real estate tax laws and accounting. If you have any questions, please do not hesitate to call him at 310.479.7020 x301, email him atdavid@saacpa.com or visit www.saacpa.com orwww.SilkRoadRealtyInc.com. Thank you.