Owe tax to IRS? Your passport may have been revoked!

Joe just received a shocking notice from IRS (CP508C) informing him that his passport is being revoked when he was about to embark on a business meeting overseas.
Joe reaches out to his CPA for help. Can he do anything to avoid the revocation of passport?

CPA explained that IRS notified the U.S. State Department about his seriously delinquent federal tax debt (SDTD) and as a result, is revoking his current passport. Joe has limited options. He needs to request an installment agreement or pay off the tax debt. Both solutions seemed overwhelming to Joe.

Joe enters in to installment program with IRS based on the CPA’s advice. CPA with the help of Taxpayer Advocate Service, was able to resolve the issue. Joe received CP508R notice from IRS notifying him that the certification of tax debt was reversed. Fortunately in this case, Joe was able to get his passport reinstated only with the timely help of his CPA – just in time for his travel plans.

If you owe greater than $50,000 to IRS, be careful! IRS may have revoked your passport and you may not be able to travel. There are different options available for different situations based on facts and circumstances. We at CPA Global Tax are happy to assist.

Payments to foreign persons and 1042 – Don’t miss the March 15 deadline

IR 2017-43

The Internal Revenue Service today reminded non-U.S. citizens who may have taxable income, such as international students and scholars who may be working or receiving scholarship funds, that they may have special requirements to file a U.S. tax return.

The IRS also reminded withholding agents — such as payroll professionals or universities — that accurately filed Forms 1042-S help speed any refunds due to their non-U.S. citizen taxpayers. Errors on forms or returns could result in some refunds being delayed.

What Non-U.S. Citizen Taxpayers Must Do

The Internal Revenue Code generally requires non-U.S. citizens, whom the code defines as either resident or non-resident aliens, who are engaged in a trade or business within the U.S. to file tax returns. Non-resident aliens such as foreign students, teachers or trainees temporarily in the United States on F, J, M or Q visas are considered engaged in a trade or business.

Most individuals in F-1, J-1, M-1, Q-1 and Q-2 non-immigrant status are eligible to be employed in the U.S. and are eligible to apply for a Social Security number if they are actually employed in the United States. Those not eligible for an SSN but who have a tax filing requirement may request an Individual Taxpayer Identification Number from the IRS.

The non-U.S. citizen’s name must be reported exactly as it appears on the official documentation provided to the withholding agent (such as a Social Security Administration card or some other form of official governmental documentation).

Filing a Form 1040-NR or 1040NR-EZ is required by non-U.S. citizens who have a taxable event such as:

A taxable scholarship or fellowship, as described in Chapter 1 of Publication 970, Tax Benefits for Education;

  • Income partially or totally exempt from tax under the terms of a tax treaty; and/or
  • Any other income, which is taxable under the Internal Revenue Code.

Non-U.S. citizens also must attach one copy (generally Copy B) for each Form 1042-S received to their tax returns. Non-U.S. citizens should review the Form 1042-S to ensure it accurately reflects their name and income. If the form does not contain accurate information, they must contact the withholding agent for an amended Form 1042-S.

What Withholding Agents Must Do

Generally, non-U.S. citizens who have taxable income also may have withholding of taxes by the source of their income. Withholding agents are required to complete Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding.

Withholding agents must provide five copies of the Form 1042-S. Copy A should go to the IRS; Copies B, C and D to the recipient of the income; and copy E should be retained by the withholding agent. All information, including the name of the taxpayer, must match exactly on all copies of Form 1042-S.

If withholding agents create a substitute Form 1042-S, all five copies must be in the same physical format. The size, shape and format of any substitute form must adhere to the rules of Publication 1179, General Rules and Specifications for Substitute Forms 1096, 1098, 1099, 5498, and Certain Other Information Returns. The official Form 1042-S is the standard for substitute forms.

A common error is to have a Form 1042-S listing two or more recipients in box 13a. The 2016 instructions to Form 1042-S have been updated to clarify that in the case of joint owners, Form 1042-S can only list one of the owners in box 13a.

Withholding agents should review Fact Sheet 2017-03, where they can find the latest changes to Form 1042-S instructions and common errors that delay processing of tax returns.

Who says MNCs want to keep the earnings offshore

IRS recently stated that the U.S. based holding companies claimed $18.3 billion in foreign tax credit in 2013 which is up from $8.17 billion in the previous year. The foreign tax credit was generally claimed for the tax paid in foreign countries on the dividend income repatriated to the U.S. by these holding companies. The data says that the holding companies reported $25.1 billion in such dividend income in 2013.

The data suggests that U.S. companies are bringing in more income from the foreign earnings to finance U.S. operations.

Since the tax incentives are not the motivation for repatriating the earnings, the economic factors seem to be the driving such a trend.

Transfer Pricing – IRS announces changes in APA for Mexican Maquiladoras

IR 2016-133

IRS today announced that U.S. taxpayers with maquiladora operations in Mexico will not be exposed to double taxation if they enter into a unilateral advance pricing agreement (APA) with Mexico’s Servicio de Administración Tributaria (SAT) under terms discussed in advance between the U.S. and Mexican competent authorities.

Maquiladoras typically operate in Mexico as contract manufacturers of foreign multinationals.

To recap in 1999, the U.S. and Mexican competent authorities reached an agreement on transfer pricing and other aspects of the tax treatment of maquiladoras of U.S. multinational enterprises. The new agreement updates and expands upon the 1999 agreement in order to reflect recent revisions to Mexican domestic tax rules governing transfer pricing rules, documentation requirements and other tax attributes of maquiladoras.

Because the transfer pricing framework adopted under SAT’s program was discussed and agreed upon with the U.S. competent authority in advance, the transfer pricing results set forth in unilateral APAs executed between SAT and Mexican affiliates of U.S. taxpayers pursuant to this program will be regarded as “arm’s length” under section 482 of the Internal Revenue Code.

In conjunction with the 1999 agreement, this announcement will provide certainty for U.S. taxpayers regarding double taxation, foreign tax credits and permanent establishments in relation to transactions with their maquiladoras. Further guidance on the U.S. taxable years and tax consequences of these unilateral APAs will be included in a forthcoming IRS practice unit.

Please contact CPA Global Tax for further information and assistance.

 

Fact check for NRAs – is your US source capital gain exempt?

This article should serve as a reminder to foreign students, scholars and other foreign government employees in the USA.

Based on the F, J, Q or M visa categories, the above taxpayers are considered non- resident aliens even if they meet substantial presence test and would otherwise be considered US tax residents.

Internal Revenue Code specifically exempts US source capital gain income generated by the non-resident aliens. I am being often asked a question whether the capital gains are taxable for foreign students, scholars and other NRAs who are in “exempt” categories for the US residency purposes. 

The tax law is very clear on this. A flat 30% tax applies on US source capital gain for the NRAs who are substantially present in US for more than 183 days. This 183-day rule bears no relation to the 183-day rule under the substantial presence test of IRC section 7701(b)(3). 

For example, a foreign diplomat, consular officer, or other nonresident alien employee of a foreign government, or nonresident alien employee of an international organization, who is visiting the United States in A or G nonimmigrant status for a period longer than 183 days in a calendar year would be subject to the 30 percent tax on his/her U.S. source capital gains – even if he/she continues to be a nonresident alien per the “exempt individual” rules under the substantial presence test. The same rule applies to a foreign student or scholar visiting the United States in F, J, M, or Q nonimmigrant status whose presence in the United States equals or exceeds 183 days in any calendar year.

 

Refunds approved! Some good news from IRS for foreign students and other foreign workers

Tax professional community including CPA Global Tax & Accounting encountered issues in recent times regarding the filing of tax returns and receiving refunds for foreign students, grantees, researchers and similar foreign persons working temporarily in United States. In recent years number of tax returns filed by these taxpayers, whose US source income and tax withholding were reported on 1042-S, were either regularly audited or their refunds were delayed beyond a reasonable period of time. This was creating an undue hardship to such taxpayers. After several representations, IRS was convinced that in most cases there were no fraudulent or questionable claims and provided a reassurance that such refunds are being issued as soon as possible while IRS is working on redesigning the process in the interim.

Here is the news release issued by IRS today (2016-23):

“In response to concerns about the difficulties that some foreign students are experiencing in obtaining refunds of withholding tax reported on Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding, the IRS just completed a comprehensive review of the program. As a result, the IRS is taking steps to help foreign students at United States colleges and universities and other foreign taxpayers affected by this situation, including adjusting withholding and issuing refunds as appropriate.

No additional action is needed at this time by foreign students and other foreign taxpayers who filed Form 1040NR to request a refund of tax withheld on Form 1042-S.

Background

The IRS review found several areas that are resulting in a significant number of “false positives” in our processing systems – meaning tax returns are being selected for review and validation for issues that present minimal risk of fraudulent or erroneous refunds.  While some degree of false positives is inevitable in any compliance program aimed at detecting fraud and protecting revenue, our review indicated we are not achieving the proper balance in this area.  Although we initially thought the issues were caused by tax software, upon a closer review these problems were minimal and easily corrected.

Steps the IRS is taking

We are taking several actions to resolve the accounts of those taxpayers who were affected by our existing verification process and to adjust the process going forward to help avoid further issues.  We are working as quickly as possible to identify all the taxpayers whose refunds are being held as a result of this process.  As they are identified, we will release the hold and issue the refunds (with interest, in instances where we have exceeded the 180 calendar day period for processing these refunds).

Taxpayers whose withholding credits were denied will have their withholding restored, eliminating any balance due and thus stopping the notices of levy.  Also, we will not be holding any additional refunds until we have redesigned the process in place for detecting fraudulent or questionable returns and refunds. “)