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 Your passport may have been revoked!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.

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Combat-zone contract workers could qualify for foreign earned income exclusion – it’s the new Law!

Certain U.S. citizens or resident aliens, specifically contractors or employees of contractors supporting the U.S. Armed Forces in designated combat zones, may now qualify for the foreign earned income exclusion.
The Bipartisan Budget Act of 2018, enacted in February, changed the tax home requirement for eligible taxpayers, enabling them to claim the foreign earned income exclusion even if their “abode” is in the United States. The new law applies for tax year 2018 and subsequent years and under this law, the taxpayers can choose to exclude their foreign earned income from gross income, up to a certain dollar amount. For tax year 2018, that dollar amount limit is $103,900.
Under prior law, many otherwise eligible taxpayers who lived and worked in designated combat zones failed to qualify because they had an abode in the United States. The new law makes it clear that contractors or employees of contractors providing support to U.S. Armed Forces in designated combat zones are eligible to claim the foreign earned income exclusion.
The foreign earned income exclusion is not automatic. Eligible taxpayers must file a U.S. income tax return each year with either a Form 2555 or Form 2555-EZ attached. These forms, instructions and Publication 54,Tax Guide for U.S. Citizens and Resident Aliens Abroad, will be revised later this year to reflect this clarification.
What is Foreign Earned Income?
Foreign earned income is the income a taxpayer receives for performing personal services in a foreign country or countries during a period in which he or she meets both of the following requirements:
• His or her tax home is in a foreign country, and
• He or she meets either the bona fide residence test or the physical presence test.
Taxpayers choosing the foreign earned income exclusion cannot take advantage of any other exclusion, deduction or credit related to the excluded income. This includes any expenses, losses or other items that would have been deductible had the exclusion not been claimed. CPA Global Tax (www.cpaglobaltax.com) specializes in international tax issues and will be glad to assist if you have any questions!

Repatriation tax – IRS provides penalty reliefs to many

In recently published Newswire, IRS announced that it will grant penalty relief in certain cases with regard to repatriation tax under IRC 965.

In nutshell, following are the new three relief provisions:

In general, the questions and answers indicate that:
• In some instances, the IRS will waive the estimated tax penalty for taxpayers subject to the transition tax who improperly attempted to apply a 2017 calculated overpayment to their 2018 estimated tax, as long as they make all required estimated tax payments by June 15, 2018.
• For individual taxpayers who missed the April 18, 2018, deadline for making the first of the eight annual installment payments, the IRS will waive the late-payment penalty if the installment is paid in full by April 15, 2019. Absent this relief, a taxpayer’s remaining installments over the eight-year period would have become due immediately. This relief is only available if the individual’s total transition tax liability is less than $1 million. Interest will still be due. Later deadlines apply to certain individuals who live and work outside the U.S.
• Individuals who have already filed a 2017 return without electing to pay the transition tax in eight annual installments can still make the election by filing a 2017 Form 1040X with the IRS. The amended Form 1040 generally must be filed by Oct. 15, 2018.

IRS accordingly updated the FAQ page and added these reliefs.

Please contact CPA Global Tax (www.cpaglobaltax.com) team if you have any questions regarding repatriation tax as well as GILTI tax.

 

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.

Calling all non-residents! Your ITIN may be expiring

IRS recently announced that the Individual Taxpayer Identification Numbers (ITIN) will need to be renewed every 3 years. The new release states that the ITIN is temporary and cannot be permanently used. In order to renew the ITIN, non-residents will need to file a new application on Form W-7 after 3 years, otherwise their tax returns will be rejected.

The IRS announced changes which require certain taxpayers to renew their ITINs. The renewal of ITINs requirement does not apply to ITIN holders who do not need to file their tax returns in 2017.

The following taxpayers require renewal of ITINs:

  • Taxpayers with ITINs not used on federal tax returns for at least once in last 3 years i.e. 2013, 2014 and 2015. Such unused ITINs will require renewal and will not be valid for filing tax returns in 2017.
  •  Taxpayers who were issued ITINs prior to 2013. Their ITINs will begin expiring this year and the taxpayer must renew them to prevent rejection of their tax returns.

IRS further states that Taxpayers will need to renew their ITINs on a rolling basis which means that the first ITINs that will expire are the ones with middle digits of 78 or 79 and the ones that are not used for one of the 3 prior years. These ITINs will need to be renewed with the period beginning October 1, 2016.

The taxpayer who has an expired ITIN and who does not renew it before filing the tax returns in 2017, may have a delay in refund and may be ineligible for certain tax credit like American Opportunity tax credit and child tax credit till the time new ITIN is not received.

Taxpayers should check their ITINs as soon as possible. Taxpayers with an ITIN with middle digits of 78 or 79 can apply for ITINs for the entire family at the same time. Family members include taxpayer, spouse and dependents claimed on their tax returns.

Other important changes for dependents of taxpayers:

Following are the new requirements for dependents whose passport do not have the date of entry in the U.S.:

  1. The IRS will not accept passport as stand-alone identity document if the passport does not have the date of entry in the US for dependents from countries other than Canada and Mexico or dependents of military members overseas.
  2. All such applicants who do not have a date of entry in the US on their passports will now be required to submit medical records for dependents under the age of 6 or U.S. school records for dependent under the age of 18 along with the passport.

All dependents aged 18 years or above can submit the rental or bank statement or utility bill having full name of the applicant and US address along with the passport.

CPA Global Tax & Accounting is an IRS approved Certifying Acceptance Agent. Generally, taxpayers are required to send their original passports and/ or other original documents, however, we can certify these documents, ensure that the Form W-7 is correctly prepared and submit them to IRS.

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.

 

No Form 1042 extensions, higher penalties and no refunds – IRS changes its ways!

As readers may recall, in 2013 IRS launched a new foreign payment practices (FPP) division under the LB&I to specifically oversee withholding agents’ compliance activities. The short article is intended to make the withholding agents and other affected taxpayers/ tax professionals aware that FPP has recently begun proposing significantly higher penalties for late filing of Form 1042-S and 1042 by the withholding agents.

Generally, Form 1042 and 1042-S are required to be filed by the withholding agent with regard to the U.S. source income paid to the non-U.S. persons. The forms must be prepared for the calendar year regardless of the withholding agent’s taxable year. These Forms are due on or before March 15th of the following calendar year. They must also be furnished to the payees by the same date. 

Until recently IRS was granting a 30-day extension for filing Form 1042-S when they filed application for extension of time to file on Form 8809 on or before March 15th. Form 1042 can be extended for 6 months by filing Form 7004. IRS has recently proposed regulations that will limit granting the automatic extension with regard to Form 1042-S. IRS proposed regulations state that the extension will be allowed only under extreme circumstances and may be denied if no such circumstances exist. Withholding agents must be bear in mind that IRS may not grant extensions in future and it may be considered not only late but late with intentional disregard. 

In case of intentional disregard of filing Form 1042-S, the penalty is greater of $250 per form or 10% of the amount required to be reported. Based on the facts and circumstances, in order to prove intentional disregard, IRS must show that 1) The filer was required to file an information return, 2) filer knew or should have known about the requirement to file, and 3) deliberately chose not to file or ignored the requirement to file (this occurs in case of repeated failures or delays in filings). 

Now think about this in another perspective. In Notice 2015-10, IRS stated that it will consider the refund claim only if it can trace the withholding payment as actually paid. In case the IRS cannot trace that, no refund will be issued. This along with the difficulties in applying for 1042-S extensions and increased penalties, withholding agents are well advised going forward to implement a serious process to file the forms in a timely manner.