How to split foreign taxes and claim foreign tax credit when there is combined foreign income? IRS issues final Regs.

IRS has issued final regs clarifying eligibility for the foreign tax credit. Specifically, they provide additional guidance for determining who is considered to pay a foreign tax for purposes of the foreign tax credit. The regs affect taxpayers claiming direct and indirect foreign tax credits.

Code Sec. 901 permits taxpayers to claim a credit for income, war profits, and excess profits taxes paid or accrued during the tax year to any foreign country or to any U.S. possession. In 2006, IRS issued proposed regs that would retain the general principle that tax is considered paid by the person who has legal liability under foreign law for the tax. However, they would further clarify application of the legal liability rule in situations where foreign law imposes tax on the income of one person but requires another person to remit the tax. The regs also provide detailed guidance on how to treat taxes paid on the combined income of two or more persons.

Code Sec. 909, which addresses concerns about the inappropriate separation of foreign income taxes and related income, was added by the Education, Jobs and Medicaid Assistance Act, effective for foreign income taxes paid or accrued in tax years beginning on or before Dec. 31, 2010.

Under Code Sec. 909, there is a foreign tax credit splitting event if a foreign income tax is paid or accrued by a taxpayer and the related income is, or will be, taken into account by a covered person with respect to such taxpayer. In such a case, the tax is suspended until the tax year in which the related income is taken into account by the payor of the tax.

IRS tightening grip – issues proposed regs on information reporting by U.S. passport applicants

IRS has issued proposed regs that set out rules on information reporting by passport applicants under Code Sec. 6039E.

Any individual who applies for a U.S. passport, or the renewal of a passport, or applies for the privilege of becoming a permanent U.S. resident  (green card application) must include with that application a statement containing certain items of tax information. (Code Sec. 6039E(a)) The information that must be included by both passport and immigrant applicants includes the applicant’s taxpayer identification number (TIN), if he has one. (Code Sec. 6039E(b)(1))

The 1992 proposed regs provided guidance for both passport and permanent resident applicants to comply with information reporting rules under Code Sec. 6039E, and indicated the responsibilities of specified federal agencies to provide certain information to IRS. Proposed regulations issued January 25th, replaces the 1992 regulations.

The new proposed regs under Code Sec. 6039E would require an individual applying for a U.S. passport, other than an individual who applies for an official passport, diplomatic passport or passport for use on other official U.S. government business, to provide certain information with his passport application. (Prop Reg § 301.6039E-1(a))

The passport applicant would have to provide:

(1) the applicant’s full name and, if applicable, previous name;

(2) address of regular or principal place of residence within the country of residence and, if different, mailing address;

(3) taxpayer identifying number (TIN); and

(4) date of birth. (Prop Reg § 301.6039E-1(b)(1))

The required information would have to be submitted with the passport application, regardless of where the applicant resides at the time it is submitted. (Prop Reg § 301.6039E-1(b)(2))

IRS could impose a $500 penalty amount on any passport applicant who failed to provide the required information. (Prop Reg § 301.6039E-1(c))


How much Taxpayer information is currently being exchanged by US?

PALO ALTO—U.S. participation in exchange of information agreements does not mean that the Internal Revenue Service automatically releases taxpayer information to any nation that requests it, Douglas O’Donnell, IRS assistant deputy commissioner (International), said on Jan. 20.
“Every country that’s on the receiving end of a specific request is paying very close attention to the narrative of the story that is being told by the requesting jurisdiction,” he told attendees at the 2012 Pacific Rim Tax Institute. That way, he said, countries“know whether they have met the standard to request the information.”
Since the Group of 20 launched its global initiative in 2009 to safeguard the international financial system through improved transparency, more than 700 additional EOI agreements have been signed and 81 nations—including the United States—have undergone peer reviews, O’Donnell said.

Courtesy –

Breaking news – 3rd Offshore Voluntary Disclosure Program Reopens

The Internal Revenue Service today reopened the offshore voluntary disclosure program to help people hiding offshore accounts get current with their taxes and announced the collection of more than $4.4 billion so far from the two previous international programs.

The IRS reopened the Offshore Voluntary Disclosure Program (OVDP) following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. The third offshore program comes as the IRS continues working on a wide range of international tax issues and follows ongoing efforts with the Justice Department to pursue criminal prosecution of international tax evasion. This program will be open for an indefinite period until otherwise announced.

“Our focus on offshore tax evasion continues to produce strong, substantial results for the nation’s taxpayers,” said IRS Commissioner Doug Shulman. “We have billions of dollars in hand from our previous efforts, and we have more people wanting to come in and get right with the government. This new program makes good sense for taxpayers still hiding assets overseas and for the nation’s tax system.”

The program is similar to the 2011 program in many ways, but with a few key differences. Unlike last year, there is no set deadline for people to apply. However, the terms of the program could change at any time going forward. For example, the IRS may increase penalties in the program for all or some taxpayers or defined classes of taxpayers – or decide to end the program entirely at any point.

“As we’ve said all along, people need to come in and get right with us before we find you,” Shulman said. “We are following more leads and the risk for people who do not come in continues to increase.”

The third offshore effort comes as Shulman also announced today the IRS has collected $3.4 billion so far from people who participated in the 2009 offshore program, reflecting closures of about 95 percent of the cases from the 2009 program. On top of that, the IRS has collected an additional $1 billion from up front payments required under the 2011 program.  That number will grow as the IRS processes the 2011 cases.

In all, the IRS has seen 33,000 voluntary disclosures from the 2009 and 2011 offshore initiatives. Since the 2011 program closed last September, hundreds of taxpayers have come forward to make voluntary disclosures. Those who have come in since the 2011 program closed last year will be able to be treated under the provisions of the new OVDP program.

The overall penalty structure for the new program is the same for 2011, except for taxpayers in the highest penalty category.

For the new program, the penalty framework requires individuals to pay a penalty of 27.5 percent of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the eight full tax years prior to the disclosure. That is up from 25 percent in the 2011 program. Some taxpayers will be eligible for 5 or 12.5 percent penalties; these remain the same in the new program as in 2011.

Participants must file all original and amended tax returns and include payment for back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties.

Participants face a 27.5 percent penalty, but taxpayers in limited situations can qualify for a 5 percent penalty. Smaller offshore accounts will face a 12.5 percent penalty. People whose offshore accounts or assets did not surpass $75,000 in any calendar year covered by the new OVDP will qualify for this lower rate. As under the prior programs, taxpayers who feel that the penalty is disproportionate may opt instead to be examined.

The IRS recognizes that its success in offshore enforcement and in the disclosure programs has raised awareness related to tax filing obligations. This includes awareness by dual citizens and others who may be delinquent in filing, but owe no U.S. tax. The IRS is currently developing procedures by which these taxpayers may come into compliance with U.S. tax law. The IRS is also committed to educating all taxpayers so that they understand their U.S. tax responsibilities.

More details will be available within the next month on In addition, the IRS will be updating key Frequently Asked Questions and providing additional specifics on the offshore program.