Nonresident alien (NRA) athletes and entertainers performing independent personal services or participating in the U.S. and embassy and consulate employees in the U.S. can expect more enforcement and litigation, an IRS official said May 12.
Speaking at the American Bar Association Tax Section meeting in Washington, Lindsey D. Stellwagen, Special Counsel International, Office of Chief Counsel said that although there had been a lot of publicity on IRS measures to enforce compliance on U.S. persons with offshore wealth, her agency is also stepping up enforcement of NRAs and resident aliens (e.g. green card holders) that owe U.S. tax. She discussed the IRS programs pertaining to athletes and entertainers and the embassy project.
Foreign athletes and entertainers may pose a challenge to IRS enforcement because they come into the U.S. for a brief period of time, earn a lot of money, then leave. Such persons may be able to evade paying tax on their U.S.-source income and enforcement may be futile if they money earned has exited the U.S. without the imposition of withholding at source.
Nonresident alien entertainers or athletes performing independent personal services or participating in athletic events in the U.S. are generally subject to a 30 percent withholding on gross income. Stellwagen explained that under the central withholding agreement (CWA) program, such persons may be subject to reduced withholding provided that certain requirements are satisfied. The agreement is entered into by the NRA athlete or entertainer, a withholding agent and the IRS and is valid for a specific tour or series of events. Withholding is based upon the budget provided and estimated net profits.
CPA Global Tax & Accounting PLLC can assist athletes and entertainers with the CWA program and work with the IRS to minimize the exposures.
HIRE Act of 2010 enacted Code Section 6038D that provided that individuals as well as certain domestic entities with interest in “specified foreign financial assets” must attach a disclosure statement to their tax returns each year if the aggregate value of all such assets is greater than $50,000. Specified financial assets include depository or custodial accounts at foreign financial institutions, and to the extent not held in an account at a financial institution, (a)
stocks or securities issued by foreign persons, (b) any other financial instrument or contract held for investment that is issued by or has a counterparty that is not a U.S. person, and (c) any interest in a foreign entity.
IRS issued Notice 2011-55 wherein it suspended teh reporting requirements until it releases the final Form 8938 – the draft Form was released in June 2011.
IRS today released the draft instructions that include the following:
The Instructions provide that individuals satisfy the reporting requirements if they have specified foreign financial assets of more than $100,000 at any time during the year or if the total value of their specified foreign financial assets on the last day of the tax year is more than $50,000 for unmarried taxpayers living in U.S., $100,000 for married taxpayers filing a joint return and living in the U.S., and $50,000 for married taxpayers filing separate returns and living in the U.S.
The Instructions also provide the reporting threshold for taxpayers living abroad, i.e., taxpayers who are bona fide residents of a foreign country or countries for an uninterrupted period that includes the entire tax year, or are present in a foreign country or countries during at least 330 full days during any period of 12 consecutive months ending in the tax year (in short meet S. 911 conditions). They meet the reporting obligation if they are not filing a joint return and the value of their specified foreign financial assets is more than $200,000 on the last day of the tax year or more than $400,000 at any time during the tax year.
The Instructions also reminds the taxpayers that filing Form 8938 does not relieve a taxpayer of the requirement to file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR), if he or she is otherwise required to file Form TD F 90-22.1.
IRS Tax Tip 2011-08 lists tax evasion due to hiding of income offshore as the top tax scam. We would like to remind all US citizens and permanent residents that their worldwide income is subject to tax in US. Heavy penalties can be enforced if the income is not reported to IRS. Due to increased cooperation between all countries, don’t take your chances by not declaring worldwide income. There are also stringent requirements to report your controlled foreign entities, foreign trusts, foreign inheritance or gifts and not to forget foreign financial accounts. It is still not too late to take advantage of the IRS offshore voluntary disclosure initiative that expires August 31, 2011. Here is an excerpt from the tax tip:
“Hiding Income Offshore: The IRS aggressively pursues taxpayers involved in abusive offshore transactions and the promoters who facilitate or enable these schemes. Taxpayers have tried to avoid or evade U.S. income tax by hiding
income in offshore banks and brokerage accounts, or by using offshore debit cards, credit cards, wire transfers, foreign trusts, employee-leasing schemes, private annuities or life insurance plans.
In February, the IRS announced a second voluntary disclosure initiative to bring offshore money back into the U.S. tax system. The new voluntary disclosure initiative will be available through Aug. 31, 2011.”
On February 23, 2011, FinCEN issued amendment to the FBAR reporting requirements in the Bank Secrecy Act (BSA) that addresses the scope of persons required to file reports, the types of reportable accounts and provisions intended to prevent the rule from being circumvented by those persons subject to the reporting requirement.
Form 90-22.1, popularly known as FBAR – is used to report a financial interest in, or signature or other authority over, one or more financial accounts in foreign countries if the maximum aggregate balance meets the $10,000 threshold. When filed, FBARs become part of the BSA database. They are used in combination with Suspicious Activity Reports, Currency Transaction Reports, and other BSA reports to provide law enforcement and regulatory investigators with valuable information to fight fraud, money laundering, terrorist financing, tax evasion and other financial crime.
FinCEN delegated the authority to enforce the FBAR rules and to amend the form to IRS in 2003. However, FinCEN retained the authority to revise the applicable regulations.
On February 26, 2010, FinCEN published a Notice of Proposed Rulemaking (NPRM) proposing to amend the BSA implementing regulations regarding the FBAR. Amongst other things, the NPRM proposed to: define the scope of individuals required to file the FBAR; delineate the types of reportable accounts; and exempt certain persons and accounts from the reporting requirements.
The final rule issued by FinCEN:
- Clarifies if and account is foreign and must be reported (as well as addresses the treatment of custodial accounts);
- Modifies the definition of “signature or other authority” to extend the filing requirement to persons who have the authority to control the disposition of assets in the account by direct communication;
- Provides that officers/employees that file an FBAR are not expected to personally maintain their employer’s account records; and
- Clarifies that filers may rely on the final rules to determine their filing obligation for FBAR where their filing was properly deferred under prior Treasury guidance.
Generally if you are a US taxpayer and have foreign source income on which you paid taxes in foreign country, you can claim credit for such taxes in US. However, rules are not the same for the NRAs. Many times it is seen that the NRAs have to report their income both in US as well as in their home country. Generally, due to the foreign tax credit provisions, the same income is not taxed twice. However, NRAs and tax professionals need to be careful while claiming credit in US and examine if US source income is also taxed in their home country. In such cases, the credit cannot be claimed in US due to the fact that the corresponding income is US source income and not foreign source income.
IRS Publication 514 released on January 27, 2011, makes this point amply clear. Taxpayers and professionals should pay attention to this and many other requirements before correctly filling out Form 1116.
Tiger Woods’ reluctance to accept a Ryder Cup wild card may in part be due to a £1m tax bill he could face for playing in the event, which pays no prize money. Aside from any sporting price his team-mates might face because of his wretched form, the issue highlights a problem that is causing concern for many British sporting events.
Sportsmen and women who earn money in the UK while not resident have been targeted by HMRC after it won a high-profile case against Andre Agassi four years ago. The implications are now being felt. Previously HM Revenue & Customs had only gone after a portion of “active income”, earnings from prize money or appearance fees. But the so-called “passive income” – mainly from endorsements – was not deemed liable for UK tax. Now attempts are made to claim tax not just on a foreign sportsperson’s direct earnings on British soil (for example, prize money) but also on a proportion of the sportsperson’s |global endorsement earnings. The Independent understands that leading players have voiced their concerns to the European Tour, the organisers of the Ryder Cup, and a Tour spokesman last night confirmed that they are in “discussions” with HMRC. HMRC told The Independent yesterday that Woods and the other players would still probably be liable on their equipment sponsorships.
“Product endorsements that are directly connected to the sportsperson’s performances are subject to UK tax,” explained an HMRC spokesperson. “Though full UK expenses arising from the performance can be claimed against the income chargeable to UK tax.”
Woods’ deal with Nike is rumoured to pay $40m a year. So if he played 14 events this year, and one of those is the Ryder Cup, he would be billed to pay tax, at 50 per cent, on one-fourteenth of that amount, leaving the potential tax bill as high as £900,000. The taxman would no doubt also be interested in the reported $10m he receives from EA Sports, for whom his name and images appear in a computer game based on the Ryder Cup.