For individual taxpayers who have a net tax liability under IRC section 965 in the individual’s 2017 taxable year of less than $1 million (i.e., the total of all eight installments is less than $1 million) and make a timely election under IRC section 965(h) but missed the April 18, 2018 deadline for making the first of the eight annual installment payments, the guidance in IRS FAQ#16 still applies: The IRS will waive the late-payment penalty (but will not waive the interest) and will not accelerate subsequent installments under IRC section 965(h)(3) if the individual pays the full amount of the first installment (and the second installment) by the due date for its 2018 return (determined without regard to extensions) (i.e., April 15, 2019 for most calendar year taxpayers).
Watch out however for state tax liability. Nearly all states require payment of the liability in the year of the section 965 inclusion and do not allow for the section 965(h) election, or otherwise spreading the liability over 8 years.
On August 24th, the Financial Crimes Enforcement Network (FinCen) issued a guidance that requires private banks, credit unions and trust companies to identify the beneficial owners of legal entities and the people who control these entities. The step is taken to track down people who are hiding company ownership to avoid taxes and other government rules.
As the readers may recall, the rules announced in May 2016 covered federally regulated banks.
It is believed that the FinCen will also soon announce that certain other banks and financial institutions will also be covered under these rules. Banks authorized by law in Puerto Rico and the U.S. Virgin Islands to provide banking and other services to nonresident aliens can also be included.
The IRS said this list isn’t exclusive and could be expanded at some point.
In one feature likely to attract attention, FinCEN didn’t propose changing the ownership percentage that triggers reporting from the 25% required in the final rule in May.
Some called for the agency to lower it, asserting that 25% was too high and wouldn’t catch numerous taxpayers trying to hide from the IRS. Others said it was too low and would create big hassles for banks.
FinCEN said it considered increasing the ownership percentage to 50%, but finally concluded that 25% is “appropriate to maximize the benefits of the requirement while minimizing the burden.”
The beneficial ownership rules would require banks to enhance customer identification programs and anti-money laundering initiatives.
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.:
- 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.
- 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.
Foreign investors are generally not subject to US tax on US source capital gain unless it is effectively connected with a US trade or business, or it is realized by an individual who meets certain physical presence requirements.
Gain from the disposition of a U.S. real property interest (USRPI), however, is treated as income effectively connected with a US trade or business under the Foreign Investment in Real Property Tax Act (FIRPTA). This FIRPTA gain is subject to tax and withholding under Code Sec. 897 and Code Sec. 1445.
Stock or a beneficial interest in a US real property holding corporation (USRPHC) is a USRPI.
Under pre-2015 PATH Act law, in the case of any disposition of a USRPI by a foreign person, the transferee was required to deduct and withhold at the rate of 10% of the amount realized on the disposition.
Effective dispositions made on or after February 16, 2016, the new PATH Act increases the FIRPTA withholding rate to 15% on the dispositions of USRPIs and other prescribed transactions.
However, the PATH Act provides for a reduced FIRPTA withholding rate of 10% in the case of a disposition of property which is acquired by the transferee for use by the transferee as a residence, and the amount realized for the property does not exceed $1,000,000, provided the exemption for a residence bought for $300,000 or less does not apply.
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.
IRS announced that it intends to issue regulations under Code Sec. 304(b)(5)(B), Code Sec. 367 , Code Sec. 7701(l), and Code Sec. 7874 with respect to corporate inversion transactions.
Among others, the regulations will prevent inverted companies from accessing a foreign subsidiary’s earnings while deferring U.S. tax through the use of creative loans, which are known as “hopscotch” loans (under section 956(e) of the code).
In general, the forthcoming regulations will prevent inverted companies from using certain techniques to access the overseas earnings of the U.S. company’s foreign subsidiaries without being subject to US tax. This would close a loophole to prevent inverted companies from transferring cash or property from a controlled foreign corporation to a new parent to completely avoid U.S. tax, and make it more difficult for U.S. entities to invert.
Notice 2014-52 further added that regulations will generally apply to transactions completed on or after Sept. 22, 2014.
Internal Revenue Service today issued Notice 2014-21 providing answers to 16 FAQ’s while dealing with Virtual Currency such as Bitcoins. These FAQ’s explains how the transactions using Bitcoins are treated for Federal tax purposes. In general, Bitcoins are treated as property for U.S. tax purposes and general tax rules for property transactions apply in these cases.
The Notice further states that:
Among other things, this means that:
- Wages paid to employees using virtual currency are taxable to the employee, must be reported by an employer on a Form W-2, and are subject to federal income tax withholding and payroll taxes.
- Payments using virtual currency made to independent contractors and other service providers are taxable and self-employment tax rules generally apply. Normally, payers must issue Form 1099.
- The character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer.
- A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property.