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San Jose, CA tax attorney foreign foreign tax compliance

U.S. taxpayers are required to report all of the income they earn and pay applicable taxes, including income earned from foreign investments and offshore accounts. The requirements related to these types of accounts can often be complex. Taxpayers who are not compliant may be audited, and they could face penalties that include civil fines or criminal prosecution. 

Foreign tax compliance has become more difficult since the end of the Offshore Voluntary Disclosure Program (OVDP). This program, which was discontinued in September 2018, allowed taxpayers to avoid penalties by disclosing their foreign assets and paying taxes due. Since the end of the OVDP, some taxpayers who had previously been compliant may be facing additional scrutiny and potential penalties from the IRS. The IRS’s Streamlined Domestic Offshore Procedures (SDOP) and Streamlined Foreign Offshore Procedures (SFOP) programs are still available for taxpayers able to make sworn nonwillfulness statements and file the required forms and make the required payment.

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San Jose tax compliance attorney for form 3520 and 3520-AThe more complex a person’s assets and debts, the more complex his or her tax return will typically be. Non-U.S. trusts and trusts involving gifts from people outside the United States require especially specific tax documentation. Taxpayers who fail to file the applicable tax documents or make errors on trust-related tax forms are subject to significant penalties imposed by the Internal Revenue Service (IRS). Determining which tax forms are needed and accurately completing these forms is increasingly time-consuming and stressful for many taxpayers. Fortunately, a qualified tax attorney can help. If you are required to file tax Form 3520 or 3520-A this tax season, it is crucial that you complete this paperwork promptly and accurately.

Form 3520 and 3520-A Errors Can Cost You

When reporting transactions with non-U.S. trusts, ownership of non-U.S. trusts subject to Internal Revenue Codes 671 - 679, or receipt of gifts from non-U.S. persons or businesses, you may need to file Form 3520. If you are the trustee of a foreign grantor trust with a grantor in the United States, you will likely be required to file Form 3520-A. Form 3520 is due by April 15. However if the taxpayer lives and works outside the United States, the deadline is June 15. Form 3520-A must be filed by March 15. Time extensions may be granted for qualifying applicants who take the appropriate steps.

If you are required to submit Form 3520 and the form is incomplete, inaccurate, or is not filed before the deadline, you will be subject to a penalty. The initial penalty is typically the greater of $10,000 or 35 percent of the value of the property added to the trust, 35 percent of the distributions received by the U.S. beneficiary, or 5 percent of the value of the trust assets owned by the U.S. grantor. Taxpayers may be subject to additional penalties and other consequences if the noncompliance continues after the IRS notifies the taxpayer of the compliance issue.

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San Jose tax audit attorney for offshore complianceTaxpayers often make errors on their tax returns that are due to simple miscalculations or misidentification of assets and income. These mistakes rarely lead to criminal charges, and they can typically be rectified with help from a qualified tax lawyer. However, when a taxpayer or business makes a deliberate effort to avoid tax liability, this may constitute illegal tax evasion. Tax evasion is a serious crime punishable by up to 5 years’ incarceration and fines up to $250,000 for an individual or $500,000 for a corporation. In recent years, the Internal Revenue Service has dramatically increased enforcement of income compliance with regard to offshore accounts. The United States, however, is not the only country that is concerned about the increasingly common crime of offshore tax evasion. Recently, the U.S. was joined by several other countries in a “day of action” against offshore tax evasion schemes.

IRS Continues to Investigate Potential Facilitation of Tax Evasion

The Sixteenth Amendment to the U.S. Constitution and a number of other laws dictate Americans’ tax obligations. In order to avoid paying their fair share of taxes, however, some individuals and businesses transfer assets outside the United States and into offshore tax shelters. Tax evasion is a massive problem that is estimated to have cost the U.S. federal government $458 billion per year from 2008 to 2010. Tax evasion schemes occur in developed countries around the world. 

In 2018, the Joint Chiefs of Global Tax Enforcement was formed by leaders in the United States, the United Kingdom, the Netherlands, Canada, and Australia to coordinate efforts to fight global tax evasion. The recent “day of action” occurred as part of an ongoing investigation into a financial institution in Central America that may be facilitating tax evasion and money laundering. The Joint Chiefs of Global Tax Enforcement have reason to believe that some taxpayers are anonymously hiding assets and laundering profits from criminal activities using this institution. Using interviews, subpoenas, search warrants, data analytics, and other intelligence, a great deal of information was uncovered about this institution and the activities taking place there. A number of civil and criminal actions are expected to result from the information gained during the investigation.

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San Jose foreign asset tax attorneyThe federal government has long been concerned with assets and businesses based abroad but owned by United States citizens. The IRS regularly looks to address income that is purposefully generated outside the country to avoid taxation. As part of the efforts to ensure that foreign investments are taxed correctly, the Tax Cuts and Jobs Act (TCJA), which was passed last year, made sizable changes to taxation rules, such as the addition of regulations mandating that global intangible low-taxed income produced by controlled foreign corporations be included in a taxpayer’s taxable income.

What Is a Controlled Foreign Corporation?

A controlled foreign corporation (CFC) is an American corporation that operates in another country with U.S. shareholders who hold 50% or more of the control of that corporation. American shareholders, directors, or officers of one of these businesses must report their income from the foreign corporation and pay taxes on that income. 

New Laws Under the Tax Cuts and Jobs Act

The TCJA provides that a U.S. taxpayer who possesses at least 10% of the value or voting rights in at least one CFC must now report global intangible low-taxed income from these CFCs as currently taxable income. This holds true even if there are no distributions to shareholders. 

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San Jose offshore tax attorney OVDPIf it has come to your attention that your tax filings may not be in compliance with U.S. tax laws and regulations, and you may be concerned you could face criminal liability, the IRS Offshore Voluntary Disclosure Program (OVDP) may provide a means to rectify your noncompliance status. 

About the Offshore Voluntary Disclosure Program

The OVDP applies to tax issues related to unreported offshore income or assets. The OVDP was created for taxpayers who are concerned the IRS will view their conduct as willful or fraudulent. Under the law, a taxpayer’s failure to report offshore financial assets and fully pay the taxes due related to such assets may lead to criminal charges. Allowing for voluntary disclosure once tax returns have been filed is a way a taxpayer may be able to avoid criminal prosecution.

In order to utilize the OVDP, certain requirements must be met and certain procedures must be followed. Several iterations of the OVDP have been in effect over the past few years. The IRS ended one disclosure program on September 28, 2018 and announced new rules that would affect disclosures made after that date.

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