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.

The 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.

California Assembly Bill 5, also called AB 5, has many business owners wondering how compliance with the new law will affect their business. The bill will significantly limit employers’ ability to classify workers as independent contractors. Many workers will now need to be classified as employees of the company, and they will be entitled to the associated benefits, such as workers’ compensation, minimum wage, overtime, rest breaks and meal periods, protection from anti-discrimination and retaliation laws, and reimbursement for business expenses incurred during the course of their job. Employers will also be required to pay payroll taxes on the workers classified as employees. AB 5 takes effect on January 1, 2020, so employers only have a short period of time to make any changes necessary to stay compliant with the new law.

AB 5 Makes the California Supreme Court Decision Regarding Worker Classification State Law

In 2018, the California Supreme Court announced its decision regarding Dynamex Operations West, Inc. v. Superior Court of Los Angeles. The landmark decision established a test called the “ABC test” for determining whether a worker is an independent contractor or an employee. Under the new rule, a worker can only be classified as an independent contractor if the hiring agency can establish each of the following criteria:

• The worker is not under the direction and control of the hiring agency with regard to the performance of the work.
• The worker performs duties that are outside the hiring agency’s typical course of business.
• The worker is engaged in an independently established occupation, trade, or business of the same nature as the work he or she does for the hiring agency.

California employers are already subject to the rules established by the Supreme Court Decision. The purpose of AB 5 is to clarify exactly how the ruling should be implemented in practice and identify industries that are exempt from the new rules. Doctors, psychologists, dentists, veterinarians, insurance agents, lawyers, accountants, architects, stockbrokers, real estate agents, state-licensed engineers, and private investigators will not be forced to comply with the new worker classification law. Newspaper delivery companies must comply, but they will be given an extra year before being required to classify their paper carriers as employees.

Many people have felt the sinking feeling that accompanies receiving a letter from the Internal Revenue Service (IRS). While it may be tempting to simply put the letter in a drawer and forget about it, ignoring the IRS can result in serious consequences. If you are contacted by the IRS and asked to make an office audit appointment, you should be sure to schedule the appointment, contact a tax lawyer for help if you need it, and attend the meeting. If you have already missed an audit meeting, you may wonder about the consequences you may face and what steps you can take to protect yourself.

Voluntary Appointments Versus Required Appointments

When the IRS examines a tax return and decides that the tax filer has misfiled, it may send a letter requesting an appointment. The tax filer may respond to the letter and schedule an appointment, or s/he may choose not to. If you have received a letter and did not schedule the appointment, the IRS has the authority to request a legal summons from a judge and demand that you attend it. If you fail to show up at an appointment that you personally scheduled, you will likely get the chance to reschedule the meeting without any major consequences. However if you were required to be at the appointment because of a legal summons and do not show up, the consequences will be much more serious.

Married couples have the option to file a joint tax return instead of separate tax returns. There are often benefits to choosing this filing status, but there can also be drawbacks. Couples who file jointly are “jointly and severally” responsible for any tax liability, interest, or penalties due. The terms “jointly and severally” mean that each spouse is legally responsible for the entire tax debt. When one spouse does not adequately fulfill his or her tax obligations, this can leave the other spouse in serious trouble with the Internal Revenue Service (IRS). Fortunately, there are several ways that a spouse in this situation can be released from tax liability. One of these types of tax relief is called “innocent spouse relief.”

What Is Innocent Spouse Relief?

Imagine this scenario: your wife is a business owner who struggles to keep track of her profits and expenses. When you jointly file your tax returns, the IRS notices that there are inconsistencies with the business income, expenses, and/or deductions. You are audited. As a result, both of you now owe a significant amount of money in back taxes. In situations like this, innocent spouse relief, also called innocent spouse protection, may help a guiltless spouse avoid his or her spouse’s tax liability.