Archives For Economics

We’ve invited Brian Wynne of Bond Beebe, a Maryland Accounting Firm, to share some insights on FATCA in light of the upcoming June 30 deadline.  For more great posts on taxes, estates, accounting, and finance, check out their blog: It’s Taxing.

flagsWe’ve been talking with our clients quite a bit the past few years regarding the push surrounding foreign financial reporting and the associated penalties if you don’t comply.  The Foreign Account Tax Compliance Act (FATCA) requires that you disclose all ownership of US assets in foreign accounts.  This requirement is in place both for individual taxpayers and for foreign financial institutions (which can report your holdings, even if you do not) and carries significant penalties for non-compliance – up to 50% of the value of the interest, and criminal charges may apply.

There is a deadline on the horizon: FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR) is due to the U.S. Department of Treasury by June 30.  In this post, we’ll provide a high-level explanation FATCA, including what types of assets you need to disclose and what forms are required.

What is FATCA and What Do I Need to Disclose?

Any person or entity subject to the jurisdiction of the United States (including individuals, corporations, partnerships, trusts, and estates) with a financial interest in, or signature or other authority over, bank accounts, securities, or other financial accounts having a value exceeding $10,000 in a foreign country, must report this relationship.

Wait- what exactly does that mean?  Bottom line, if you are a US citizen who owns any foreign asset(s) valued at over $10,000, you must report it to the Treasury Department; the IRS threshold for reporting is $50,000.

This requirement doesn’t stop at anything that you yourself own.  You also have to file if you have direct or indirect control over a foreign or domestic entity (a company, a partnership, a trust) with foreign financial accounts, even if you yourself do not have foreign account(s). For example, a corporate-owned foreign account would require filings by the corporation and by the individual corporate officers with signature authority.

This requirement isn’t exactly new – you should have been reporting these assets since the 2012 tax year.  However, the IRS requirement for foreign financial institutions to report these assets will go into effect on May 5, 2014, which means that these banks will be required to disclose your assets, even if you haven’t.

What is a Foreign Financial Asset?

Not sure if what you own/have interest in counts as a foreign financial asset?  Here is a guide to help you determine whether or not (and what) you need to disclose:

  • Bank accounts (savings, checking, deposit) and brokerage accounts that are held at a financial institution outside the US.
  • Stocks, bonds, and other securities issued by a foreign individual or entity
  • Any interest in a foreign corporation, partnership, estate or trust
  • Any financial instrument that is issued by a non-US person, as well as any swap or similar agreement

Note that if you have a foreign investment that is held by a US-based account, it does not need to be reported. In addition, foreign real estate, currency, and directly-held tangible assets do not need to be disclosed.

What Forms Do I Have to File for FATCA?

IRS tax forms regarding FATCA are due when your income tax return is due, including extensions. If you fall into one of the below categories, or if you have any direct or indirect foreign interests, you may be required to file applicable IRS forms:

  • You are an individual or entity with ownership of foreign financial assets and meet the specified criteria (Form 8938);
  • You are an officer, director or shareholder with respect to certain foreign corporations (Form 5471);
  • You are a foreign-owned U.S. corporation or foreign corporation engaged in a U.S. trade or business (Form 5472);
  • You are a U.S. transferor of property to a foreign corporation (Form 926);
  • You are a U.S. person with an interest in a foreign trust (Forms 3520 and 3520-A), or;
  • You are a U.S. person with interests in a foreign partnership (Form 8865).

The threshold for disclosing foreign assets to the IRS is $50,000 (total value of the assets).  You’ll also need to file FinCEN Report 114 (formerly Form TD F 90-22.1) with Department of the Treasury on or before June 30th for any foreign assets that are valued at $10,000 or above.

What Happens if I Don’t Report Foreign Assets?

There are significant penalties for failing to file these forms.  Failure to file IRS Form 8938 can result in a $10,000 penalty, with an additional $10,000 penalty for every 30 day period that it is not filed, up to a maximum penalty of $50,000. Failure to file with the Treasury can elicit a penalty of up to $10,000 per non-willful violation.  Willful violations can elicit penalties that are the greater of $100,000 or 50% of the amount in the account for each violation.

The IRS Offshore Voluntary Disclosure Program provides an opportunity to become compliant while eliminating criminal exposure and reducing the civil penalties you may face.  More details about this program are available on the IRS website.

As foreign financial institutions prepare to report all accounts held by US citizens and the government continues to ramp up its efforts to curb foreign tax evasion, it’s essential that you disclose your foreign assets.  Talk with your CPA to make sure you are in compliance regarding this tricky tax issue.

Brian Wynne, CPA is a Principal at Bond Beebe Accountants & Advisors who specializes in tax preparation and planning for high-net-worth individuals.  He can be reached at wynne@bbcpa.com or 301.272.6019.   

 

This infographic takes a look at major tax policy changes in U.S. history. Along the way, it highlights a “slippery slope” of scandals ranging from serious mishandling of taxpayer funded organizations to unethical behavior by the IRS.

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As Washington lawmakers struggle to make any progress on tax reform, North Carolina passed a major overhaul of its tax code – the first in 80 years.

The legislation is based mainly on Republican ideals – a flat tax, simplified code, fewer deductions, and less revenue. It will change the state’s tax system from one that was on par with national averages to one that is “fairly radical in relation to other states.”

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Maybe two wrongs can make a right.

Internal Revenue Service watchdog Russell George said there is new evidence to suggest that Tea Party affiliated groups were not the only ones subject to cherry-picking by IRS employees for extra scrutiny based on their names.

George, a Republican, told a congressional committee on Thursday that the IRS also used “progressives” as a search term to flag organizations for added review in their applications for tax-exempt status. The news is the latest twist in the three-month-old controversy plaguing the IRS.

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A recent report to Congress revealed that effective tax rates (ETRs) for large corporations were lower than the statutory rates– a lot lower.

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The U.S. Senate’s Permanent Subcommittee on Investigations released a 40-page bipartisan report yesterday unveiling that Apple has been using legal loopholes in the United States and Ireland to skirt additional taxes. Senate investigators are reporting that Apple sheltered $44 billion in offshore, taxable income between 2009-2012.

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New Hampshire: “Live free or die.”

As the only state without a sales or income tax, New Hampshire appears to live up to its motto.  But the state still has a functioning government and department of revenue, so the question bodes: Is New Hampshire a model for a tax-free society or is it just disguised as one?

First, let’s see how New Hampshire stacks up to other states, 1st being the best, 50th being the worst.

In a CNBC measure of competitiveness, developed with input from business groups including the National Association of Manufacturers and the Council on Competitiveness, states received scores based on 10 broad categories relevant to living and doing business there.  Here’s How New Hampshire ranked:

Overall Cost of Business Workforce Quality of Life Economy Infra & Transp. Tech. & Innovation Education Business Friendliness Access to Capital Cost of Living
19 35 44 1 34 46 26 8 2 19 40

Overall, New Hampshire ranked slightly above average.  On the good side, they scored first for quality of life and second for business friendliness.  On the other hand, they are in the bottom 10 for cost of living and near last in infrastructure/transportation – both of which could be the result of a crippled revenue stream.

Now, about all of this no tax stuff.  If you thought New Hampshire had no taxes period, you’re mistaken.  In fact, other states actually have smaller tax burdens when considering income, property, sales and auto taxes together.  In a report on major tax burdens for the largest city in each state, Manchester, New Hampshire ranked 31st for a hypothetical family of three earning $50,000/year.  The cumulative tax rate for this family was estimated to be 8.8%, just a few ticks lower than the national median of 9.4%.

Below is a list of all New Hampshire taxes:

So it’s not that New Hampshire doesn’t have taxes, they’re just better at hiding it.  Their property tax, for example, is the third-highest in the country.

Here’s another piece to the puzzle:  One reason New Hampshire can afford it’s modestly low tax rates to begin with is because their citizens are some of the wealthiest in the country.  According to data from the US Census Bureau, the 2008-09 average median income in New Hampshire was the highest in the country at $68,187.  In 2010-11, that figure dropped to $67,308, but was just a couple hundred dollars behind Maryland’s top national average of $67,551.

With higher incomes, overall tax rates can be lower; however, note that the state’s revenue per capita is still modest, according to the National Tax Foundation.  In 2011, New Hampshire’s revenue per capita was $4,746 – the 40th lowest and below the national average of $5,323.

In sum, New Hampshire’s overall tax burden is relatively low, but because their population has above average income and auto and property taxes are high, taxes paid per capita are normal, allowing the government to function without collecting sales or income tax.

200px-Free_State_Project_Logo.svgOne more thing: New Hampshire relies heavily on tourism as a source of revenue.  While there is no uniform sales tax, the state does collect tax on certain items including restaurant food, gasoline and hotel rooms – all things that tourists spend a lot of money on.

The tax portrait of New Hampshire isn’t as libertarian as its made out to be, but that doesn’t stop its attraction to some of the most die-hard anti-tax people in the country.  As the Free State Project, an “enthusiastic legion of libertarian activists,”  says, “choose New Hampshire, where freedom happens first.”

If you want to learn more about New Hampshire’s libertarian culture and vision of a no-tax society, consider attending the annual Porcupine Fest this summer.   Continue Reading…

senatevote

MFA Votes

The U.S. Senate voted overwhelmingly on Monday to approve a measure allowing states to collect sales tax from online purchases.  In a vote that split party lines, the Marketplace Fairness Act (MFA) passed by a margin of 69-27 (See vote breakdown on right).

Despite its ease of passage through the Senate, the bill faces an uphill battle in the Republican-controlled House.

“We place a 30 percent probability that the bill is signed into law by the end of the year” primarily due to opposition in the House, said Guggenheim Securities analyst Chris Krueger, “Our odds will increase following passage of this bill in the Senate provided it receives a big vote of support,” he said (Reuters).

The bill received support from prominent Republicans such as U.S. Senators John McCain (Ariz.), Lindsay Graham (N.C.) and Saxby Chambliss (Ga.), but may be less favorable with House Republicans who have been reluctant to attach their names to anything that hints of a tax increase.

“Call me a conservative, but I believe the right approach to tax fairness is to reduce rates – not force higher rates onto others,” said Tom Graves, a House Republican from Georgia (Reuters).

Anti-tax activist Grover Norquist tweeted that the MFA represents a “struggle against new and higher taxes.”  His sentiment is shared by lawmakers from states with no sales tax (Alaska, Delaware  Montana, New Hampshire, Oregon), and online merchants such as eBay Inc, and Overstock.com Inc.

The bill’s co-sponsors are Illinois Sen. Dick Durbin (D), Wyoming Sen. Mike Enzi (R) and Tennessee Sen. Lamar Alexander (R).  Corporate backers include Best Buy Co Inc, Wal-Mart and Amazon.com Inc.  The bi-partisan National Governors Association  also strongly supports the MFA:

“Marketplace fairness is about collecting taxes that are already owed on retail sales—it is not a new tax nor a tax on the Internet. Annually, states fail to collect more than $23 billion from taxable transactions conducted over the Internet or through catalogues. This legislation levels the playing field between Main Street and e-street. It means fair competition for consumers, helps states collect what is owed and does not cost the federal government a dime” (National Governors Association statement released 02/14/2013)

One of the biggest hurdles to passing the MFA is its perception as hurting small businesses.  EBay Inc Chief Executive John Donahoe said the legislation unfairly burdens small online merchants; in an unprecedented lobbying effort, he sent an e-mail to over 40 million eBay sellers urging them to oppose the MFA.

Most eBay sellers won’t be effected by the legislation though, since the MFA exempts businesses with annual out-of-state sales of $1 million or less. Rex Solomon, owner of a Houston jewelry store that uses eBay, told cpapracticeadviser.com that “eBay is working to preserve special treatment for a handful of multi-million dollar sellers that puts my business at risk.”

Donahoe, for his part, is pushing to raise the ceiling to $10 million.

The MFA will be reviewed by the House Judiciary Committee, where it will undergo hearings. “Judiciary Committee Chairman Robert Goodlatte, a Republican, has reservations about the legislation, including its complexity and potential impact on small businesses, a spokeswoman said,”(Reuters).

Interestingly, the MFA mandates something that both parties support – tax simplification.  If implemented, states could only begin collecting sales tax from online merchants only if they simplify their tax code.  As instructed in the MFA, the tax simplicity requirement can be met either by adopting the Streamlined Sales and Use Tax Agreement, or by meeting a list 5 simplification measures described in the bill.

24 states have already simplified their sales tax laws to make it easier for multistate retailers, according to Tax Cloud, a sales tax service for online retailers.

The MFA is independent from Congress’ effort for broader tax overhaul.    Continue Reading…

Last month President Obama proposed nearly doubling the federal tax on cigarettes from its current rate of $1.01 per pack to $1.95. CNN Money reports the increased revenue, estimated at $78 billion/10 years, would be used to fund childhood education and reduce smoking rates. If implemented, the administration will have raised the cigarette tax by more than 5 times its pre-Obama level of $0.39 per pack.

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For those who think taxes are unconstitutional thievery, this may come off as good news.

But for everyone else, the IRS’ announcement of five agency-wide shutdown days (furloughs) just means longer waits and more hassle.

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