FBAR Filings and Non-Resident Aliens
Non-resident aliens file Form 1040 NR to report U.S. taxable income. Form 1040 NR does not require a Schedule B (to report foreign accounts by completing boxes 7(a) and 7(b) on Form 1040 Schedule B).
If the person filing Form 1040 NR has foreign accounts, he is not required to attach Schedule B to his tax return (to report the foreign accounts).
Artists, athletes, and entertainers who are not citizens or residents of the U.S. do not have to file FBAR’s (if they occasionally come to the U.S. to participate in exhibits, sporting events or performances).
Generally, a foreign person has to file FBAR’s if they are considered to be doing business in the U.S. (i.e., conducting business in the U.S. on a regular and continuous basis).
Tax Provisions and the Health Reconciliation Act
On March 25, 2010, Congress passed the Healthcare and Education Reconciliation Act of 2010 (H.R. 4872). Included in this tax act is the Economic Substance Doctrine (new IRC Section 7701(o)). The test for Economic Substance will be two-fold:
1. Only if the transaction changes the Taxpayer’s position in a meaningful way (apart from tax benefits).
2. Taxpayer has a substantial purpose (independent of the tax benefits) for entering into the transaction.
Under the Reconciliation Act, a failure to meet the two-prong test of the Economic Substance Act (IRC Section 7701(o)) makes the transaction subject to penalty under IRC Section 6662, imposes an increased penalty amount for nondisclosed transactions that lack Economic Substance.
Under the Act, the transactions that lack Economic Substance no longer qualify for the reasonable cause exception (IRC Section 6664) and a penalty may be imposed.
H.I.R.E. and the Foreign Account Tax Compliance Act
On Thursday, March 18, 2010 President Obama signed the Hiring Incentives to Restore Employment Act (H.R. 2847). Included in the bills’ provisions is the Foreign Account Tax Compliance Act.
This Act requires foreign entities to provide U.S. Tax Withholding Agents with the name, address and Tax Identification Number of any U.S. Individual who is an account holder or a substantial owner of a foreign entity, i.e., owns more than 10% of:
1. the foreign corporation’s stock;
2. the profits or capital interest of a foreign partnership; or
3. holds more than 10% of the beneficial interest in a foreign trust (or is the trust grantor).
U.S. Tax Withholding Agents are required to report foreign account tax compliance to the U.S. Treasury Department. Publicly held corporations are exempt from the reporting requirement.
Foreign entities, who fail to report the required information will be required to withhold tax at the rate of 30% on payments made to U.S. Taxpayers.
IRS Audits for Wealthy on the Rise
In 2009, the IRS increased its audits of Taxpayers with $1 million income (and over):
1. $1M - $5M Up 45%
2008: 12,746
2009: 18,585
2. $5M - $10M Up 17%
2008: 1,784
2009: 2,090
3. $10M (or more) Up 9%
2008: 1,347
2009: 1,473
In 2009, the IRS created a new “Global High Wealth Industry Group” to examine tax-avoidance vehicles (e.g., sophisticated financial, business & investment vehicles for tax avoidance).
Under the 3/25/10 Healthcare and Education Reconciliation Act of 2010 (HR 4872) a new “investor tax”: “3.8% Medicare tax” on investment income: the lesser of:
1. Net Investment Income for the Tax Year.
2. Excess over $200,000, individual’s modified adjusted gross income.
In 2010, $1M + Earners Tax Risks:
1. 2010 (Forward) Increased Risk of Tax Audits.
2. Increased Taxes (3.8% Medicare Tax for these Investors with over $200,000 in adjusted gross income.
Please see: 4/4/10 Article from Investment News
Medicare Tax on Investment Income
On March 25, 2010, Congress passed the Healthcare and Education Reconciliation Act of 2010 (H.R. 4872).
The Reconciliation Act amends various provisions of the Patient Protection and Affordable Care Act (P.L. 111-148) which was enacted March 23, 2010. The Reconciliation Act adds provisions that were not included in the Patient Protection Act including a Medicare Tax Investment Income.
The Reconciliation Act added a new IRC Section 1411 that imposes a new 3.8% Medicare tax on investment income. The new tax on individuals is equal to 3.8% of the lesser of:
1. The individual’s net investment income for the year, or
2. The amount the individual’s modified adjusted gross income exceeds the threshold amount ($200,000 individual).
For estates and trusts, the tax equals 3.8% of the lesser of:
1. Undistributed net investment income, or
2. Adjusted gross income (over $11,200, the dollar amount of the highest trust and estate tax bracket).
For married couples, the threshold amount is $250,000 for a joint return and $125,000 for married, filing separately. For all other individuals the threshold amount is $200,000 (i.e., if the individual’s modified adjusted gross income exceeds $200,000, a 3.8% tax is imposed on the lesser of the individual’s net investment income (for the tax year) or the adjusted gross income amount, i.e., $200,000).
Net investment income (defined): income from interest, dividends, annuities, royalties and rents (other than such income derived in the ordinary course of a trade or business).
The definition of net income includes:
1. Income from passive activities
2. From a trade or business of trading in financial instruments or commodities.
This tax provision takes effect for tax years beginning after December 31, 2012 (i.e., commences January 1, 2013, first tax year, 2013).
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