Posted on October 26,2021 in Taxation Law

Over the past decade, the rates of expatriation, in which a U.S. citizen renounces their citizenship or a long-term resident of the United States ends their legal residence status, have increased significantly for a variety of reasons. Because U.S. citizens and residents are required to pay taxes on all income they earn, including income earned in foreign countries, expatriation may seem like a good option to alleviate a person’s tax burden. However, expatriation has tax consequences, and upon renunciation of U.S. citizenship or termination of residency status, a person may be required to pay taxes based on the assets they own. Failure to do so can result in significant tax penalties. Fortunately, an experienced attorney can help expatriates understand the tax laws that apply to them and ensure they are taking the correct steps to avoid penalties.

Recent Case Demonstrates the Consequences of Misreporting Income and Assets

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 Posted on October 22,2021 in Taxation Law

There are many different issues that can lead to tax penalties, including failing to file the correct forms and report certain information to the IRS. In a recent blog, we looked at the potential penalties that may apply if a taxpayer fails to file Forms 3520 and/or 3520-A. These forms are used to report transactions involving foreign trusts, and in some cases, a taxpayer may be required to pay a penalty of 35% of the amount that was transferred to or distributed from a trust. For those who have not filed these forms as required, it may be possible to mitigate this issue by using the Streamlined Domestic Offshore Procedures, which is commonly known as streamlined compliance.

What Are the Streamlined Procedures?

Individual taxpayers who meet the standards of being “U.S. persons” may use the Streamlined Domestic Offshore Procedures to fulfill all of their reporting requirements and correct any errors that may have led to an underpayment of the taxes owed. While these taxpayers will be required to pay a penalty, it will often be lower than the penalties that would apply otherwise.

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 Posted on October 13,2021 in Taxation Law

The U.S. Tax Code is complicated, and it is easy for taxpayers to make mistakes when filing tax forms or reporting their income and assets to the IRS. This is especially true for taxpayers with foreign assets or income. These taxpayers will need to meet multiple types of reporting requirements, and failure to do so can result in large penalties. A taxpayer who is the owner or beneficiary of a foreign trust will need to be sure to file Forms 3520 and/or 3520-A at the appropriate times, and if they fail to do so, they may face significant penalties.

A person may hold assets in a trust that is outside the jurisdiction of the United States. Since these types of trusts may sometimes be used in tax avoidance schemes, taxpayers are required to report certain types of transactions to ensure that income taxes and any other applicable taxes will be applied correctly. These requirements may apply to the owner or grantor of a foreign trust, a beneficiary who receives distributions from a foreign trust, and a trust itself.

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 Posted on September 28,2021 in Taxation Law

Business owners may need to address a variety of tax matters, and one important issue involves the classification of workers as either employees or independent contractors. Employers who classify workers incorrectly could face penalties, or they may be required to pay certain types of employment taxes at the federal and state levels. By understanding the rules for classifying workers, business owners can be sure they are in compliance with all applicable tax laws.

Federal Worker Classification Rules

Employers will need to withhold and pay certain types of federal taxes on behalf of employees, including income taxes, Social Security taxes, and unemployment taxes. However these taxes do not need to be withheld for independent contractors. The IRS looks at three issues to determine whether a worker should be classified as an employee or independent contractor:

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 Posted on September 15,2021 in Taxation Law

When a couple gets divorced, they will need to address a wide variety of financial issues, and they should be sure to understand how the decisions they make will affect the taxes they will be required to pay and the deductions and credits they can claim. One divorce-related tax issue that may affect people in 2021 is the Advance Child Tax Credit. Parents will need to be sure to understand how this credit will be handled during the divorce process and after their divorce has been completed.

Claiming Child Tax Credits and Receiving Advance Payments

When a parent can claim a child as a dependent, they will be able to receive a child tax credit when filing their annual tax return. In 2021, Congress passed a law that provides parents with advance payments for this tax credit. Between July and December of 2021, a parent who will claim the child tax credit for this year can receive monthly payments. The monthly payment for children under the age of 6 is $300, and the monthly payment for children under the age of 18 is $250. To qualify for these payments, children must meet the applicable age requirements on December 31, 2021. 

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 Posted on September 09,2021 in Taxation Law

The IRS may assess multiple types of tax penalties against a taxpayer. While the most common penalties involve the failure to file a tax return or pay taxes that are owed, taxpayers may also face penalties for failing to report certain types of transactions. To prevent potential penalties, a taxpayer will need to understand their reporting requirements, and those who are facing penalties may want to engage an attorney to determine options for relief.

Transaction Reporting Requirements

Certain types of transactions must be reported to the IRS by filing Form 8886. Taxpayers involved in such transactions, including individuals, corporations, partnerships, trusts, or estates, must file this form for each reportable transaction. Reportable transactions include the following:

• Listed transactions and transactions of interest - The IRS maintains a list of types of transactions that must be reported because they are commonly used for tax avoidance. These include basket option contracts, distressed asset trust (DAT) transactions, and syndicated conservation easement transactions. Other reportable transactions are considered transactions of interest because they have the potential to be used for tax avoidance.

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 Posted on August 25,2021 in Taxation Law

While nearly everyone in the United States is required to pay taxes, many taxpayers struggle to do so. The U.S. Tax Code is complicated, and it can be easy for a person or business to make mistakes. A taxpayer may also encounter financial difficulties that affect their ability to make payments to the IRS. Because of these issues, there are a variety of reasons why a taxpayer may be subject to penalties, which can make their tax burden even more difficult. Fortunately, the IRS provides different forms of penalty abatement in certain situations. By working with an attorney who is experienced in addressing tax penalties, taxpayers can request abatement and find ways to resolve their tax issues as quickly and affordably as possible.

Abatement for IRS Tax Penalties

The IRS most commonly imposes failure-to-file (FTF) penalties for those who do not file a tax return or extension by the due date or failure-to-pay (FTP) penalties for those who do not pay the taxes owed in full when they are due. Taxpayers may qualify for relief from these penalties in certain circumstances, and they will usually need to show that they failed to meet the IRS’s requirements based on factors that were out of their control. The type of penalty abatement that may be available include:

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 Posted on August 17,2021 in Tax Appeals

Taxpayers have a number of options for responding to attempts by the IRS to collect taxes. If the IRS conducts a tax audit and determines that there is a tax deficiency, it may perform a tax assessment and take action to collect the amount owed. A taxpayer can appeal the IRS’s determinations by filing a petition in U.S. Tax Court, and after a petition has been filed, the IRS is prohibited from taking action to perform a tax assessment or collect taxes while the matter wends its way through the Tax Court process. However the U.S. Tax Court is currently experiencing delays, and this may result in complications and difficulties for some taxpayers.

Responding to Tax Court Delays and Premature Tax Assessments

Typically, the U.S. Tax Court receives 23,000 to 26,000 petitions from taxpayers each year. As of July 23, 2021, the Tax Court court has already received more than 24,000 petitions this year, and this has affected its ability to process cases. Because of the large number of petitions, there may be a delay between when a person files a petition with the Tax Court and when the Tax Court serves notice of a petition to the IRS.

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 Posted on August 10,2021 in Taxation Law

The requirements that taxpayers must follow when reporting their income to the IRS can be complicated. This is especially true for those who have foreign investments, including individual taxpayers, corporations, and partnerships. Recently, the IRS issued a notice that taxpayers with an interest in controlled foreign partnerships will need to file some new forms starting in 2022. By understanding these requirements, taxpayers can ensure that they are providing the correct information and taking steps to avoid potential tax penalties.

Schedule K-2 and K-3

U.S. taxpayers who have an interest of 10 percent or greater in a partnership that was formed in a foreign country are required to provide information about the partnership to the IRS, including details about a partner’s ownership interest and their allocations of income and tax deductions and credits. Starting in the 2021 tax year, the IRS will be requiring partnerships, S corporations, and individual partners to report information of international tax relevance on two new schedules, K-2 and K-3. These schedules will be included in the following forms:

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 Posted on July 21,2021 in Taxation Law

When a couple chooses to end their marriage, they will need to address a wide variety of financial matters, and they will need to make decisions about how to handle multiple types of divorce-related tax issues. However, there are many situations where couples separate before getting divorced, either as a trial to determine whether to move forward with ending their marriage or in preparation for their final split once the divorce process is complete. 

When a couple is living separately while they are still legally married, they will need to address certain types of unique tax issues. The decisions they make during this time may be based on how they expect to handle matters during their divorce, or they may need to take temporary measures to ensure that both parties’ financial needs are addressed properly. It is important for spouses to understand their rights and options when addressing these matters, since decisions that may be beneficial for one spouse may lead to financial difficulties for the other.

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