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American Citizens with Foreign Accounts Must Comply with FATCA

The federal government devotes extensive time and resources to ensure that American taxpayers with foreign holdings pay appropriate taxes on these accounts. The Foreign Account Tax Compliance Act (FATCA) is one of the primary laws in this field. FATCA imposes many responsibilities on individual and business taxpayers with foreign holdings.

Perhaps most importantly, taxpayers who meet the FATCA threshold must file a Statement of Specified Foreign Financial Assets, known as Form 8938, along with their tax return. Taxpayers with foreign accounts must also file Form 114, the Report of Foreign Bank and Financial Accounts (FBAR). Failure to file either or both of these documents can bring on severe financial consequences. We will go into greater detail about various aspects of FATCA below.

What Are the Trends in the IRS Criminal Investigation Report?

IRS Criminal Investigation (IRS-CI) recently released its annual report. This report contains substantial information regarding the types of cases it investigates and the number of cases it recommends for prosecution.

Anyone reviewing this report will have a greater understanding of the IRS's priorities going forward, as well as overall trends in the data. Perhaps the most obvious trend is that IRS-CI, along with other areas of the IRS, has had reduced funding in recent years. This reduced funding is reflected in the number of investigations and prosecutions. Secondly a review of the report will show that IRS-CI investigates a broad range of cases touching on many cases in different areas of criminal law.

Thinking about expatriation? Beware the Exit Tax.

The IRS's continued focus on offshore assets has led some American citizens and green card holders to at least consider the possibility of expatriation. Considering the gravity of this decision, citizens and permanent residents must account for many factors. One such factor is the Expatriation Tax, more commonly referred to as the Exit Tax.

The IRS is Getting Tougher (But Also Nicer!) in 2017

The IRS is constantly updating and refining its tax collection processes. In recent months, the IRS has formally announced many changes to its tax collection procedures. For taxpayers with delinquent taxes, some of these changes may create additional challenges. Some of these changes, however, could be welcome news.

Let's start with the good news first

IRS Permanently Establishes Fast Track Settlement Program for Small Businesses

In March, the IRS officially rolled out a Fast Track Settlement program (FTS) for small businesses and self-employed individual taxpayers. The FTS for small businesses is in effect for businesses that file Form 1040, Schedules C, E, F or Form 2106. Moreover, it applies to small businesses with assets less than $10 million. The IRS claims that the FTS can resolve disputes "within 60 days after acceptance into the program."

How does the Fast Track Settlement program work?

Companies enrolled in the FTS, along with a Small Business Examiner or Small Business Group Manager of the IRS, try to resolve their issues before an IRS Appeals Officer who serves as a neutral mediator of the dispute. The mediator's goal will be to help the taxpayer and the IRS reach agreement. It is understandable that some companies may be concerned about the impartiality of the Appeals Officer. In its own documentation, the IRS acknowledges that an unbiased mediator is critical to the success of the program.

The Department of Treasury is scrutinizing large cash residential real estate purchases

Investors who are thinking of paying cash for residential real estate in New York City should know that the federal government may be looking closely at their transaction. The Department of the Treasury's Financial Crimes Enforcement Network (FINCEN) announced recently that it renewed an order requiring title companies in certain areas of the United States to reveal the names of individuals paying cash for "high-end" residential real estate. The compliance with the order requires completion of IRS Form 8300 and a review of the subject transaction.

Where is FINCEN targeting?

This Geographic Targeting Order (GTO) applies to New York City and five other parts of the country, including Miami and surrounding areas, Los Angeles, the Bay Area, San Diego and San Antonio. New York City and the Miami area have been targets of this GTO since 2015. In New York City, title companies must report all real estate transactions in Manhattan of $3 million, and of $1.5 million or more in Brooklyn, Queens, the Bronx and Staten Island. This renewal order went into effect on February 24, 2017, and will be in effect for 180 days.

The Alternative Minimum Tax: Its Purpose and Potential Drawbacks

With the recent release of President Trump's 2005 tax return, many millions of Americans were introduced to the Alternative Minimum Tax (AMT). In fact, of the $38.4 million Trump paid in taxes in 2005, $31 million came from the AMT. With the AMT in the news, this is a good time to look at why the AMT exists, as well as potential pitfalls associated with the law.

The purpose of the AMT

As the name implies, the AMT forces taxpayers who reach certain income thresholds to pay some minimum amount of income tax. With an AMT, higher earners and the wealthiest should not, at least in theory, avoid paying income tax through the use of various deductions. All taxpayers, including individuals, families and businesses could be subject to the AMT if their income reaches certain levels. As a result, taxpayers should calculate their taxes under both the standard tax laws and the AMT.

Audits Are Down, but Audits on the Rich Are Likely to Increase

The number of IRS audits has decreased in each of the last five years. In 2016, only one in 143 individual taxpayers was audited. While audits are a necessary aspect of our tax system, it is safe to say most taxpayers will not lose sleep about the decreased likelihood of an audit.

Not all taxpayers will be flying under the radar, however. High earners have always faced a higher audit risk. In fact, a taxpayer with an income of more than $1 million is roughly ten times more likely to be audited than a taxpayer with income under $200,000. In 2017, the IRS has indicated that it will devote a larger share of its resources to pursuing high-earning taxpayers.

What is the IRS looking for?

The IRS isn't fully disclosing how it intends to scrutinize the assets of higher earners. It is likely that the IRS will proceed on multiple fronts, however. One step the IRS is sending out automated notices to taxpayers who claim substantial charitable contributions, large mortgage deductions, significant donations to 529 savings plans, or other large deductions. Taxpayers who provide proof of the legitimacy of deductions should be able to satisfy the IRS. These notices are the tip of the iceberg, however.

Thousands of Charities May Not Be Meeting IRS Requirements

Every year tens of thousands of charities and non-profit organizations apply to the IRS for tax-exempt status. Charities with less than $250,000 in total assets and less than $50,000 in donations in each of the past three years are eligible to file the "streamlined application", known as Form 1023-EZ. Although the IRS approves 94 percent of these applications, many of these charities may not be fully compliant with IRS requirements.

The National Taxpayer Advocate (NTA) is a federal agency that identifies and reports on issues faced by taxpayers. In its 2016 report, the NTA claims that the IRS is wrongfully approving one-quarter of Form 1023-EZ applications. The NTA reached this conclusion after reviewing a sample of Form 1023-EZ applications from 20 states.

Unpaid Tax Debts Could Put Your Passport in Jeopardy

The IRS has many tools at its disposal to enforce the collection of unpaid tax debts, among them liens, levies, and even asset seizure. Beginning in late March, the IRS, in conjunction with the State Department, will have yet other weapon in its arsenal. Very shortly, the IRS will be forwarding the State Department information regarding individuals who have substantial tax deficiencies. Upon receipt of this information, the State Department can deny a taxpayer's passport application or renewal or place other restrictions on the taxpayer's passport.

What gives the IRS and State Department the right to restrict a person's passport?

In 2015 Congress passed the Fixing America's Surface Transportation Act, or the FAST Act. One provision in this bill requires that the IRS identify individuals with "seriously delinquent tax debt" and report this information to the State Department. By doing so, the federal government would have additional leverage against delinquent taxpayers.

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