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Tax planning for traveling athletes, artists, and entertainerS

4/20/2018

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Whenever a well-known KBO League star is signed to a deal with an MLB team, or a K-pop group announces a new tour in the States, most Korean Americans are either simply happy to hear the news or, at most, they begin researching how to get a ticket for an upcoming game or concert.  As a tax attorney, however, these announcements generally result in me mechanically checking on rarely advertised, and infrequently considered, facts and circumstances associated with such news, including the Korean-born athlete or singer’s nationality, tax residence, number of days and/or stays in the U.S. for the game or tour, relationship with an agent, and the agent’s presence in the U.S.  All of these various facts and circumstances, as well as some additional select details, will indicate and dictate how an athlete and performer will be taxed while working and performing in the States.

As of today, the United States has entered into tax treaties (“Tax Treaties”) with 68 different countries around the world.  In certain instances, these Tax Treaties provide international entertainers, artists, and athletes with special exemptions from the imposition of U.S. income tax earned while in the States.  Artists and entertainers from most Eastern European countries, for example, are wholly exempt from U.S. federal income tax earned in the States so long as the artist or entertainer satisfies certain requirements set out in a Tax Treaty with the artist’s or entertainer’s country of residence.  

Entertainers, artists, and athletes from most other countries, however, are not as fortunate as their Eastern European counterparts.  In the majority of Tax Treaties, the United States actually caps the amount of income able to be exempted from U.S. federal income tax by providing a limited exemption from federal income tax generally in the range of $3,000 to $20,000.  If earned income from a foreign entertainer, artist, or athlete exceeds the $3,000 to $20,000 threshold prescribed in the Tax Treaty, even by a single dollar, then the entire amount of U.S. source income, generally, will be subject to U.S. federal income tax and, in most cases, state level income tax as well.  

Unfortunately, the U.S. - Republic of Korea Income Tax Treaty happens to be one of least advantageous Tax Treaties, from the viewpoint of the U.S. counterpart and specifically with regards to income earned by entertainers, artists, or athletes, among all 68 Tax Treaties.  (See U.S. - Republic of Korea Income Tax Convention, Article 18).  In order to avoid becoming subject to maximum U.S. withholding and income tax requirements, however, Korean-resident entertainers, artists, and athletes can proactively plan by: (i) reviewing, and revising when necessary, their relationships with their agents; (ii) taking active steps to establish proper expense and reimbursement plans in accordance with U.S. tax rules; and (iii) only choosing, and applying for, optimal and beneficial Visa programs.  In order to address these concerns in the most advantageous way possible, foreign celebrities, athletes, artists, and entertainers should, preferably, begin planning with U.S. and foreign counsel well-before signing a final tour, concert, or big league contract or agreement.

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Cryptocurrency Mining and International Tax Implications

9/8/2017

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Like Al Capone before them, many in the coin mining industry are under the mistaken impression that the IRS and other government bodies abroad do not have authority to tax mining activities because the coins being mined are “not really regulated.” Unfortunately for them, this view is severely misguided.

The default rule in the U.S. is that the receipt of any sort of property, be it cash, real estate, securities, or even drugs, is a taxable event...unless the IRS or the Tax Code says otherwise. This means that as a default you recognize income, whether you are repaid for your efforts and/or investments in the form of cocaine, or you are mining coins.  This is good and bad news for mining pools and investors in those pools. While you are subject to U.S. taxation, knowing this ahead of time should allow you to plan and structure mining operations, pools, and investments appropriately. But what does it mean to be subject to taxation in a global economy?

Let’s take, as a case study, a mining pool with operations in the U.S. and with investors both within the U.S. and abroad. For all practical purposes, for the investor this is no different than  investing in any other sort of business within the United States. The U.S. operations means the pool is engaged in a U.S. trade or business, which in turn means that the business is subject to U.S. taxes, whether it earns profits in altcoins or U.S. dollars. For U.S. investors, there is no surprise that the mined coins should be included as income. If this business is passing profits through to its investors abroad, then we look to the appropriate tax treaties in effect between the U.S. and the country of residence of each foreign investor, and the various US-sourced income withholding rules. Structuring the relationship as an individual investor simply leasing mining equipment, as opposed to investing in a mining pool, does not change this basic principle, or the end result.

Typically, there are two possible characterizations of the income flowing out to a non-resident alien (NRA) investor: 1. It could be income effectively connected to a U.S. trade or business (ECI), or 2. It could be considered fixed and determinable periodic income (FDAP). FDAP is subject to withholding under IRC §1441(a). As a default, this means the payor (e.g., the mining pool in this instance) is required to withhold 30% of the GROSS payment to the NRA. This 30% rate is reduced in many instances depending on the particular investor’s country of residence and that country’s tax treaty with the United States.

On the other hand, ECI is exempt from this harsh withholding requirement and is instead subject to taxation on a NET basis at normal U.S. income tax rates. Depending on where an investor is located, structuring the mining activities to generate ECI may or may not be preferable to having the profits or payments treated as FDAP. These two classifications can have wildly different results, and the difference in classification can sometimes stem from very simple variations in structuring. This means that a little proactive planning for your mining investment and/or the setup of your mining operation/pool can go a long way towards reducing your tax burden.

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Family Trust for cross border Tax Planning

10/5/2016

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In recent years, with the rapid growth of high-net-worth individuals in China (“HNWIs”) and the distribution of their assets all over the world, the use of trusts by HNWIs, to manage their global wealth, has increasingly gained in popularity. Most major global economies, including China's and the world’s leading tax havens, have statutorily enacted special function trusts that permit a trust owner to transfer property without tax consequences.

Following such a transfer by a settlor (the property owner) of property to the trustee (the trust manager), the settlor is generally no longer considered the owner of the trust property. The trustee, however, must subsequently follow the instructions of the settlor, and the trust itself, in terms of managing and distributing the trust property. Then, upon the occurrence of certain events, such as sudden death of the settlor, the filing of claims by settlor's creditors, or the mandatory division of property due to divorce, dissolution, or bankruptcy, the property in the trust will legally be treated separately from the other assets of the settlor. Accordingly, such property will be protected from any subsequent encumbrance or enforcement action that normally is derived from any or all of the aforementioned events.  


A special purpose trust often used by HNWIs is a family trust, which is a form of trust where the property owner (the settlor) uses the trust to separate the ownership of the trust property from the profit that is expected to be derived from such trust property. The settlor will typically authorize a third-party to manage and distribute the trust income for the benefit of the settlor's family members. This separation of ownership, between the trust property and the profits derived from such property, is an advantageous feature that is frequently employed by individuals and/or families, from all over the world, in order to achieve tax efficiency on various levels.

On the other hand, due to the special structure of a family trust, the various tax issues surrounding the trust can be quite complicated and a family trust must be established under the proper guidance of a competent attorney. For example, there may be issues surrounding the different locations of various trust property and the different locations of the trust beneficiaries. When relevant property or relevant parties are located in different jurisdictions, and such jurisdictions have competing laws surrounding the interpretation of taxable profits or beneficiaries, then complex planning problems will likely arise. Without proper planning, a settlor attempting to employ a family trust for tax efficiency often ends up finding himself or herself ensnared in a complex situation involving the laws of several jurisdictions. Such considerations also include the nationality and tax status of the settlor, the trustee, and the beneficiaries, as well as various laws surrounding the trust property, the type of trust, and the terms regulating the investment, management, and profit distribution of the trust property. 

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are you expanding into the united states?               TAX CREDIT & INCENTIVE OPPORTUNITIES IN Virginia 

10/31/2014

 
So, you are now done with your country to country analysis and decided to expanded into the United States. If you already know where your new company will be in the United States, it is a fairly simple process. You would set up a company in the state of your choice and deal with the requirements.  However, what if you don't have the location in mind and are open to any suggestions on which state or locality is better for your business?

Most businessmen will follow the traditional path to check the state tax rate, which is easily available.1) However,  a creative businessman will be more interested in  state tax credits or state benefit programs that may help their business in a more direct way. If you are one of those creative businessmen, here it comes. We will introduce to you some of the most helpful state tax incentives for a new business or expanding business. Let's start with our home state, the Commonwealth of Virginia. 

Virginia

Capital Gains Tax Exemption
State income tax exemption for long term capital gains incurred in connection with investments in technology, biotechnology, and energy-related companies/start-ups
Informational Link: http://www.nvtc.org/advocacy/virginia_initiatives.php

 
Angel Investor Tax Credit
A credit of 50% per qualified investment made each year, Virginia’s highly competitive Angel Investor Tax Credit encourages early investment in biotechnology, energy, and technology start-ups that are located in the Commonwealth
Informational Link: http://www.tax.virginia.gov/site.cfm?alias=taxcredit#Qualified_Equity_And_Subordinated_Debt_Investments_Credit

Major Business Facility Job Credit
An income tax credit of $1,000 per full-time job created over a threshold number of jobs (the threshold is 50 for some companies, and 25 for others)
Informational Link: http://www.tax.virginia.gov/site.cfm?alias=TaxCredit

Research and Development Tax Credit
An income tax credit for qualifying research and development expenses incurred by companies and individuals located in Virginia; tax credit amounts per company or individual can be as high as $25,050 or $30,000, depending on if the R & D was conducted in conjunction with a college or university located in Virginia

Informational Link: http://www.tax.virginia.gov/site.cfm?alias=TaxCredit#Research_and_Development_Tax_Credit

1) If you are interested in the tax rates by State, the Tax Foundation has excellent web-site showing all sorts of tax rate applicable to your business.

Heroes, Citizenship, and Kryptonite 877A

7/19/2013

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Say two years ago, Superman revealed his plan to officially renounce his U.S. citizenship.1 According to Superman, he was fed up with having his actions construed as U.S. foreign policy. His plan is to officially announce his renunciation, while giving a speech before the United Nations. It is not known, however, whether he followed up on all the renunciation procedures, such as (1) signing an oath of renunciation (2) in a foreign country (3) before a U.S. consular or diplomatic officer, (4) catching up with late or missing tax returns, and finally (5) complying with Section 877A.

Knowing that Superman enjoys traveling, meeting people, and his established status as a proud public figure, he probably would not have any issues dealing with the first three or four requirements. However, dealing with the IRS is an entirely different matter. He will most likely need a good tax counsel to analyze and review his situation under Section 877A.

Section 877A was enacted as a part of the Heroes Earnings Assistance and Relief Tax Act (the “Heroes Act”). This section generally imposes a “mark to market” regime on expatriates covered under this section and it assesses taxes based on a hypothetical income that assumes that all properties owned by the expatriate were sold at market value on the date before expatriation. This law is intended to prevent tax avoidance schemes by affluent taxpayers, who have taken advantage of deferral features of current tax laws.

How many people will be affected by the “Heroes Act”? The law in Section 877A applies only to a handful of cases where (1) the net average annual income taxes owed for the five tax years preceding the expatriation date is more than $151,000 for an expatriation during the year 2012, (2) the net worth was more than two million U.S. Dollars, or (3)if the individual failed to comply with any federal tax obligations in the five tax years leading up to the expatriation date. In fact, you can find Section 877A cases more often that you thought.

Dr. Jeong H. Kim seems to be one of these cases. If you are not already familiar with recent news related to Dr. Kim, he is a Korean-American electrical engineer who came to the U.S. when he was 14 years old. He left his home at sixteen and worked menial labor jobs before eventually obtaining a Ph. D. Eventually he founded a venture, Yurie System, and he sold it to Lucent in 1998 for almost a billion dollars. He is an American success story, and a hero to many Korean immigrants in the United States. After serving many public posts, receiving various honors and making large charitable contributions, he was appointed by the South Korean government as the Minister of Future Creation and Science.

To take that offer, he announced his intention to give up his U.S. citizenship. However, he soon withdrew his plan to take the appointment, and blamed the political situation for changing his mind. However, many people cast doubts on his reasoning and sudden change. After all, he pledged, like Superman, to loftily contribute to his mother country. Some newspapers previously reported the impacts of Section 877A on this Korean -American hero’s decision. Considering that a corporate transaction typically involves stock issuance and deferral of gains, the mandatory recognition of income under Section 877A could have had certain effects on his decision. Even though no one knows for certain whether Section 877A was his Kryptonite, the case was interesting enough to attract attention to this law.

Several months ago, Superman quit his day job at the Daily Planet. I am not sure if he will eventually found a profitable company, like Dr. Kim. Nonetheless, if he is planning to renounce his U.S. citizenship as a part of his long term plan, he will be better off having his tax counsel involved at an early stage.

1 See the news at http://www.foxnews.com/entertainment/2011/04/28/superman-renounces-citizenship-00th-issue/


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Turning a Frog into a Prince: Implementing FATCA through Intergovernmental Agreements

7/19/2013

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Let’s say you are a good beekeeper, who happens to live next door to an exceptionally good gardener. You realize that your bee colonies take advantage of the variety of flowers in your neighbor’s garden. But sometimes you notice that some of your larger hives are split, and many of your bees end up in your neighbor’s hives. Now you want to take a share of the honey out of your neighbor’s hives. What would you do?  Would you barge in your neighbor’s yard without permission and take some honey? Or do you want talk to your neighbor first?

Most people would avoid barging in on their neighbors, for obvious consequences. Nevertheless, the United States clearly had the first option in its mind when it announced the Foreign Account Tax Compliance Act (“FATCA”) in 2010.[1] The FATCA targets non U.S. foreign financial institutions(“FFI”) that serve U.S. taxpayers such as bankers, brokers, insurance or other investment companies. It requires FFIs to have an agreement with the United States to disclose and report any U.S. taxpayers’ identity, account information, and other related financial information to the U.S. Department of Treasury regardless of their business frequency or  size with their U.S. taxpayer clients.  If the FFIs does not enter into an agreement with the United States, the plan was to assess the FFI , 30% of  the withholding tax for all of its U.S. source income.

How feasible is it to regulate someone who is not under your jurisdiction? What if it is against their domestic laws to disclose or share the client information to a third party? As the largest economy in the world, the United States may have the power to push the FATCA into effect. However, the Department of Treasury has wisely changed its direction to implement the FATCA. The United States is currently engaging with more than 50 countries to facilitate the FATCA implementation.

The agreements signed thus far are all based on intergovernmental information exchanges under the Model I document. Under Model I, FFIs are required to report the FATCA information to their home country revenue authorities, and the revenue authorities exchange the information directly with the Internal Revenue Service. If the Revenue Agency wants to have similar information from the United States, it can reciprocally request the information from the IRS. The United States has already established bilateral agreements this way with the United Kingdom, Denmark, Mexico and Spain.[2]  In addition, there is another intergovernmental agreement model that incorporates FFI’s direct reporting to the United States. The Model II reflects a framework that the United States is working with Japan and Switzerland. However, there is not a signed agreement yet under Model II.

The Department of Treasury clearly abandoned or set aside its unilateral approach to implement the FATCA by negotiating bilateral agreements with a number of countries.[3] By all means, the FATCA could have been viewed as a nonsense U.S. law encroaching on other countries sovereignty.  Through international reciprocity, however, the FATCA seems to find a legal basis. It is still interesting to see though, how the FATCA will be implemented against FFIs in countries without bilateral agreements with the United States.

[1] Hiring Incentives to Restore Employment Act signed into law on March 18, 2010

[2] The informaiton is available at http://www.treasury.gov/resource-center/tax-policy/treaties/Pages/FATCA.aspx

[3] U.S. Engaging with More than 50 Jurisdictions to Curtail Offshore Tax Evasion November 8, 2012 available at http://www.treasury.gov/press-center/press-releases/Pages/tg1759.aspx

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Road Map to FBAR compliance

7/19/2013

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There are many routes that you can take to your destination. If the destination is a common one, you would expect a common road map showing the ideal route. Even though the Foreign Bank Account and Financial Accounts Reporting (“FBAR”) requirement has been around for a while, it appears that we still haven’t found a decent road map for taxpayers with offshore account issues.

This is partially because the previous Offshore Voluntary Disclosure Programs (OVDP) did not embrace the wide variety of situations. This was especially true for international taxpayers. In many cases, international taxpayers have a reporting obligation solely due to their United States green card or citizenship by birth, when they were, in fact, working, living, or paying taxes entirely in other countries.

Would these taxpayers be willing to take the OVDP and pay harsh penalties for mistakenly failing to file the FBAR, even when they had no intention of avoiding taxes and when the FBAR penalty truly targets U.S. tax dodgers?

Over the past years, the Internal Revenue Service (“IRS”) has responded to this frustration over the one-size-fits-all nature of the OVDP. Accordingly, taxpayers now have more options to achieve the FBAR compliance status. To give you an introduction to these options, let me outline a simple road map.

  1. Offshore Voluntary Disclosure Program (“OVDP”). As introduced in the previous blog post, the 2012 OVDP is an open end program with a penalty rate of 27.5% of the maximum account balance. Regardless of the increased penalty rate, the OVDP may still be the best option for those who made voluntary and intentional violation of their known legal duty of FBAR compliance.[1]

  2.  Opt-out to Standard Audit Process. The IRS is flexible enough to allow taxpayers in the OVDP to opt out of the program.[2] By doing so, taxpayers can ask the IRS to handle their cases under standard audit processes. When taxpayers are already in the OVDP and find that the OVDP penalty is not appropriate for their situation, opting out may be an appropriate choice.

  3. Streamlined Filing Compliance Procedures. Effective as of September 1, 2012, international taxpayers with low compliance risk may file delinquent tax returns and FBARs without concern of serious penalties. The eligibility and compliance risk in the procedure has to be carefully reviewed, as they are quite narrowly defined.[3]

  4. Delinquent Filing Procedures. Taxpayers who properly reported and paid taxes on all their taxable income in prior years can now file the delinquent FBAR or delinquent information returns.[4] Once taxpayers file delinquent FBAR or informational returns such as Forms 5471 or 3520, the IRS will not impose a penalty for failing to file.

  5. Quiet Disclosure to the OVDP. Some taxpayers did so-called quiet disclosures by filing amended returns and paying any related tax and interest for previously unreported offshore incomes without notifying the IRS. The taxpayers who made quiet disclosures are also eligible to participate in OVDP. The IRS strongly encourages the taxpayers who made quiet disclosures to come forward under the OVDP to avoid harsher penalties and/or possible criminal conviction.[5]

If your case fits squarely into one of these five options, then take it and resolve your offshore account issues once and for all. However, if your case falls in the gray area, then it would be safer to consult with your legal counsel.

What you are dealing with here will be more than mere numbers, and you will need good legal advice to help you to assess relevant facts and circumstances to infer your intent objectively.

[1] IRM 4.26.16.4.5.3

[2] Offshore Voluntary Disclosure Program Frequently Asked Questions and Answers #51, 51.1 and 51.2 (June 26, 2012).

[3] Instruction available at http://www.irs.gov/uac/Instructions-for-New-Streamlined-Filing-Compliance-Procedures-for-Non-Resident-Non-Filer-US-Taxpayers

[4] Offshore Voluntary Disclosure Program Frequently Asked Questions and Answers #17 (June 26, 2012).

[5] Ibid  #16.


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The Two Year Rule for J Visa Holders: Qualifying for Treaty Based Tax Exemptions

7/19/2013

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If you are a student, teacher or researcher invited by an accredited U.S. educational institution or university to teach or engage in research, you have probably heard about the Tax Treaty provision exempting tax on your research or teaching income for typically two years. In fact, nonresident alien students, teachers, or researchers from countries that have income tax treaties with the United States have often benefited from this provision.

The most common issue that arises from this provision is the ambiguous condition of duration stipulated in the Tax Treaty. For example, Article 20 of the U.S. Korea Tax Treaty exempts the invitee’s income from teaching or research at the inviting organization from tax, under the condition that the invitee comes to the United States for the purpose of teaching or research “for a period not expected to exceed 2 years.” Many other Tax Treaties with this provision don’t clarify whether this is the invited researcher’s expectation or the inviting organization.

Due to this ambiguity, the inviting organizations often depend on administrative evidence to determine the length of the invitee's intended stay. For example, they could decline to respect the tax treaty when the Exchange Visitor Certificate (DS-2019) shows a Visa expiration date after the two or three year limit that the relevant tax treaty requires. They issue a W-2 instead of a 1042S to the invitee and withhold income taxes from their income.

Many J Visa holders express their frustration at this kind of process, as oftentimes their expected stay was truly within the required duration under the Tax Treaty. In fact, there are plenty of possibilities that they actually planned or expected to stay was within the period that the relevant treaty required, even when the DS-2019 no longer allowed an extended stay.

The Tax Court recently made it clear that the Visa expiration date alone cannot be enough evidence to prove the Visa holder’s expectation of the two or three year requirement stipulated in the Tax Treaty.[1] In Santos v. Commissioner, a J Visa invitee argued that she could not possibly expect to stay in the United States more than two years when her Visa was not permanent and was not guaranteed valid after the two years, and her employment contract was for one year. Her argument was rejected by the Court. The Court considered all of the relevant facts and circumstances to reach “objective” determination of whether the invitee came to the United States with the intent of staying for only 2 years, and concluded that the expectation was actually more than two years.

According to this case, the expectation of duration of stay does not belonging to one party. It is shared, rather, by both parties involved- the inviting organization and the invitee. Any single or particular factor cannot prove or disprove this expectation by itself.

If you want to find out whether you are eligible for the Treaty based tax exemption, it is ideal to consult a legal professional to consider all relevant facts and circumstances in the historical context of the exchange program, including similar cases with situated individuals within your current exchange program.

[1] Santos v.Commissioner of Internal Revenue Service (35 T.C. No. 22).

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Despicable Doubles

7/19/2013

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The adjective “double” seems to carry a negative connotation. For example, double dipping, a double chin, and double playing can all ruin your day.

Amongst all these despicable doubles, I would say that double taxation is by far the worst. As an immigrant to the United States, you may understand the serious consequences of  double taxation.  Let’s say that you are a green card holder in the United States and have earned your income in a different country during the same tax year. You already paid taxes to the country where you earned your income. Do you have to pay taxes in both countries? In another words, are you subject to double taxation?

The general answer to this question is no. Many countries try to avoid double taxation by signing a bilateral agreement with one another. This agreement, often referred to as a tax treaty, usually allows a taxpayer to pay income tax only in the country where the income was sourced. If you are from a country that signed a tax treaty with the United States, you may be able to take advantage of the bilateral agreement for your federal income tax purposes.

Even without a tax treaty, you may still be able to claim the tax amount that you paid to a foreign country either as foreign tax credit or as an itemized deduction to reduce your taxable income. The application procedure may seem a little complicated, but they are fair in that there is  no surprise in the final tax due.

In my previous post, I briefly explained that concepts in federal taxation are not always applicable to state tax reporting. Even though states were inspired and influenced by federal tax laws, their approach is usually unique in reflecting their own situation. The issue of double taxation is no exception.

For example, several states, including Massachusetts and New York, allow individuals foreign tax credit only for the payments made to Canada. If you paid tax to any other country, you are out of luck. You will have to include your foreign earned income in your state taxable income, and it will be taxed once again. In a state like California, there is no conspicuous relief for foreign tax payment in either credit or deduction. To make matter worse, the state of California has the highest marginal income tax rate at 10.30%.

Either way, I hope it is now clear why state tax law is just as important as federal tax law to a cross border tax payer.

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Introduction to the U.S. Tax System for Immigrants

7/19/2013

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Whether you arrived in the United States for a short visit or for a permanent stay, you will be faced with navigating your obligations as a U.S. taxpayer. To help you understand the somewhat daunting nature of this task, let me introduce you to some interesting statistics from the National Taxpayer Advocate’s 2010 Annual Report to the Congress.[1]

According to this report, the U.S. tax code has grown so voluminous that it has become a challenge to calculate its volume.[2]  Comprised of 3.8 million words, the printed code equates to about 11,045 single spaced pages in Microsoft Word.[3] The Treasury Department’s income tax regulations, which provide guidance on the meaning of the Internal Revenue Code, stands one foot high in printed form.[4] The U.S. tax code has gone through constant changes throughout its history.  It was amended 4,428 times during the last ten years or on average, one change each day![5]

You may now wonder why the U.S. tax system is growing in complexity. There are a myriad of answers, but I have a relatively straightforward one: “A fair tax system cannot be simple.”

For example, European history is riddled with examples of ludicrous taxes on beards, hats, gloves, and house windows. I am sure we can laugh at the naïve rationale behind these tax laws now. However, how simple and how inaccurate would it be, if we tried to assess a taxpayer’s wealth by the price of his hat, the presence of his beard, or the number of windows in his house? Clearly, in the case of a tax system, simple is not always good.

Hopefully, you feel a little better now. Yes, you have just arrived to the U.S., a country with one of the most complicated tax systems in the world, a tax system that is constantly changing.  Yet, the change is rooted in an effort to reflect principles of fairness and equality. If it still seems like a daunting task, you are not alone. More than 60% of individuals in the United States seek professional help with their taxes.

As a newcomer to the United States, your first decision would be to determine whether you would like to handle your U.S. tax issues independently or seek advice and assistance.  For newly arrived immigrants, expert assistance generally saves time, money and hassles with the U.S. tax authority, the Internal Revenue Service.

That is what we do: help people understand the U.S. tax system and reduce the stress of tax compliance.

[1] Taxpayer Advocate Service is an independent organization within the IRS. Each State has at least one local office of the Service, and National Taxpayer Advocate (“NTA”) is the head office. By law, NTA must submit two annual reports to the Congress. To criticize the complexity of the current U.S. tax Code, the report quantifies the U.S. Tax Code in an interesting way. (http://www.irs.gov/advocate).

[2] National Tax Payer Advocate’s 2010 Annual Report to Congress (http://www.irs.gov/pub/irs-utl/2010arcmsp1_taxreform.pdf).

[3] Ibid.

[4] Ibid.

[5] Ibid.

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Offshore Voluntary Disclosure Program Reopened

7/19/2013

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Are you a U.S. taxpayer with undisclosed offshore accounts or assets?  Have those accounts or assets generated income that you did not report to the Internal Revenue Service? If so, there is currently more than one option for you to come forward.

The Internal Revenue Service announced its reopening of the Offshore Voluntary Disclosure Program (“OVDP”) on Friday, January 9th. The OVDP is an IRS initiative to bring taxpayers that have used foreign accounts or entities to avoid tax into complying with U.S. tax laws. When a taxpayer complies with all the provisions of the OVDP, the IRS accepts the penalty payment at a reduced rate and does not recommend criminal prosecution to the Department of Justice.

The penalty for the program has increased from 25% in 2011 to a current rate of 27.5%. Smaller or qualified account holders will face a reduced penalty rate of 12.5%.  If you  do not come forward and your offshore accounts are ultimately detected by an IRS audit, the penalty can be up to 75% of your income from the audited accounts and 50% of the account balance. In addition, criminal prosecution can inflict up to three to ten years of prison time.

You may think that the program penalties are set too high. Let me give you an illustrative example to compare the two different cases with and without the OVDP program.

Eight years ago, say you deposited one million in offshore income generating accounts, and earned $400,000 in interest. You neither reported the existence of the accounts nor paid tax on the income from the accounts.

If you participate in the OVDP program in 2012, you will pay about $600,000, assuming the highest income tax rate. The amount includes an income tax of $140,000 ($400,000 x 35%), accuracy related penalty costs of $28,000 ($140,000 x 20%), program penalties of $385,000 ($1,400,000 x 27.5% = $385,000), and interests on unpaid tax dues. However, if the IRS independently detects your offshore accounts and found your tax avoidance, over 4.5 million dollars of tax, penalties, and interest may be assessed.[1] That’s right: the payment may be 7.5 times more without the OVDP program.

The United States has never made an effort to regulate tax avoidance through offshore accounts. Since 2009, when the program was initially launched, the OVDP has expanded its covered periods and increased the penalties over the years. As current IRS Commissioner, Doug Shulman has stated, their effort is “gaining its momentum internationally” through bilateral tax treaties, agreements, and active lawsuits.

This is why you should consider taking advantage of the OVDP program in 2012, if you have yet undisclosed offshore accounts.

[1] See the IRS website comparing the payment dues under the two different scenarios with or without OVDP program participation at; http://www.irs.gov/businesses/international/article/0,,id=235699,00.html.

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Pick Your Poison: Comparing International Income Tax Rates

7/19/2013

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If you are like any other tax payer, you probably tried, at least once, to compare two  tax systems by looking at the  income tax rate. In 2010,  the highest marginal tax rate was in the United Kingdom at 50% , while  Canada’s highest rate was 29%, and the United States was somewhere in the middle at 35%. So, you may think it would be best to live in Canada to save on your taxes.[1] In fact, this is quite misleading to compare the top marginal income tax rates of different countries.

There are several fundamentally different ways a country may structure income taxes. Some could have a flat rate;  some could have different exemption or deduction rules for the threshold amount for the marginal tax rate; some could additionally assessed tax on the same income.   As such, it is tough to meaningfully compare tax systems based on rates alone.

The Organization for Economic Co-operation and Development (OECD) provides the All-in average personal tax rate data on wages, a good resource for individuals who want to compare their taxes on their earned income.[2]  For example, the All-in tax rate for the U.S. single taxpayer’s wage was 22.9% in 2010. The rate for the sole-earner married with two children was 8.2%. The U.S. tax rate was ranked in the middle of the OECD member countries for the single tax payer’s wage. For the sole-earner family with two children category, it was the fourth lowest rate.

If you are not a wage earner, you might be interested in the GDP vs. Tax ratio. OECD compares its member countries’ tax revenue with their gross domestic product (“GDP”) every year. The ratio shows the effective tax burden or rate assessed on each country’s domestic economic activity. According to this report, the U.S. tax revenues was 24.8% of its GDP in 2010. This was the third lowest rate among 34 OECD countries.[3]

Even these statistics are not enough to paint a complete picture of what your tax situation would be in these countries. Until you collect all the relevant information and run some numbers under each country’s tax system, you would not be able to tell which country has a higher tax or tax rate for your individual case. Nevertheless, you can be assured that the U.S. tax rate is generally ranked as one of the modest tax systems compared to other industrialized countries.

[1] OECD Tax Data available at http://www.oecd.org/document/60/0,3746,en_2649_34533_1942460_1_1_1_1,00.html#pir.

[2] OECD developed a model to show effective tax rate on wage by countries including income tax and social security tax paid by employee and employer. To find more detail, please see the article available at http://www.oecd.org/dataoecd/55/11/47813509.pdf

[3] OECD Tax Data available at http://www.oecd.org/document/60/0,3746,en_2649_34533_1942460_1_1_1_1,00.html#pir.

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    Authors


    ​B.J. Kang JD, CPA
    Josh Portman JD, LL.M
    Habeeb Syed JD
    Nora Ji Li LL.M
    Nathaniel S. Johnson

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