What is FIRPTA?
The disposition of a U.S. real property interest by a foreign seller (the transferor) is subject to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) income tax withholding. Persons purchasing U.S. real property from foreign sellers are required to withhold and remit 15% of the amount realized on the disposition (i.e., typically the sales price).
In Part 1 of this FIRPTA series, we’ll review the steps in determining whether a transaction is covered by FIRPTA.
U.S. tax resident
An individual is a U.S. tax resident if they meet either the below tests.
1. Lawful permanent resident test: An individual who holds a green card is considered a resident for tax purposes for the period of time that he was a lawful permanent resident
2. Substantial presence test: An individual that spends at least 31 days during the current calendar year; and the sum of the total number of US presence days in the current year, plus 1/3 of the total US presence days in the preceding year, plus 1/6 of the US days during the second preceding year equals or exceeds 183 days.
U.S. tax residents must pay income tax on worldwide income. There are exceptions available for individuals who otherwise be considered U.S. tax residents to be treated as non-residents. One such exception is the closer connection exception to the substantial presence test.
How are cryptocurrencies treated for federal tax purposes?
Despite the name, cryptocurrencies are not “currencies” at all for tax purposes. The IRS treats virtual currency as property (i.e., assets). General tax principles applicable to property transactions apply to purchase and sale of virtual currencies.
As an asset, the taxable income from the sale of a cryptocurrency unit is determined by subtracting the sales price minus the basis.
If purchased, the basis is the cost at with the units were purchased. If received as payment for goods or services, the basis is the fair market value of the virtual currency in U.S. dollars as of the date of receipt.
If mined, then when a taxpayer successfully “mines” virtual currency, the fair market value of the virtual currency as of the date of receipt is includible in gross income.
A recent decision in an FBAR case (U.S. v. Colliot) in the Western District of Texas might be huge win for taxpayers who have been incorrectly assessed FBAR civil penalties under 31 U.S. Code 5321(a)(5)(C).
In December 2016, the Internal Revenue Service (IRS) initiated a lawsuit to reduce to judgment outstanding civil penalties assessed against Colliot….The penalties were assessed for Colliot’s repeated and willful failures to timely file Form TD F 90-22.1, entitled “Report of Foreign Bank and Financial Accounts” and commonly referred to as an “FBAR,” from 2007 to 2010…For 2007, the IRS assessed penalties of $548,773 for four separate FBAR violations.
Defendant filed a motion for summary judgment arguing that while 31 U.S. Code 5321(a)(5)(C) provides a maximum penalty of the greater of (i) $100,000 or (ii) 50% of the undisclosed foreign accounts, the related regulation, 31 C.F.R. § 103.57 sets a lower ceiling. That regulation allows the assessment of a maximum penalty of the greater of (i) the balance in the account (not to exceed $100,000) or (ii) $25,000.
The IRS has been increasingly auditing taxpayers who’ve claimed the foreign earned income exclusion (FEIE). It was identified as a compliance campaign by IRS LB&I last year (link).
It’s easy to see why the IRS would audit this issue. A qualifying individual may exclude up to $104,100 (for 2018) of foreign earned income from U.S. taxation, plus a housing exclusion. In a typical 3 year audit, an adjustment favorable to the IRS could lead to additional taxes (plus penalties and interest) on more than $300,000 of incorrectly-excluded income.
Sometimes FEIE is claimed along with foreign tax credits (although scaled down). Likely the taxpayers with the highest audit potential are those that rotated in foreign countries with no income tax since there would be no foreign tax credits to claim in lieu of the FEIE. Most notably are contractors working in Middle Eastern countries such as Saudi Arabia and UAE. Short-term rotators generally do not qualify for the FEIE – although a series of 1 year rotations may qualify (see Linde v. CIR, T.C. Memo 2017-180).
Earlier this year the IRS announced that it would be ending the offshore voluntary disclosure program on September 28, 2018. There are signs that the the program could be replaced by a new program. After the announcement, the IRS requested comments from the public for its federal register on the following topics pertaining to the OVDP (link):
- whether the collection of information is necessary for the proper performance of the functions of the agency, including whether the information shall have practical utility;
- the accuracy of the agency’s estimate of the burden of the collection of information;
- ways to enhance the quality, utility, and clarity of the information to be collected;
- ways to minimize the burden of the collection of information on respondents, including through the use of automated collection techniques or other forms of information technology; and
- estimates of capital or start-up costs and costs of operation, maintenance, and purchase of services to provide information.
The U.S. Supreme Court on Monday declined to review a Ninth Circuit decision imposing a $1.1 million FBAR penalty on a taxpayer. The Internal Revenue Service assessed the penalty after finding the taxpayer failed to report assets exceeding $1 million in a Swiss bank account.
The taxpayer argued the amount of the assessment violated the Eighth Amendment protection against excessive fines and said the IRS improperly obtained nontax information, such as the existence of the foreign account, through the Swiss-U.S. tax treaty.
Below are details from the appellate history in United States v. Bussell.
The IRS released their yearly Dirty Dozen tax scams for 2018. Offshore tax cheating remains on its list this year, despite the large number of taxpayers who have voluntarily come forward since the offshore voluntary disclosure program was implemented. Here’s are some figures from the IRS’ offshore compliance efforts:
- There have been more than 56,400 disclosures and the IRS has collected more than $11.1 billion from the Offshore Voluntary Disclosure Program (OVDP) since it opened in 2009.
- In addition, another 65,000 taxpayers have made use of separate streamlined procedures to correct prior non-willful omissions and meet their federal tax obligations.
- The IRS conducted thousands of offshore-related civil audits that resulted in the payment of tens of millions of dollars in unpaid taxes. The IRS has also pursued criminal charges leading to billions of dollars in criminal fines and restitutions.
Source: IR-2018-62, March 19, 2018.
The IRS announced recently that it is ending the OVDP program which has been in existence since 2009. Here are more details from the announcement.
WASHINGTON – The Internal Revenue Service today announced it will begin to ramp down the 2014 Offshore Voluntary Disclosure Program (OVDP) and close the program on Sept. 28, 2018. By alerting taxpayers now, the IRS intends that any U.S. taxpayers with undisclosed foreign financial assets have time to use the OVDP before the program closes.
“Taxpayers have had several years to come into compliance with U.S. tax laws under this program,” said Acting IRS Commissioner David Kautter. “All along, we have been clear that we would close the program at the appropriate time, and we have reached that point. Those who still wish to come forward have time to do so.”
IRC 6038 Penalties in Dewees v. United States
Dewees v. United States, 16-cv-01579 (D.C. 2017) is a difficult case. The IRS appears to have been unusually tough on this taxpayer.
Dewees is a U.S. citizen living in Canada, where he operates a consulting business. Because the business is incorporated abroad, Dewees was required to furnish certain annual information about the company to the IRS. Unfortunately for Dewees, he neglected to do so for over a decade.
U.S. citizens who hold controlling interests in foreign corporations must annually file IRS Form 5471, which discloses certain ownership and financial information about the corporation. In addition, U.S. citizens living abroad must disclose holdings in foreign bank accounts over certain thresholds by filing a Report of Foreign Bank and Financial Accounts (“FBAR”).