Taxpayer Income Tax Returns and Reports of Foreign Bank and Financial Accounts
The IRS is aware that some United States taxpayers living abroad have failed to timely file US federal income tax returns or Reports of Foreign Bank and Financial Accounts (FBARs), Form TD F 90‐22.1. These taxpayers have recently become aware of their filing obligations and now seek to come into compliance with the law. The Service is announcing a new procedure for current non‐residents to file those delinquent returns. This includes dual citizens who have not filed US income tax and/or required information returns. This procedure will go into effect on Sept. 1, 2012.
Taxpayers utilizing the new procedure will be required to file delinquent tax returns, with appropriate related information returns, for the past three years and to file delinquent FBARs for the past six years. All submissions will be reviewed. The intensity of review will vary according to the level of compliance risk presented by the submission. For those taxpayers presenting low compliance risk, the review will be expedited and the IRS will not assert penalties or pursue follow‐up actions.
Tax, interest and penalties, if appropriate, will be imposed in accordance with US federal tax laws based on a review of the submission.
Compliance risk determination: The IRS will determine the level of compliance risk presented by the submission based on certain information provided on the returns filed, and on certain additional information required as part of the submission. Low risk will be predicated on simple returns with little or no US tax due. Absent high risk factors, if the submitted returns and application show less than $1,500 in tax due in each of the years, they will be treated as low risk. In general, the risk level will rise as the income and assets of the taxpayer rise, if there are indications of sophisticated tax planning or avoidance, or if there is material economic activity in the US. Additional risk factors include any history of noncompliance with US tax law and the amount and type of US source income.
What is required: Taxpayers wishing to use the new procedure will be required to submit: (1) delinquent tax returns, with appropriate related information returns, for the past three years, (2) delinquent FBARs for the past six years, and (3) any additional information regarding compliance risk factors required by future instructions. Payment of any federal tax and interest due must accompany the submission.
Additional information regarding the specific factors the IRS will use to assess the level of compliance risk, how information regarding those factors should be presented in the submission, and where submissions should be sent will be released prior to the effective date.
Caution: Taxpayers who are concerned about the risk of criminal prosecution should be advised that this new procedure does not provide protection from criminal prosecution if the IRS and Department of Justice determine that the taxpayer’s particular circumstances warrant such prosecution. Taxpayers concerned about criminal prosecution because of their particular circumstances should be aware of and consult their legal advisers about the Offshore Voluntary Disclosure Program (OVDP), announced on January 9, 2012, which offers another means by which taxpayers with undisclosed offshore accounts may become compliant. It should be noted, however, that once a taxpayer makes a submission under the new procedure described in this document, OVDP is no longer available. Taxpayers who are ineligible to participate in OVDP are also ineligible to participate in this procedure.
Please do not hesitate to contact a member of our team of professional advisors if you have additional questions or need assistance with compliance under these procedures.
The Health Care Act
On Thursday, June 28, 2012 the Supreme Court legitimized the Patient Protection and Affordable care Act (PPACA). The Court concluded that the mandate was a valid exercise of the Constitution’s tax clause which provides Congress the authority to tax. Individuals with household income in excess of $250,000 (married filing joint) or $200,000 (single) will see an increase in the total amount of taxes that they will owe. Some of the notable increases effective 1/1/2013 (unless otherwise noted) based on these threshold amounts are as follows:
- 0.9% higher Medicare taxes on wages – The current Medicare tax is at 2.9% with employees and employers each paying half or 1.45%. Employees will be paying 1.45% on earned income up to the threshold amounts indicated above and 2.35% on income in excess of that amount.
- Medicare payroll tax extended to investments – A new 3.8% tax will be imposed on net investment income in excess of the threshold amount. Investment income for purposes of this surtax is interest, dividends, net capital gains, annuities, rents, royalties, and passive activity income. The surtax is not imposed on distributions from IRAs or income derived from trade or business activities. Trusts with net investment income in excess of $11,350 will also be subject to this new tax.
Other changes under the PPACA are as follows:
- Penalty for not purchasing health insurance – In 2014, individuals will face a penalty of up to 1% of AGI if they do not purchase health insurance. This penalty will go up in 2015 to 2.0% and to 2.5% every year thereafter.
- Increase in penalties on nonqualified distributions from HSA’s and Archers MSA’s – Effective for distributions made after 12/31/2010, the penalty is increased to 20% from 10% for HSA’s and to 20% from 15% for MSA’s.
- Excise tax on indoor tanning services – Effective 7/1/2010 consumers of these services will pay an excise tax of 10%.
- Limit on flexible spending accounts (FSAs) – Limit is decreased from an allowance of $5,000 to $2,500 for pretax amount to pay for uninsured qualified expenses. The definition of qualified expenses has also been modified to exclude more items such as over the counter medications.
- Floor on medical expenses deduction is raised from 7.5% of adjusted gross income to 10%. – The new floor will remain unchanged until 2016 for individuals 65 or older and their spouses.
Sunset of the Bush Era Taxes
The Bush era tax changes are due to sunset at the end of 2012. In 2013, barring new legislation, pre-Bush tax laws go back into effect. Some of the notable potential changes are as follows:
- Changes to Tax Rates – The highest ordinary income rate goes from 35% to 39.6%. Long-term capital gain rate goes from 15% to 20% and qualified dividend rate goes from 15% to a potential maximum of 39.6%.
- Return of the Stealth Tax – Taxpayers with income in excess of certain threshold amounts will have their Itemized deductions reduced by the lesser of 3% of the excess income or 80% of the total itemized deductions. This would have the effect of increasing the top rate from 39.6% to 40.8%.
- Estate, GST and Gift Tax – Currently the lifetime exclusion is $5,120,000 per individual. In 2013, this goes down to $1,000,000.
The combination of the health care act and the potential sunset of the Bush tax law may mean that higher taxes are on the horizon. We encourage you to contact your advisor at tonneson + co to take advantage of planning opportunities available in 2012.
Please visit our website at www.tonneson.com to read about other current relevant topics.
View the Email Here
Current federal developments affecting Circular A-133 audits and covered federal awards:
- Updates on the federal awards process, audit requirements
- The OMB Circular A-133 environment
- Current compliance vulnerabilities and related audit procedures
When: Friday, June 29 from 8:30 a.m. to 5:00 p.m.
Where: Sheraton Colonial Boston North Hotel and Conference Center in Wakefield, Massachusetts
Cost: This is a complimentary event with continental breakfast, lunch and refreshments provided
Benefits of Attending
- Information to help you plan your next steps
- Interaction with your peers
- 8 Yellow Book continuing professional education credits
Who Should Attend: Auditors, auditees and executives involved in the administration and/or financial processes of entities receiving federal grants.
About Our Presenter
We are fortunate to have Robert M. Lloyd as the presenter for this seminar. Mr. Lloyd operates a public management and governmental relations consulting practice based in Washington, D.C. He is a leading authority on rules and regulations governing acquisition, administration and audit of federal grants and contracts. Mr. Lloyd is the former director of the Grants Management Advisory Service and, in that capacity; he developed both the Federal Grants Management Handbook and the Single Audit Information Service, widely recognized reference authorities used by auditors and their clients. His consulting clients have included 15 federal agencies as well as governmental units, colleges and universities, associations and other private non-profit organizations and commercial firms located in all 50 states and the District of Columbia. Mr. Lloyd has conducted hundreds of training programs in his areas of expertise. He encourages questions and situation specific discussion so that the sessions meet participant needs and expectations.
RSVP: Please respond by June 22th, 2012 to Marc Bucalo at firstname.lastname@example.org or call Marc at (781) 451-9228 for more information. For additional information about tonneson + co CPAs and advisors, please visit our website at www.tonneson.com. We look forward to seeing you.
John is now a Principal in our tax department and has over twenty years of public accounting experience. He works closely with small to mid-size companies on accounting and tax needs and consults with high net worth families on a wide variety of multi-generational tax issues. John has unique industry insight with food and beverage, law firms, advertising and marketing, home builders, horse farming, and consulting. His experience includes assisting clients throughout their entire business cycle from start-up to acquisition, as well as aiding clients with their succession plans. John has a Bachelor of Science degree in Accounting from Providence College and a Master of Science degree in Taxation from Bentley University. He is a member of the Finance Committee at St. Matthew Church in Southborough, MA and a member of the Massachusetts Society of Certified Public Accountants.