IRS Offers Relief Penalties For Deferred Offshore Company Income Late Tax Payment

IRS Offers Relief Penalties For Deferred Offshore Company Income Late Tax Payment

The IRS will provide relief from late-payment penalties. Sec. 965 Treatment of deferred foreign income upon transition to participation exemption system of taxation.

Sec. 965 required some taxpayers to pay a transition tax on their 2017 tax returns on untaxed foreign earnings of specified corporations as though those earnings had occurred within the United States. Sec. 965 affects U.S. shareholders and applies to the last tax year of specified foreign companies beginning before January 1, 2018. The amount that U.S. shareholders must include in income is related to the foreign company’s fiscal year ends.

Estimated Tax Penalty

The first form of relief the IRS offers from estimated tax penalties is for taxpayers that made a Sec. 965(h) election for 2017, had 2017 income tax returns that showed overpayment but did not include the taxpayer’s total net tax liability under Sec. 965. In addition, the taxpayer improperly tried to apply calculated overpayments from 2017 returns to their 2018 estimated tax. This relief only applies if the taxpayer made all required estimated tax returns before the due date for the second estimated tax installment. This second installment was June 15, 2018 for calendar-year taxpayers and the taxpayer must have satisfied the underpayment of the first required tax installment for 2018 and the full amount of the second tax installment. This relief only applies to taxpayers whose first installment for 2018 was due on or before April 18, 2018.

If a taxpayer qualified for the relief described above and has received an addition to tax for a Sec. 6654 or 6655 estimated tax underpayment from the IRS, they should request an abatement of the addition to tax through contacting the IRS office that sent the notice.

Failure To Make Installment Payment

There are two other forms of relief that are offered to individual taxpayers. The first form of relief applies to individual taxpayers who elected to pay Sec. 965 net tax liabilities in eight installment payments but were unable to make the first of the eight payments by April 18, 2018. The IRS will waive the late-payment penalty for these taxpayers if the installment is paid in full by April 15, 2019.This relief applies strictly to individual taxpayers with a tax liability under $1 million. Taxpayers will still pay interest on late payments, but for certain individuals who live and work outside of the U.S., a later payment of June 17, 2019 is applicable. Without this relief, the remaining eight installment payments become due immediately for taxpayers who failed to make the first year’s payment.

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How to plan for IRS tax relief

Late Elections

Individual taxpayers who did not elect to pay the transition tax in eight installments under Sec. 965 (h) when filing in 2017 can receive relief. By filing a Form 1040-X (Amended U.S. Individual Income Tax Return), on or before the due date of the individual’s 2017 return, those taxpayers can still make an election. This filing will also take into account additional time granted through any extension requests made by the individual taxpayer.

AICPA Letters

On April 4, 2018 and April 19, 2018, the AICPA submitted comment letters to the IRS seeking clarity regarding previous FAQs related to the above issues. These letters also sought more information on relief for some taxpayers subject to this transition tax. Although the newly released penalty and other relief answers many questions brought to the surface by the AICPA in the April 4 letter, Jonathan Horn, Senior Manager for AICPA Tax Policy and Advocacy, stated, “the IRS actions to date fail to mitigate the detrimental impact on taxpayers raised in the AICPA’s letter of April 19.”

How to Deal with IRS Debt for Offshore Investors

If you fail to submit your tax return as well as FBAR, reporting your offshore banking accounts, most likely you will find yourself in trouble with the IRS and will trigger its action for collection. It is important to get yourself familiar with the process of IRS debt collection and some of the possible solutions to it.

Check Our IRS Tax Relief Service To Start Tax Debt Resolution Strategy

What could happen?

In short, the IRS has powers to freeze and take your assets to settle a debt. This means that:

  • Your U.S. bank account can be levied.
  • Your foreign bank account with a branch in the U.S. can be levied.
  • Your real estate in the U.S. can be seized.
  • Your real estate in other countries that have signed the MCAR treaty can be seized. Those are:
    • France
    • Denmark
    • Canada
    • Netherlands
    • Sweden
  • Your paycheck can be levied if you work in the U.S.
  • Your paycheck can be levied if you work for a U.S. company abroad.
  • You can be prosecuted for criminal charges if you refuse to pay your taxes.

When the IRS makes their decision on the amount of taxes you owe they will send you 4 letters that demand payment. If you cooperate there are different IRS debt relief programs that you can sign up for.

What are your options?

If you have found yourself in debt, there are two main IRS debt relief programs you can use – offer in compromise and installment agreement.

  • What is offer in compromise
    • You are eligible if you can prove you will be unable to settle the IRS debt over the collection period, which is 10 years.
    • You will pay less than the original sum you owe.
    • You must pay 20% deposit of the agreed settlement.
    • You can pay in full or over a period of a few months.
  • What are installment agreement
    • You can make small payments every month over a maximum period of 10 years.
    • IRS will agree to stop debt collection activities.
    • It’s fairly easy to get approved for this IRS debt relief program.
    • You will pay a late payment penalty charge and interest on the unpaid amount, which is roughly 10% a year.

How to recognize scammers?

Don’t trust people who promise you unbelievably good deals for IRS debt settlement, because that’s exactly what they are – unreal. You would probably have to pay a thick fee for them to ‘get the job done’ but at the end, the most likely scenario is that you will end up with a rejection for Offer in Compromise.

FAS CPA & Consultants will never mislead you and trick you into paying for a service that is not going to help you deal with your IRS debt. However, we can provide reliable and specifically tailored to your unique situation tax advice, so call us today!

How to recognize you need help?

In certain situations, you will need the professional help of a tax attorney or a CPA. Here are some of the cases:

  • If you owe more than $24,000 and can’t afford to pay at least $500 a month.
  • If you owe more than $100,000.
  • If you think you may make mistakes in your filing documents.

How Single Member LLC With Foreign Owner Must Report To The IRS

LLCs or limited liability companies with a single member have disregarded entities for tax purposes. Under the new IRS regulations, LLCs with a single owner who is not a U.S. citizen will report to the IRS the same as corporations. Treating single member LLCs with a foreing owner as corporations will oblige to keep records and penalties in case of no compliance under section 6038A,

Under section 6038A IRC, corporations with a 25% foreign ownership are obligated to comply with these requirements. Starting January 1, 2017, single-member LLCs are also under the same obligation.

This new regulation comes as a result of the use of LLCs from foreign investors to buy real estate, sometimes not even rented, escaping the reporting requirement, parking determined amounts of cash using LLCs as a money-laundering vehicle or even to hide assets from foreign tax authorities in conjunction with the formation of a Grantor Trust, given the lack of disclosure from single-member LLCs entities. Foreign real estate buyers to avoid probate, use offshore trusts or companies that own the assets via a fully owned LLCs.

New Reporting Requirements:

  1. File form 5472.
  2. Keep records of transactions with related parties.
  3. Obtain a Tax ID or EIN.
  4. Filing is an obligation even if it’s a foreign corporation and reporting form 5472 or 1120-FSC
  5. Inform Reportable Transactions:
    • Property sales,
    • Licenses,
    • Leases,
    • Loans,
    • Assignments and remunerated services,
    • Any amount paid or received in connection with the formation, dissolution, acquisition, and disposition of the entity,
    • Funding the LLC, whether by loan or contribution.

This new regulation came after the recent tax case of the Wylys fined with $1.1 Billion.

IRS Auditors Are Watching Companies That Owe Offshore Profit Tax

IRS auditors are keeping tabs on companies that have outstanding taxes on overseas profits and repatriation payments – their auditors are watching, they say.

Companies can be tempted to reduce their foreign earnings to reduce their taxes and there has been some abuse in this field in the past according to IRS insiders. The IRS posted this warning on their website at the end of October 2019.

Repatriation Tax Payments?
Levies that companies have to pay on their accumulated offshore earnings.

In terms of the TCJA of 2017, US-based companies now have to pay tax on the trillions of dollars in profits held overseas since 1986 at a once-off rate of 15.5% on cash and 8% on non-liquid assets, which can be paid over eight years.

Before the TCJA of 2017, companies were not taxed on overseas earnings that were not brought back to the US, but they paid 35% when bringing it back to the US. The 2017 TCJA reduced the corporate tax rate to 21% and overhauled US tax rules

The IRS indicated that audits to review taxes on offshore profits might expand to any changes made to tax strategy after the 2017 law. According to the IRS website, returns will also be risked and examined for further material issues related to corporate tax planning after the publication of Code Sec. 965, which regulates the repatriation of taxes.

According to the Joint Committee on Taxation, the 15.5% levy will generate tax revenue of more than $338.8 billion over eight years.

Readers should note that this article is only intended to convey general information on these issues and that FAS CPA & Consultants (FAS) in no way intends for the contents of this article to be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. This article cannot serve as a substitute for such professional services or advice. Any decision or action that may affect the reader’s business should not rely solely on the contents of this article, but should rather be consulted on with a qualified professional adviser. FAS shall not be responsible for any loss sustained by any person who relies on this presentation. This article is subject to change at any time and for any reason.

If you are currently dealing with IRS debt, be sure to contact us and discuss which debt resolution option would be most beneficial for your present situation and future goals and opportunities.

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Gala Cedeño

Thanks to FAS & CPA Consultants and Fulton Abraham Sanchez, CPA, I was able to resolve a debt of $479,677.71 that I had with the IRS.

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Fulton Abraham Sanchez, CPA

Fulton Abraham Sánchez, CPA I am Certified Public Accountant, specialized in Tax Planning & Offshore Strategies for Real Estate, Hedge/Equity Funds, Fintech, Crypto, Expats, IRS Debt Resolution. You can email me and follow us on Facebook : FAS CPA & Consultants.

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