Although, the current status of the Kurotaki v. The United States of America case stands with the US District Court for the District of Hawaii determination on the government’s motion for summary judgment, the Kurotaki case is an interesting analysis of willfulness and other standards relating to the failure to file an FBAR.  This article recaps the facts of the case and the courts recent determination of whether to grant summary judgment to the government.  

Do you know if you need to file an FBAR? Are you a US Citizen or permanent resident living abroad and confused about your tax liabilities in the US? As this case shows, not filing can result in steep fines, even if they might eventually be forgiven. Get in touch if you need help meeting your filing obligation. 

Facts of the Case

Osamu Kurotaki was born in Japan in 1965 and in 1997 obtained a US Permanent Residence Card of which he held for tax years 2011, 2012 and 2013, which are the years at issue.  Kurotaki resided primarily in Japan and spoke absolutely no English.  Kurotaki had used Tomohiko Kokuso, a certified public accountant who spoke both English and Japanese to prepare his US Individual Income Tax Returns for the applicable tax years and had used Kokuso since 2007.  

The Internal Revenue Service was alerted that Kurotaki had unreported income on his individual income tax returns by the Japanese taxing authorities for tax periods 2008 through 2012.  Upon the IRS’ examination of Kurotaki’s failure to report all income, the IRS determined that Kurotaki had failed to file his FBARs and properly report foreign accounts and/or assets.  The United States assessed Kurotaki $10 Million in civil penalties alleging the failure to file the FBARs was willful for tax years 2011, 2012 and 2013.  Kurotaki paid a portion of the penalty to the IRS for each applicable tax year and then filed his complaint against the United States requesting a refund.  The United States, as defendant filed an answer to Kurotaki’s complaint and counterclaimed to reduce the assessed FBAR penalties to a judgment in favor of the United States.  Additionally, the United States filed a Motion for Summary Judgment in July of 2023 and Kurotaki filed an opposition to the motion in September of 2023.  

Quick Background on Summary Judgment

What is summary judgement? Summary judgment is requested and properly granted when a party believes there is no genuine issue of a material fact and thus the party requesting the motion (the “moving party”) should be entitled to a judgment as a matter of law.  The key terms here are “genuine” and “material.”  Courts have held that an issue is genuine only if or when a sufficient evidentiary basis exists whereby a reasonable fact finder could find for the nonmoving party (Kurotaki in this case).  Further, a dispute is material only if it could impact or affect the outcome of the suit under governing law.  The United States as the moving party would initially bear the burden of proof to show an absence of a “genuine issue of material fact.”  It is important to note that courts view the facts and draws reasonable inferences in the light most favorable to the nonmoving party when considering a motion for summary judgment.  

FBAR Penalties

What are the penalties for failing to file the FBAR?  The Bank Secrecy Act was enacted to fight what was perceived as “serious and widespread use of foreign financial institutions, located in jurisdictions with strict laws of secrecy as to bank activity, for the purpose of violating or evading domestic criminal, tax and regulatory enactments.”  Cal. Bankers Ass’n v. Shultz, 416 U.S. 21, 27, 94 S. Ct. 1494, 39 L. Ed 2d 812 (1974).  It was believed that the use of foreign bank accounts and foreign financial investments had caused the loss of millions of dollars to the United States government in tax revenues.  Thus, the treasury regulations promulgated under the Bank Secrecy Act allow for a civil penalty of $10,000 for each violation for the failure to file an FBAR.  Further, if the failure to file the FBAR is “willful” the penalty is increased to $100,000 or 50% of the value of the account at the time of the violation.  Thus, the penalties for failing to file the FBAR are substantial!  That being said, although the BSA requires the filing of the FBAR, the term “willful” is never defined within the BSA or the treasury regulations.  Therefore, one must look to court determinations and language in terms of determining a definition for willfulness.  In Safeco Ins. Co. of Am. V. Burr, 551 U.S. 45, the Supreme Court provided that, “where willfulness is a statutory condition of civil penalty…. It… cover(s) not only knowing violations of a standard, but reckless ones as well.”  Many other courts have also held that willfulness as it relates to filing or failing to file an FBAR includes both a knowledge and reckless component.  Thus, one could be so reckless in failing to file or disregarding an obvious risk so as to be willful in terms of the penalty. 

The Application of Willfulness in the Kurotaki Case

Kurotaki did not speak English and relied on his CPA to take care of his tax related matters and act as his interpreter.  Kurotaki was provided a tax questionnaire that provided an explanation of the FBAR filing requirement in both Japanese and English, but Kurotaki only read the Japanese version, which when translated into English stated, “U.S. resident taxpayers are required to report their world-wide income from both U.S. and foreign sources.  In addition, taxpayers who have an interest in, are signatories of, or have other authorities over financial accounts in a foreign country, such as bank accounts….. are required to file Form TD F 90-22.1 (FBAR)….”

Kurotaki claimed he did not think the FBAR requirement applied to him because he was not a U.S. resident as he did not reside in the United States and did not know the FBAR filing requirements applied to U.S. green card holders.  Furthermore, Kurotaki believed the FBAR requirement did not apply to him because he had a Japanese passport, he lived or resided in Japan, he worked in Japan etc.  

The Court found that Kurotaki’s understanding of the word “resident” was reasonable and therefore whether applying an objective or subjective standard, there was a genuine issue or material fact as to whether Kurotaki was acting willfully when he failed to file his FBARs.  The Court, in Kurotaki, thus denied the government’s request for summary judgment.

The end-all outcome of the Kurotaki is yet to be determined as of the date of this article but the facts and circumstances led to an interesting analysis of  willfulness in the context of failing to file an FBAR.  

If you have questions or issues related to foreign bank accounts, foreign assets or foreign businesses, you can speak with an international tax attorney at the McGuire Law Firm. Get in touch with us.

Comprehensive Review of Your Rights to a Collection Due Process Hearing Before the IRS

Under certain circumstances and upon the Internal Revenue Service issuing certain collection notices, you have the right to request a Collection Due Process Hearing. Requesting and holding a Collection Due Process Hearing before the IRS Appeals Office can be a very beneficial tool in resolving an outstanding tax liability. The article below provides detailed information relating to a Collection Due Process Hearing.

What is a Collection Due Process Hearing?

A Collection Due Process Hearing is a right afforded to a taxpayer when the IRS has proposed a levy or enforcement action to collect on a tax debt. The hearing allows the taxpayer to work with an impartial appeals officer towards a collection alternative to resolve the debt as opposed to the proposed levy action by the IRS.

When Can a Taxpayer Request a Collection Due Process Hearing?

The most common time a taxpayer has the right to request a Collection Due Process Hearing is upon the IRS issuing a Final Notice of Intent to Levy. A Final Notice of Intent to Levy is also known as Letter 11 (L 11) or Letter 1058 (L 1058). A taxpayer has 30 days from the date on the Final Notice of Intent to Levy to request the hearing.

How Does a Taxpayer Request a Collection Due Process Hearing?

The taxpayer makes the request by filing Form 12153 with the service center or revenue officer who issued the Final Notice of Intent to Levy. Form 12153 is completed with the taxpayer’s general information, the tax periods of which the Final Notice of Intent to Levy was issued upon or included on the notice, the reason the hearing is being requested, and the proposed collection alternative. The hearing request can be faxed and/or mailed to the appropriate party within the IRS.

What Are the Benefits or Potential Benefits of Requesting a Collection Due Process Hearing?

While there are many benefits to requesting a Collection Due Process Hearing, perhaps the biggest or most advantageous benefit is the stay or hold on enforcement action that is afforded the taxpayer when a timely hearing request is filed. When a taxpayer timely requests a collection due process hearing, there is an automatic hold on IRS collection actions such as bank levies, wage garnishments, and other asset seizures. Please note that the automatic stay on enforcement action may not apply when the taxpayer owes 941 employment taxes and the taxpayer is not in compliance with the current quarter. This stays on enforcement, which allows the taxpayer time free of levies and seizures to prepare for the hearing and make a proposal to resolve the outstanding tax liability based upon their current financial circumstances.

Once a Collection Due Process Hearing is Requested, What Can I Expect?

Generally, the taxpayer will receive a notice from the IRS Appeals Office within 30-60 days from requesting the hearing that their hearing request has been received, and an appeals officer will contact the taxpayer once assigned to the case. Thereafter, the taxpayer will receive a notice from the appeals officer assigned calling an initial hearing or conference date. The initial hearing or conference date can be adjusted by the taxpayer, but the taxpayer must contact the appeals officer to reschedule the hearing date. The notice from the appeals officer will generally request additional information the taxpayer wishes to present and produce during the hearing relating to the resolution proposal the taxpayer is proposing. This information could be financial statements and information relating to an installment agreement, an offer in compromise, or perhaps a request that the liabilities be placed in a currently non-collectible status.

What is the Procedure or Process of Working With the IRS Appeals Office?

First, the appeals officer will verify that the IRS has taken all required and legal steps towards a collection of the debt and that the taxpayer has received their proper due process. Further, the appeals officer verifies that they have had no prior involvement with the applicable case or taxpayer and are a true impartial party to the matter. Upon establishing the hearing or conference date, the taxpayer will need to compile the necessary information, documents, and statements to submit to the appeals officer along with their proposal to resolve the tax liability. If the taxpayer was an individual and owed individual income tax, they would draft an individual collection information statement, also known as Form 433A, and compile all of the necessary attachments such as W-2s, income statements for self-employment income, bank statements, current statements for stocks, bonds, 401(k)s, mortgage statements, etc., to verify the income, expenses, and assets stated on the financial statement. If the taxpayer was a business or the applicable individual owned a business, the taxpayer would also need to compile Form 433B, which is a collection information statement for businesses. The taxpayer would use the financial statements and documents to propose an installment agreement or request their liabilities be placed in a non-collectible status. A taxpayer can also request a settlement, known as an offer in compromise, through the hearing process. If a taxpayer requests an offer in compromise through the hearing process, the offer will be submitted by the appeals officer (usually) to the IRS Offer in Compromise Unit, and the appeals officer will maintain the file while the IRS Offer in Compromise Unit makes an initial determination on the offer. If the determination on the offer needs to be appealed to the appeals office and the taxpayer appeals the initial offer determination, the appeals officer will then have control or jurisdiction of the appeal. Inevitably, through the appeals hearing process, the appeals officer will make a determination relating to a resolution of the liabilities.

What Are the Potential Outcomes of Holding a Collection Due Process Hearing?

The outcome or determination issued by the appeals officer through the hearing process may be dictated by the resolution proposed by the taxpayer. If the taxpayer has proposed an installment agreement and the appeals officer and taxpayer agree on the terms and conditions of an installment agreement, the appeals officer will issue a determination that an installment agreement has been reached, and thus, the levy action proposed by the IRS is not sustained. In short, if the taxpayer and appeals officer come to a collection alternative, then the appeals officer will issue their determination stating the agreement that has been reached and that collection action is not sustained. However, if an agreement or resolution cannot be agreed upon with the appeals officer, the determination made by the appeals office will state that the proposed levy action by the IRS is sustained, and thus, the taxpayer is open to enforcement such as levies once the file or case is returned to IRS Collections or the IRS revenue officer.

What if I am Unable to Establish a Formal Agreement Through the Collection Due Process Hearing?

If you cannot come to an agreement with the appeals officer, it does not mean an agreement is not possible. You are still able to enter into an installment agreement or submit an offer in compromise through the IRS Offer Unit, but you would do so outside of the context of the appeals hearing or appeals office. The key would be to work on formalizing or proposing an agreement as quickly as possible after the appeals hearing concludes because, technically, once the matter is back before the IRS Collections Department or the revenue officer, you are subject to enforcement because there is no longer a stay or hold on enforcement.

Comprehensive Review of an IRS Final Notice of Intent to Levy

Receiving any notice from the Internal Revenue Service is enough to make most people’s heart
skip a beat. However, one notice in particular that is issued by the Internal Revenue Service, the
Final Notice of Intent to Levy may strike the most fear and concern in taxpayers and rightfully
so. This article provides detailed information relating to a Final Notice of Intent to Levy and
your rights as a taxpayer.

What is a Final Notice of Intent to Levy?

When a tax liability or tax debt is owed, whether individual income tax or business-related
taxes, the IRS issues a series of notices. The first notices issued by the IRS act more to provide
notice of the liability and request for payment. If the liability is not paid in full or an agreement
reached with the IRS, the IRS will continue to issue notices and the notices increase in severity
eventually leading to the Final Notice of Intent to Levy. The Final Notice of Intent to Levy is the
IRS’ means to provide the taxpayer notice due process and that the government intends to levy
the taxpayer’s property such as bank accounts, wages, sources of income, and even real estate or
other assets if the tax liability is not paid or certain agreements with IRS are not formalized or
proposed. The Final Notice of Intent to Levy issued by the IRS allows the taxpayer 30 days to
make the proper arrangements or proposal to prevent levy or enforcement action. If certain
agreements or proposals are not reached within these 30 days from the issuance of the Final
Notice of Intent to Levy, the taxpayer is then open to levy and enforcement action from the IRS
to collect on the tax debt.

When and How is a Final Notice of Intent to Levy Issued by the IRS?

After the IRS has issued multiple notices regarding the tax liability and the tax liability is not
paid or a proper agreement formalized or proposed with the IRS, the IRS will eventually issue a
Final Notice of Intent to Levy. The timing of issuing the Final Notice of Intent to Levy can
differ depending upon whether the tax liability is with IRS Automated Collections or if the tax
liability has been assigned to an IRS Revenue Officer. If the tax liability is with automated
collections, it may take longer for the Final Notice of Intent to Levy to be issued, and the notice may be
issued from an IRS collection service center. If the tax liability has been assigned to an IRS
Revenue Officer, generally one of the first actions taken by the revenue officer is to issue the
Final Notice of Intent to Levy. While the issuance of the Final Notice of Intent to Levy does not
necessarily mean the revenue officer will immediately levy if they are legally able to, but rather
the IRS wants to have the ability to levy and enforce collection of the tax if necessary and thus
one of the primary reasons the revenue officer will usually issue the notice relatively quickly
once they have been assigned to collect on the tax. In short, the enforcement action available to
the IRS can be used if the revenue officer deems it necessary instead of waiting to find out if the
final notice has not been issued.

What is a Levy Under the Context of a Final Notice of Intent to Levy?

Under this context, a levy is a taking property by the IRS to collect on the underlying tax debt.
This means the IRS takes or seizes your property to satisfy all or a portion of the tax bill. A
common levy for the IRS would be a bank levy or a levy of your wages or income. Under the
context of a bank levy, the IRS will issue a notice of levy to the bank or banks they know or feel
the taxpayer may have a bank account. Upon receipt of the levy notice, the bank is to “freeze” or
hold all of the funds in the bank account or accounts held by that bank up to the amount of the
levy. The bank is to hold these funds for 21 days and then release all of the funds over to the IRS
after the 21 day period unless the bank levy is released or other instructions are provided to the
bank by the IRS. Bank levies can cause problems beyond the taking of the money if the taxpayer
has written checks or other auto payments scheduled as the bank is likely to not honor these
payments and the checks will bounce or payments not go through. The bank levy is generally a
one-time levy, meaning the bank will not continuously hold funds and turn them over to the IRS,
but rather only hold and pay over the funds in the account the day the bank received
and processed the levy. In comparison, a wage levy is generally a continuous levy.
Under the context of a wage levy, the IRS issues a levy notice to your employer and the
employer then withholds a portion (a relatively large portion) of your wages and pays the funds
over the IRS. This wage levy is usually continuous meaning that with each payroll period, your
employer will withhold the levied funds until the levy is either released or the terms of the wage
levy are adjusted by notice from the IRS.

What can be done to Prevent an IRS Levy Once I Have a Received a Final Notice?

Once a taxpayer has received a Final Notice of Intent to Levy from the IRS they are definitely
under the gun to take action to prevent enforcement. Paying the liability in full or establishing a
formal payment installment agreement with the IRS will prevent enforcement such as bank or wage
levies. Formally proposing an offer in compromise that is deemed processable will prevent
levies as well. In addition to the above, the Final Notice of Intent to Levy provides the taxpayer
with what can be a very useful tool of due process, which is the right to request a Collection Due
Process Hearing. The Request for a Collection Due Process Hearing acts as a hold on any
enforcement action on the tax periods included within the Final Notice of Intent to Levy if the
request is filed within 30 days from the date of the Final Notice of Intent to Levy. Upon
requesting a Collection Due Process Hearing, your file or the tax liabilities are sent to the IRS
Appeals Office and a hearing or conference will be scheduled to discuss collection alternatives as
opposed to levies to collect or resolve the tax liability. There is an automatic stay or hold on
enforcement until you have been able to conduct a hearing and communicate with an appeals
officer regarding a resolution to the tax liabilities. If an agreement is reached with the appeals
officer through the hearing, this will act as a hold on enforcement. If an offer in compromise is
submitted through the appeals officer, this will also act as a hold on enforcement until a
determination is reached regarding the offer. If you are unable to reach or propose any collection
alternative with the appeals office that acts a hold on enforcement, the IRS Appeals Office will
issue a determination sustaining the levy action proposed by the IRS and your case will either go
back to general collections or the revenue officer and you will be subject to or “open” to levy and
enforcement, which is not preferred and what you are trying to avoid. It is important to note that
even if you do not request a Collection Due Process Hearing within 30 days from the date of the

final notice, you still have the right to request a hearing called an equivalent hearing with the
appeals office. The biggest difference between the equivalent hearing and collection due process
hearing is that the equivalent hearing does not necessarily act as or guarantee you a hold on
enforcement action, which may be problematic if you request the equivalent hearing and the IRS
moves forward with levy and enforcement action.

Can a Bank Levy or Wage Levy be Released?

The good news is, yes. If the IRS has issued a bank levy or wage levy, you may be able to have
the levy released or partially released. If the IRS has levied your bank account, under certain
circumstances (generally those showing an economic hardship has been created) the IRS can
agree to a full or partial release of the levy. If the IRS agrees to any type of release of the bank
levy, the IRS will issue a notice to the bank either providing for a full levy release or releasing a
portion of the funds the bank is holding pursuant to the bank levy. If the IRS is levying your
wages, the IRS can agree to release the wage levy in full, or the wage levy can be
adjusted/lowered to an amount that you are able to show does not create an economic hardship.

Does the Release or Adjustment of a Levy Mean the IRS Will Not Levy Again?

Not necessarily. If the IRS releases a levy but you fail to fully resolve the tax matter with a
payment agreement or settlement, you could be open to another levy in the future. Generally, if
the IRS is forced to levy again, they may be less likely to release the levy given the prior release
and fact the underlying issues leading to the need to levy have not been resolved.

Receiving a Final Notice of Intent to Levy from the IRS means that you have a tax liability that
needs immediate attention. If you are unable to resolve the tax liability immediately after
receiving the final notice, it is highly recommended you speak with a tax attorney to discuss the
facts and circumstances of your case, your options to resolve the tax matter and the necessary
procedural steps to resolve the matter without enforcement action from the IRS.

Contact The McGuire Law Firm to discuss your tax issues with a tax attorney.

What is the FBAR?

The U.S. government requires individuals to file a document called the Foreign Bank Account Report (FBAR) with the Financial Crimes Enforcement Network (FinCEN). It is designed to ensure that foreign assets and income are correctly reported, helping the Department of Treasury track the activities of U.S. citizens, residents, and businesses and ensure that foreign income is accurately taxed in the United States.

Who Must File an FBAR?

A U.S. person, which includes citizens, residents, corporations, trusts, partnerships, limited liability companies, and estates, must file an FBAR under certain circumstances. This situation occurs when a person in the US has a financial stake in or control over a financial account located outside of the country, and the combined worth of all the foreign accounts is over $10,000 (in US dollars) at any point during the year.

It’s important to note that the foreign financial account does not need to generate income or taxable income for the account to trigger the need to file the FBAR. If the balance of all foreign financial accounts exceeds the $10,000 threshold, each foreign account or asset must be reported, regardless of whether you received income from the foreign account and no matter how small or low the account’s value may be.

FBAR Compliance and Filing

Ensuring compliance with FBAR filing requirements is crucial. The FBAR report must be submitted annually by April 15th for the previous year. In case you miss the due date, you can get an extension until October 15th without having to make a request for it. There’s no need to file for an extension separately for the FBAR.

The FBAR is not filed with your individual tax return. Instead, you file the FBAR electronically through FinCEN’s E-filing system. You may be able to paper file the FBAR, but to do so, you must receive an exemption to E-filing from FinCEN. You are allowed to have a third-party file your FBAR on your behalf.

To properly file your FBAR, you will need the following information:

• The taxpayer’s name, address, date of birth (if an individual), social security or employer identification number
• Name on the foreign account
• Name and address of the foreign bank or financial institution
• Account number or identifying number for the foreign account
• Type of account or foreign asset
• The maximum value in U.S. dollars of the account during the year.

All foreign financial accounts are generally reported on one FBAR, even if the accounts are held only by you or jointly.

While the law does not require any specific record-keeping for the FBAR, it is highly recommended that you keep all of your forms or statements to verify the information stated on the FBAR and the exchange rate you used if you converted foreign currency into U.S. dollars.

Penalties for Non-compliance

Failure to comply with FBAR filing requirements can lead to severe penalties. Both civil and criminal penalties can apply when an FBAR is not timely filed.If you fail to file the FBAR, you may be penalized up to 50% of the account or asset value that was not reported.This means you could lose up to half of the value of your foreign account or asset by not filing the FBAR.

Other Foreign Compliance Forms

If you are reporting foreign assets on the FBAR, you may also have the requirement to report these assets elsewhere. If you have a foreign bank account, there are boxes on Schedule B that may need to be checked. Additionally, you may have income to report on your Schedule B. Other common forms to report foreign assets include Form 8938, Form 3520 or Form 3520A, or Form 5471. The specifics surrounding your foreign asset reporting will dictate the form or forms you need to file and how and where the forms need to be filed.

What If I Have Failed to File FBARs for One Or Multiple Years?

If you have not filed your FBARs and are not already under an investigation by the Department of Treasury, you may be able to file your FBARs and other foreign compliance forms and unreported foreign income through specific programs with a lesser penalty. These programs include the Streamlined Offshore Voluntary Disclosure Program (Streamlined OVDP), and the IRS has a Delinquent International Information Return Submission Program. These programs differ, and weighing your options and potential outcomes with your specific facts and circumstances is essential.

Taxation on Foreign Income from FBAR Accounts or Assets

Foreign income is taxable and would be included on the appropriate form or schedule on your tax return and thus subject to U.S. tax. For example, interest from a foreign bank account would be reported just like interest from a U.S. bank and subject to ordinary income tax.

What If I Have Already Paid Tax To A Foreign Country?

If you paid taxes to a foreign country, you might be eligible for the foreign tax credit. This credit allows you to apply all or part of the tax you have already paid to your total tax bill. Form 1116 is completed to claim the foreign tax credit.

FBAR Updates

As of July 1st, 2013, the electronic version of the FBAR is currently available and must be filed electronically. This is part of FinCEN’s efforts to streamline the filing process and make it more efficient.

In addition, FinCEN has provided some relief to victims of recent natural disasters, allowing them more time to meet their FBAR filing obligations. This is a reminder that the government considers extraordinary circumstances that may affect taxpayers’ ability to file on time.

Conclusion

If you have any questions about whether you have an FBAR filing requirement or have the FBAR filing requirement and have not filed, it is highly recommended that you speak with a tax professional, preferably one specializing in international tax compliance, to determine your compliance requirements and options. FBAR compliance is critical and can lead to hefty civil and criminal penalties.

Form 5471 is an information reporting form the must be filed with a taxpayer tax return when they meet certain ownership amounts of foreign corporations.

Broadly speaking, the form reports who owns the foreign corporation, the current year financial information of the foreign corporation, information related to subpart F and GILTI inclusions (discussed below), and the characterization of earnings impact of the corporation on the U.S. Shareholders.

Who has to file form 5471:

Generally speaking, U.S. Shareholders have to file form 5471. The annual filing requirements depend on how much of the foreign corporation is owned. There are instances where a person who owns no interest in a foreign corporation must file a form 5471, for that discussion, see Category 2 filer below.

Who is a U.S. Shareholder?

A U.S. Shareholder is a U.S. Person (individual, corporation, partnership, trust, estate) who owns 10% or more of the voting rights of a foreign corporation and/or who owns 10% or more of the value of a foreign corporation.

There is a separate rule when the foreign corporation is an insurance company. In that instance, a person will be a U.S. Shareholder if it owns ANY shares of the foreign corporation.

Do all U.S Shareholders have to file a form 5471?

The fast and terrible answer to this question is: it depends.

The form 5471 is required when a person (again individual, corporations, partnership, trust, estate) meets the requirements of one of several categories of filers for form 5471.

The current form 5471 category filers are broken out into the following categories:

• Category 1a, 1b, 1c
  • Dealing with persons who are U.S. Shareholders of foreign corporations who were a Section 965 specified foreign corporation during the tax year including instances of constructive ownership.
• Category 2
  • Dealing with U.S. individuals who are officers or directors of a foreign corporation in a year when a U.S. Person acquires 10% of the foreign corporation or acquires enough shares to exceed the 10% ownership threshold to become a U.S. Shareholder (as defined above).
  • Notably, the director or officer does not have to own any interest in the foreign corporation for the filing obligations to exist and mee the requirements of a Category 2 filer.
• Category 3
  • Dealing with U.S. persons when they acquire or dispose of shares in a foreign corporation such that that person becomes a U.S. Shareholder, stops being a U.S. Shareholder or adds 10% to their current holdings. It also covers when someone owing 10% or more becomes a U.S. person.
• Category 4
  • Dealing with U.S. persons who are in control of a foreign corporation. That means they own, directly, indirectly or constructively 50% or more of the foreign corporation.
• Category 5a, 5b, 5c
  • Dealing with U.S. persons who are U.S. Shareholder of a controlled foreign corporation. This includes certain constructive owners of controlled foreign corporations.

A U.S. person can fall into multiple categories per year.

There is a larger discussion of the category filers in this article (Link to other 5471 article) that also discusses constructive ownership rules.

There are several exceptions to the form filing obligations, so ensure you are taking those into account when making filing determinations.

If you meet one or more category filers, do you have to file every year you own the interest in the foreign corporation?

Not all U.S. Shareholders will need to file a form 5471 every year they are U.S. Shareholders. In any year that you meet the requirements of any of the Category filers, you will likely have a filing obligation if you don’t meet any of the exceptions.

As an example, in year 1 you (a U.S. individual) bought 15% of a foreign corporation. You are the only U.S. person who owns shares in the company. You are not related to any other shareholders. Since you now own more than 10% of the foreign corporation you are a U.S. Shareholder. In year 1 you have a form 5471 filing obligation as a Category 3 filer.

In year 2, you have not bought any more shares, and all the shareholders are the same. In year 2 you do not meet any of the category filer requirements and do not have a form 5471 filing obligation.

In continuation of the above example, if in year 3 you purchase an additional 15% of the foreign corporation (brining your total ownership to 30%) AND two other U.S. persons each bought 15% of the foreign corporation (30% total), you become a Category 1a, 3 and Category 5a filer. Thus, you will have a form 5471 filing obligation in year 3.

If in year 4 none of the facts change and the foreign corporation has three U.S. shareholders owning a collective 60%, the entity is considered a controlled foreign corporation and the form 5471 is required to be filed by U.S. Shareholders.

The important point to remember when owning shares in a foreign corporation is that you must review your holdings and the holdings of other shareholders annually to determine if you have a form 5471 filing requirement.

Why do you have to file form 5471?

The form 5471 is required to be filed as outlined in the U.S. tax code. The information provided allows the IRS to make determinations on a U.S. persons offshore investments and if any income should be included in the taxpayer U.S. tax base.

Broadly speaking, the form 5471 and the requirement to file the 5471 has no direct impact on a U.S. taxpayers taxable income. That being said, the form does require the taxpayer to report their proportionate share of Subpart F income and tested income.

What is Subpart F income and what is the point of computing tested income?

A detailed discussion of Subpart F income and tested income are beyond the scope of the article, but each play a key role with respect to form 5471.

Subpart F income is income earned by the controlled foreign corporation (Category 5a, b, c filing for U.S. Shareholders) that is not able to be deferred from U.S. income inclusions by U.S. shareholders. Very loosely, it is passive types of income and income earned in a company whereby that company hasn’t done any of the work to earn that income. Net earnings and profits of that type is required to be treated as if it were earned by the U.S. shareholders directly and is included in the U.S. shareholder taxable income.  When a controlled foreign corporation has this type of income, it needs to be reported on the form 5471 and allocated appropriately to the U.S. Shareholders. Subpart F income is reported on Schedule I, J, P, and Q of the form 5471.

Tested income is used in computing the U.S. Shareholder amounts of Global Intangible Low Tax Income (GILTI). GITLI is another anti-deferral mechanism that prevents the earnings of a controlled foreign corporation from not being included in U.S. Shareholder taxable income. GILTI broadly treats all income of a controlled foreign corporation as if it were earned by the U.S. Shareholders directly and thus includable in their taxable income. Tested income is computed on Schedule I-1 of the form 5471.

Subpart F and GILTI are complicated topics that deserve their own discussions. There are numerous rules that impact the calculation and requirements of each. Suffice to say, if the entity you own an interest in is a controlled foreign corporation and you are U.S. Shareholder, careful attention must be paid to Subpart F income and GILTI income.

Do you have to file form 5471 if the entity you own is inactive or loses money?

Yes, mere ownership of the entity creates the filing obligation.

How do you file form 5471?

If you meet one of the categories of filers for the form 5471, you will need to complete the sections that are required of that specific category filer and attach it to your timely filed tax return. The form will be considered timely filed if it attached to your tax return which was timely filed including extensions. The form 5471 will need to be substantially complete to be considered timely.

If you fall into multiple category filer status, you need to file just one form 5471 per entity reporting all the information for each category you meet.

What happens if you don’t/didn’t file form 5471 or you file it late?

Failure to file form 5471 is subject to penalty. There is a monetary penalty of $10,000 for failure to file the form 5471. With this form, late filing is considered failure to file and subject to penalty. There is an additional $10,000 penalty for failure to file form 5471 Schedule O as well.

If you have not filed form 5471 and are required to do so you should contact our firm to discuss your options and the application of any penalties. We work with clients on their delinquent filings to assist with preventing or abating the penalty on late filings of form 5471.

Other considerations?

If you have a form 5471 filing obligation you may have other information reporting forms to file as well. Additional filings that may apply could be:

• Foreign Bank Account Reporting (FBAR)
• Form 8938 foreign financial asset reporting
• Form 8865 foreign partnership reporting
• Form 926 contributions to foreign corporations
• Form 8858 foreign branch and disregarded entity reporting
• Form 8992 GILTI reporting
• Form 8621 Passive Foreign Investment Company (PFIC) reporting

Updates on Form 5471

In recent years, there have been some updates to Form 5471 that are worth noting. The IRS has made revisions to the form and its instructions to ensure that they remain current and accurate. These changes are designed to make the form easier to understand and fill out, and to ensure that it accurately reflects the current tax laws and regulations.

One of the key updates is the revision of Form 5471 and its separate Schedules E, G-1, H, I-1, and M in December 2021. The separate Schedules J, P, Q, and R were revised in December 2020, and the separate Schedule O was revised in December 2012. These revisions are part of the IRS’s ongoing efforts to keep the form and its schedules up to date with the latest tax laws and regulations.

Another important update is the requirement to report all information in functional currency in accordance with U.S. generally accepted accounting principles (GAAP). Each amount must also be reported in U.S. dollars translated from functional currency using GAAP translation rules. This change is designed to ensure that all financial information reported on Form 5471 is accurate and consistent.

The IRS has also updated the instructions for Form 5471. These instructions provide detailed guidance on how to fill out the form and its schedules. They include information on who needs to file Form 5471, what information needs to be reported, and how to report it. The instructions also provide examples to help taxpayers understand how to fill out the form correctly.

It’s important to note that these updates are part of the IRS’s ongoing efforts to improve the tax filing process and ensure that all taxpayers are reporting their foreign investments accurately. If you’re a U.S. person with ownership in a foreign corporation, it’s crucial to stay up to date with these changes to ensure that you’re meeting your tax reporting obligations.

Tax-exempt and/or nonprofit organizations may be required to file form 5471. There are several instances where form 5471 would be required. Often, detailed analysis and thorough understanding of the tax rules are required to determine if there is a filing obligation. Failing to file (including late filing) for form is subject to a $10,000 penalty on a per form per year basis. The penalty may be abated if the taxpayer has reasonable cause for the failure to file the form 5471.

Please consult with a qualified professional when making determinations of form 5471 filing obligations. As you might expect, I am such a qualified professional. Please reach out with any form 5471 questions. Please see my contact information below.

When is a tax-exempt and/or nonprofit entity or organization required to file form 5471?

On its face, it seems unlikely that tax-exempt (TE) and/or a nonprofit (NP) entity or organization would ever be required to file form 5471, but there are a number of occasions where the form 5471 is required to be filed by a TE and/or NP entity .

To understand the form 5471 filing requirement, it helps to know who is required to file form 5471? In a very condensed summary, US persons (individuals, corporations, partnerships, trusts) are required to file form 5471 if they own or control certain percentage amounts of a foreign corporation. Specifically, if a US person owns, controls, purchases or disposes of 10% or more of a foreign corporation, there is a strong likelihood of a form 5471 filing obligation at some point in the lifecycle of the investment. US entities or people who own 10% or more of a foreign corporation are considered US Shareholders for definitional purposes of form 5471 filing obligations. For a more thorough discussion on when a form 5471 is required to be filed, please read this discussion.

US TE and NP organizations are generally organized in one of two ways: either as a state corporation or a trust. Both corporations and trusts are subject to the rules for filing form 5471 as they are specifically considered US persons as defined by the Internal Revenue Code (IRC). As such, TE and NP organizations would be considered US persons for purposes of applying the form 5471 filing rules.

There are a couple reasons why a TE and/or NP organization would own shares in a foreign corporation. First, and the most obvious, is the organization has established an entity in foreign country to carry out its mission. For the vast majority of TE and/or NP organizations, this scenario won’t arise, but could be a possibility. Second, the TE and/or NP has invested in a foreign corporation either directly or indirectly through its fund investments. The most likely instance a TE and/or NP organization would have a form 5471 filing obligation arises when that organization has made investments in non-open market vehicles such as hedge fun or private equity fund investments. Hedge fund, private equity fund and special purpose investments can give rise to form 5471 filing obligations depending on how the investment is structured.

Why should a TE and/or NP organization care if had or has a form 5471 filing obligation?

In short, penalties. Failure to file form 5471 may result in a $10,000 penalty per form per year. Additional penalties may apply depending on category filer the shareholder falls into for form 5471. Filing the form 5471 late is considered a failure to file the form and subject to penalty.

For a large organization, the failure to file penalties can add up to a large amount if it is determined the organization has failed to file multiple forms 5471 over several years.

What can be done to prevent the form 5471 penalty?

Timely filing the from 5471 will prevent a penalty. If the 5471 is already delinquent, the organization may be able to avoid the penalty if it has reasonable cause for its failure to file. Note, reasonable cause is ill defined and a fairly subjective standard in the hands of an IRS examiner.

Where does form 5471 get filed?

Generally, the form 5471 is attached to an income tax return. For a TE and/or NP entity, the form 5471 is generally attached to form 990-T, whether or not the organization has any unrelated business taxable income.

How can a TE and/or NP organization tell if they have a form 5471 filing obligation?

The only sure way to tell if the organization has a form 5471 filing obligation is through a thorough analysis of its investments. Often, it is not obvious that an investment has been made in a foreign corporation, but taking the following steps could help make the determination:

• Step 1
  • Analyze each of the investments the TE and/or NP has made to determine if it is a foreign or US formed entity.
• Step 2
  • If the entity is foreign, determine what type of entity it is and if there have been any US choice of entity elections made.
• Step 3
  • If the foreign entity is a corporation for US tax purposes, determine how much of the entity is owned by the organization. This ownership analysis includes determining the percentage owned of value of the foreign corporation and the percentage owned of voting rights of the foreign corporation.
• Step 4
  • If the organization owns between 10% and 50%, determine how much of the entity is owned by other US Shareholders (those owning vote or value of 10% or more). This analysis helps determine if the entity was a controlled foreign corporation while the organization owned its interest.
• Step 5
  • Determine if the entity owns an interest in other foreign entities.
• Step 6
  • If you have owned this investment longer than the current tax year, analyze when the investment was made and make determinations as to whether there was a filing obligation in the past as well.

What is the point of all these steps?

The point of these steps is to gather enough information to determine if there is, or should have been, a form 5471 filing obligation.

Step 1 details:

In step 1, the entire list of the alternative investments made by the organization should be reviewed to determine if the entity is US or foreign. The best way to make that determination is to work through your investment consultant or inquire directly with the investment company.

Step 2 details:

In step 2, determining what type of entity will help direct what US tax forms may be required. With respect to form 5471, the entity in question would be a corporation for US tax purposes. There are a few ways to get an indication of the type of entity, but the best way is to inquire of the fund. Sometimes reliance on common sense will result in the wrong answer. For example, the fund may be organized as a limited partnership in the Cayman Islands. It seems clear the entity is a partnership in the Cayman Islands. For Cayman Islands legal (and tax) purposes, that entity is in fact, a partnership. What can’t be determined just by the name of the entity is if the US owner (current or past) has made a check-the-box election to treat that Cayman Islands partnership as a corporation for US tax purposes. Certain entities are eligible to choose how they will be treated in the US for US income tax purposes, either as an association taxable as a corporation, a partnership, or a disregarded entity. If the owner made the check-the-box election to treat that Cayman Islands partnership as a corporation for US tax purposes, it should be considered a corporation for determining form 5471 filing obligations.

Inquiry to the fund asking specifically about any check-the-box elections is preferred.

Step 3 details:

At this point the form 5471 determinations can start to be made. Understanding the ownership percentages will allow the owner to determine if they are considered a US Shareholder or not. If the TE and/or NP organization is a US Shareholder then at some point a form 5471 should have been filed with respect to that ownership of the foreign corporation. If the TE and/or NP owns more than 50% of the foreign corporation, there is a clear form 5471 filing obligation for the TE or NPF organization.

Step 4 details:

If the TE and/or NP owns between 10% and 50% of the foreign corporation, certain annual form 5471 filing obligations will be required if the foreign corporation is considered a Controlled Foreign Corporation (CFC). A foreign corporation is a CFC when US Shareholders (US people that own 10% or more) own more than 50% of the foreign corporation. Thus, in the instance a TE and/or NP organization is consider a sub-50% US Shareholder of a foreign corporation, it will need to understand if there are other US Shareholder such that the foreign corporation is considered a CFC in order to determine how to file form 5471.

Step 5 details:

In step five, a determination or inquiry should be made to understand if the foreign corporation owned by the TE and/or NP organization owns an interest in other foreign corporations as subsidiary companies. If so, the TE and/or NP organization may be required to file form 5471 for those lower tier entities as the TE and/or NP organization is deemed to own what its investment owns in proportionate share.

Step 6 details:

Step 6 ensures that the TE and/or NP organization either has or doesn’t have delinquent form 5471 filing obligations.

What happens if a TE and/or NP is required to file form 5471?

If the discovery is made for the current tax year filing and the tax return is still timely and not late, then prepare and file the form 5471. That’s an easy thing to say, but the form 5471 is a relatively complicated form and understanding what needs to be completed on the form should be addressed. Generally, it is best to seek professional advice.

If it is determined that the form 5471 filing should have occurred in a prior year, the prior year return should be amended to attach the form 5471. As discussed earlier, late filed form 5471 is subject to penalty. The penalty may be abated if the failure to file was due to reasonable cause. Work with a qualified professional to determine how best to proceed.

Christopher Stroh, J.D. & LL.M (Taxation)

chris@jmtaxlaw.com

720-784-3296

Christopher has spent the majority of his career focused on the international tax implications for businesses, tax-exempt organizations and individuals who engage in some form of cross-border activity, either knowingly or not!  Christopher advises entities and individuals who need help or advice with the US international tax implications of structuring businesses (US or foreign) or has any sort of non-US activity that may require US tax reporting. In addition to planning and consulting on US international tax items, Christopher helps prepare and advise on all manner of US international tax forms.

Our Denver business attorneys are highly skilled and practice various transaction matters. They know how to guide businesses through the complexities of the law effectively. We can assist you with drafting contracts, negotiating deals, and resolving disputes.

We advise on employment agreements, intellectual property issues, commercial leases, real estate transactions, mergers and acquisitions, and general corporate matters. We understand the importance of protecting your interests and strive to educate our clients about their business decisions’ legal requirements.

We offer free initial consultations to discuss your particular situation and determine whether we are the right fit for you. Contact the McGuire Law Firm today to schedule your consultation.

Why You Need a Business Attorney in Denver

When you start a business, there are many things to consider, including how much money you want to spend on legal fees. You might think that hiring a full-time lawyer is the best option. But what if you don’t have enough cash flow to cover those costs? What if you’re starting and don’t know anyone who could recommend someone trustworthy? Or maybe you’ve been running your business for a while now and feel ready to hire a lawyer. Here’s a quick guide about finding and picking a business attorney.

A business lawyer can help you understand what the law says about your particular industry and business model. They are experts in navigating the many complexities involved in running a business. Your business attorney can also help you avoid common pitfalls and challenges, such as tax liabilities and potential lawsuits.

When starting a new business, knowing where you stand legally is essential. This includes ensuring that your business name is protected, that your intellectual property is secure, and that you comply with all state and federal laws.

Once you have been operating your business for a while, a business attorney can assist you in negotiating contracts, resolving disputes, and protecting your interests during mergers and acquisitions.

Your business attorney can also guide you through compliance issues, including establishing internal policies and procedures, developing a risk management plan, and managing third-party vendors.

Determine Why You Need a Business Attorney in Denver

The best time to hire a small business lawyer is before you need one. This way, you’ll know exactly what questions you want to be answered and whether you’re getting good value for your dollar. Here are three reasons startups and small businesses should consider hiring a business attorney in Denver.

Choose the Right Entity Type

Choosing the correct type of business entity is critical because it affects everything about how you run your business. If you choose the wrong form, you could end up paying unnecessary taxes, running afoul of corporate regulations, or even losing out on opportunities to be part of a larger organization.

Drafting Legal Documents

Drafting legal documents such as term sheets and operating agreements requires specialized knowledge. In addition to knowing the ins and outs of the law, you’ll need someone who knows the fine print of drafting contracts.

Navigating Securities Laws

Securities laws are complex and often confusing, especially regarding crowdfunding. Having a small business lawyer on board can make navigating this area much more manageable.

Finding a Business Attorney In Denver

One of the best places to start your research is online. Whether you find a business attorney before you need them or you’re looking for a legal advisor for a specific situation, you can follow a couple of best practices. These include having multiple options to compare, finding numerous lawyers to meet with, and selecting the individual that’s the perfect fit for your business.

If you’re looking for a general business attorney, make sure they specialize in areas relevant to your business. Start with local directories like Yelp or Google. Some attorneys specialize in commercial law, while others focus on intellectual property issues. It’s essential to compare their experience levels, qualifications, fees, and references.

Finally, once you’ve narrowed down your list of candidates, it’s advisable to schedule meetings with each of them. By doing so, you’ll be able to ask questions about their background, experience, and fee structure. After meeting with several attorneys, choose the one that’s the best match for your needs.

Helpful Questions To Ask a Business Attorney

The third step in finding the best small business law firm is to compare the rates offered by different firms. You don’t necessarily have to hire a big-name firm to provide legal representation; many smaller businesses choose local attorneys who are familiar with their industry and can help them navigate complex issues.

When comparing rates, consider that several factors affect what a small business owner must pay for legal counsel. Some factors include how long it takes to close a deal, whether the lawyer offers discounts to repeat customers, and whether the firm provides ongoing support.

In addition to reviewing fees, ask the following questions during your research:

• How long have you been a business attorney in Denver?
• What percentage of your practice consists of representing businesses?
• Do I need to pay retainer fees up front?
• Will my case require hourly billing?
• Are there any costs associated with hiring a business attorney in Denver?
• Can I review documents before signing a contract?

Business Formations

Businesses come in all shapes and sizes. Some start small and grow into large corporations. Others take off like wildfire and become household names. There are even those that remain relatively unknown despite having been around for decades. Regardless of how long a business has been operating, it is essential to understand what type of business structure best suits one’s needs. For example, does one want to be a sole proprietorship, partnership, corporation, LLC, LLP, or S Corporation?

The McGuire Law Firm offers free consultations to discuss your particular situation and answer questions about the pros and cons of each type of business entity. We can help you choose the correct form of business organization for your needs.

Mergers, Acquisitions, Sales, and Business Transactions

The McGuire Law Firm provides legal counsel for mergers, acquisitions, sales, and other business transactions. Our firm represents buyer and seller clients, and we focus on providing effective solutions to complex problems.

We represent businesses and individuals in commercial litigation matters, including breach of fiduciary duty claims, securities fraud cases, intellectual property disputes, and employment law disputes.

Our experience includes representing buyers and sellers in business transactions ranging from simple asset purchases to multi-million dollar acquisitions and complex corporate restructurings.

In addition to serving as general business lawyers, we offer specialized expertise in the following areas:

• Business Litigation & Dispute Resolution
• Corporate Restructuring & Bankruptcy
• Employment Law
• Intellectual Property
• Merger & Acquisition Transactions
• Real Estate
• Taxation & Accounting

Need a Business Attorney in Denver?

A business attorney can explain the benefits and drawbacks of each option and help you determine which is best suited for your circumstances.

If you are facing serious tax issues, you must contact JM Tax Law immediately. We offer free consultations and work hard to ensure our clients understand what options are available to them. Our attorneys provide practical solutions to complex problems and work diligently to ensure that our clients receive the best possible outcome. Contact us today to learn about how we can assist you.

There are many legitimate reasons United States persons may maintain foreign bank accounts or foreign assets. Perhaps an individual owns real estate in a foreign country, making payments via a foreign bank account easier. Alternatively, an individual has come to the United States for education and remained or married a United States citizen. 

While many US Citizens, US Residents, or US Persons may maintain foreign bank accounts and assets, many are unaware of their obligations to report their foreign bank and financial statements and learn of these reporting and compliance obligations after the time to report has passed. 

While there are stiff penalties for failing to report foreign accounts and financial assets, programs are available whereby an individual can register their foreign accounts and unreported foreign income and receive a much lesser penalty than what the IRS could assess under current tax laws. 

This article discusses the Streamlined Offshore Voluntary Disclosure Program, an option for individual taxpayers. Initially, the Internal Revenue Service started the Offshore Voluntary Disclosure Program, which required a 27.5% penalty on the highest foreign asset balance over the look-back period on unreported foreign bank accounts and financial assets. To many, the 27.5% penalty was excessive when considering the offense, and in 2012, the Streamlined Offshore Voluntary Disclosure Program was initiated, which applies a 5% penalty to the highest account balance.

The Streamlined Offshore, Voluntary Disclosure Program, is for United States Persons whose failure to timely report all foreign assets is deemed non-willful.

What is the Procedure for the IRS Streamlined Offshore Voluntary Disclosure Program?

An individual applying for the Streamlined OVDP must: file amended tax returns for each of the most recent three years whereby the tax return due date has passed along with all informational returns (Forms 8938, 3520, 5471 are examples); file FBARs (Form 114) for each of the most recent six years whereby the FBAR due date has passed; and, pay the 5% miscellaneous offshore penalty. In addition to paying the 5% penalty, any amount of tax and penalty from the amended tax returns should be paid.

How is the 5% Streamlined OVDP Penalty Calculated?

The 5% offshore penalty is applied based on the highest aggregate year-end balance of the foreign financial assets during the covered tax periods. It is important to remember that the penalty is based on year-end balances of all accounts and not just the highest balance during the year. If the highest balance during the year was used, you could calculate a higher penalty if money were transferred from one foreign account to another. For example, if an individual had three foreign bank accounts and the highest year-end balance over their 6-year look-back period was $40,000, the offshore penalty would be $4,000.

What is “Non-Willful” for Purposes of the IRS Streamlined OVDP?

For purposes of Streamlined OVDP, the IRS has deemed “non-willful” to mean that your correct mistake in reporting all foreign assets and income was due to an error, inadvertence, negligence, or good faith misunderstanding the law. Given that you were not turning a blind eye to your reporting requirements, this could mean that you did not know you had a reporting requirement and had no real reason to know.

Perhaps your foreign accounts are already taxed abroad, and thus it could be logical to think you would have no reporting requirement in the US because you had already paid tax. Perhaps you inherited a foreign bank account from a family member or friend and only had the account open for a short period. The more an account or asset appears to have a useful purpose, or you have a tie to the foreign asset apart from tax avoidance, the better the failure to report appearing “non-willful.”

What is Form 14654?

Form 14654, Certification by US Person Residing in the US, is an additional form that is submitted through the Streamlined OVDP process. Form 14654 certifies that:

• you are eligible for the Streamlined Domestic Offshore Procedures; 
• you have filed all required FBARs;
• your failure to report all income and pay all tax was due to non-willful conduct; 
• that the 5% offshore penalty you have calculated is correct. 

Form 14654 is filed with your amended tax returns and related forms and schedules through the OVDP process.

Where do I File FBARS When Going Through the Streamlined OVDP Process?

FBARS or Form 114 are filed directly with FinCEN (the Financial Crimes Enforcement Network) and may be filed online. It is important to note that current Streamlined OVDP procedures request that when filing a late FBAR through the Streamlined OVDP process, you report that you are filing the FBAR late and state “Streamlined Filing Compliance Procedures.”

How Do I Know if I Had or Have a Requirement to File the FBAR?

A US Person (defined below) has an FBAR requirement if they have a financial interest or signatory authority over a foreign bank account or reportable foreign asset and the total amount of all foreign assets exceeds $10,000 (in US Dollars) at any time during the year. Thus, it is essential to remember two key items.

First, the threshold of $10,000 applies to the total of all accounts, not each account. Therefore, you may have multiple foreign bank accounts or reportable foreign assets less than $10,000, but if they total more than $10,000, you likely have a reporting requirement.

Second, the reporting requirement applies even if you have an account or asset for a short period. Having signature authority or a financial interest over a foreign account for even a day would still require an individual to file an FBAR.

Who is a “US Person” for Purposes of FBAR Filing Requirements?

A US Person is defined as, (i) a citizen or resident of the United States, (ii) an entity that is formed, organized, or created in the United States or under the laws of the United States (or certain territories), and would include but not be limited to corporations, LLCs, partnerships, and trusts or (iii) an estate formed under the laws of the United States.

Based upon the definition of a US Person, businesses can have FBAR reporting requirements. Furthermore, because the definition considers a US Resident to be a US Person, you do not have to be a US Citizen to have an FBAR filing requirement.

What Are Common Forms Filed With Amended Tax Returns When Filing Streamlined OVDP?

Beyond the FBAR, Form 14654, and amended tax returns, we commonly see the following forms that need to be filed. 

Schedule B is typically filed with a 1040X because the individual may not have appropriately claimed foreign interest or dividends and may need to check the appropriate boxes relating to foreign assets on Schedule B. 

Form 8938, Statement of Specified Foreign Financial Assets, is another common form filed with an individual’s 1040X. Form 8938 is similar to the FBAR, whereby certain foreign assets and income are reported. The dollar threshold for filing Form 8938 is higher than the FBAR and changes based upon filing status and citizenship issues.

Form 3520, Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, is another relatively common form. If you have received a foreign gift or inheritance over certain amounts, you have a Form 3520 filing requirement.

Other forms may need to be filed depending upon the circumstances, but Forms 8938, 3520, and Schedule B are some of the common forms and schedules you may be likely to see on a 1040X being filed pursuant to Streamlined OVDP.

Does the IRS Acknowledge the Streamlined OVDP Filing or Provide a Closer Letter?

No. While you should always track the filing of your Streamlined OVDP and the cashing of your checks is reasonable verification that IRS is in receipt, you do not receive any specific acknowledgment or acceptance by the IRS when going through Streamlined OVDP procedures.

When your applicable amended returns are processed, you may receive a notice for interest or penalty based upon any additional assessment of tax, which again is reasonable verification of receipt. Still, the IRS does not provide any further acknowledgment or acceptance letter.

Have More Questions? Contact Us

The above article has been provided for informational purposes only and should not be considered tax or legal advice. If you have unreported foreign financial assets, you should discuss your specific facts and circumstances with an international tax attorney. If you have questions regarding foreign investments or international tax matters, you can speak with an international tax attorney by contacting The McGuire Law Firm at 720-833-7705.

When buying a company, you have two options: buy all its shares or just the company’s assets. If you’re looking to sell your company, you may also choose to sell all of its shares or just its assets. There are pros and cons to stock sales or asset sales options. For example, if you own 100% of a company, you will receive all the proceeds from any future company sales. However, you’ll get less money if you sell only the company’s assets. It would be best to consider both types of transactions when making an investment decision.

An acquisition is a purchase of shares in a company. An asset transaction is when you buy something like a house or car. A stock transaction is when you buy shares in a company. When you buy shares in a corporation, you become a shareholder. You get all the rights that come along with that. If you buy 100 shares of XYZ Corporation, you will receive one share of XYZ Corporation. That means you own 1/100th of the company. You also get all the rights that accompany owning a piece of the company. For example, if the company owns a factory, then you get access to the factory. 

This article has been prepared by a Denver business attorney and tax attorney to discuss section 338(h)(10) of the Internal Revenue Code.

Stock sales

In a stock sale, the company sells its shares to another company. The buyer buys all the shares owned by the sellers. The buyer also takes on all the debts and obligations of the company. The buyers gain full ownership of the company and become responsible for paying any debt or obligation incurred by the company. If the company does not have enough money to pay back the debts, the buyer must either sell off other assets or borrow money to pay them back.

Buyers should consider whether they are willing to assume the risks of buying a company’s stock. When selling a company, the seller must disclose any material facts about the company’s financial condition. 

For example, if a company faces legal challenges, there could be a lawsuit against the company. If the company is facing environmental problems, the company could face fines or penalties. Employees could strike or go on strike if the company faces labor issues. All of these situations could cause the price of the company’s stock to drop significantly.

A stock sale will allow the owners to retain control of the company while still allowing them to sell shares to investors. If the company has many copyrights or patents or has significant government or corporate contracts that are difficult to assign, then a stock sale may be a better choice. A stock sale also allows the owners to reduce the risk of losing those contracts.

Sellers often prefer to sell stocks because all the proceeds are tax-free. Sellers also avoid paying taxes on any income earned while holding the shares. For example, if you sold your stock at $100 per share, you’d pay $20 in federal income taxes. If you held onto the stock until it reached $150 per share, you’d owe $50 in federal income taxes. But if you sold the stock worth $100, you’d owe nothing on the sale.

A deal structure can greatly impact the future of both the buyer and the seller. Other factors, including the company’s structure and industry, can also affect the decision. Buyers and sellers need to consult with their business intermediary, legal counsels, accountants, and others early in the process to ensure that all necessary information is gathered and understood before making a final decision.

Asset Sale

When selling an asset, the seller remains the legal owner of the entity while the buyer purchases individual assets. For example, when selling a car, the seller keeps ownership of the vehicle while the buyer buys the engine, transmission, tires, etc. A typical asset sale does not involve buying the seller’s cash or paying off debts. Instead, the buyer pays for the assets individually. An asset sale is often called “cash-free” and “debt-free.”

Net Working Capital is usually included in an Asset Purchase Agreement. It includes items like Accounts Receivable, Inventory, and Accounts Payable.

Selling a corporation can have significant tax consequences for both the buyer and seller. Generally, sellers of corporate entities prefer to engage in a stock sale rather than an asset sale, while buyers choose to engage in an asset sale. However, it is not impossible to satisfy both parties to the transaction with a §338(h)(10) election.

Asset Purchase

If a purchaser pays for a target company’s stock, they receive a cost basis under §1012 for the value of the stock itself. On the other hand, buyers prefer an asset purchase over a stock purchase to increase their basis for depreciation purposes. The underlying assets held by the selling corporation retain the same basis as before, which does not create a benefit for the purchaser in terms of depreciation.

Asset Purchase Example

For instance, consider a corporation that holds a machine that costs $500. In years one and two, the corporation depreciates the machine by $100 per year, so the adjusted basis under §1012 is now $300. This also assumes that the seller holds the stock with a basis of $500, the total fair market value of the entity is $1,000, and there are no liabilities.

If the corporation engages in a stock sale, the purchaser will pay $1,000 for the stock since that is the fair market value. The buyer’s basis in the stock will be $1,000 under §1012. However, the machine retains the $300 basis. There is no adjustment to this underlying asset. The seller enjoys capital gains treatment on $500 of gain from the stock sale, which is the difference between the amount realized of $1,000 and the adjusted basis of $500 (§1001). Even though the buyer purchased the stock for $1,000, he may only use the machine’s basis of $300 for depreciation purposes. There is no step-up in basis allowed for underlying assets absent the §338 elections.

Limitations to Asset Purchases

Note that there are some limitations to asset purchases that make stock purchases more favorable. These include limitations built-in by contracts and other legal obligations. There could also be other liability issues that prevent sellers from engaging in an asset sale.

For these reasons, section 338 may provide an attractive alternative to satisfy both the buyer and seller in a business sale. Please discuss any specific business or tax matters directly with your business attorney or tax attorney.

To speak with a Denver business attorney or tax attorney, please contact The McGuire Law Firm at 720-833-7705.

When you start an LLC business, you are usually excited about what lies ahead. You might even dream about all the possibilities of starting a new venture. However, when you close down your business, you might feel like you need to get rid of any unfinished projects before moving on to the next thing. However, several legal requirements must be met before officially dissolving your LLC. Filing paperwork with the state and informing creditors are two of those requirements. These steps will protect you from personal liability if something goes wrong during the closing period. A Denver business attorney has prepared this article to provide additional information on dissolving an LLC in Colorado. 

Why Should You Dissolve an LLC?

To start a business, you must register your company name with the Secretary of State. You also need to file articles of incorporation with the state. If you are doing business in another state, you may need to file a similar document. Once you registered your company name, you must notify the IRS and other relevant tax authorities. You should also keep records of all payments made to yourself and the corporation. When you dissolve the company, you stop paying taxes and filing returns.

Dissolution is a legal procedure that ends the existence of a corporation. A company can dissolve itself if its owners agree to do so. Suppose the owners of a dissolved corporation wish to continue operating under another name. In that case, they must file articles of incorporation under the state’s general corporation law. Dissolving a corporation does not affect any contracts entered into before the dissolution. A corporation may also be dissolved voluntarily by filing Articles of Dissolution with the Secretary of State. Dissolution of a corporation does not mean that the corporation ceases to exist. Instead, it dissolves the corporate entity and returns all assets to the individual shareholders. When a corporation dissolves, the directors and officers remain liable for any debts incurred before dissolution.

Vote to Dissolve the LLC

The first thing you need to do when dissolving a company is to get all the members to agree to dissolve the company. You will then need to follow the procedures set out in the organizational documents. If there are no specific procedures, you must follow the general procedure outlined in your state’s business laws. Once the company is dissolved, you must keep track of any outstanding debts or liabilities.

File Your Final Tax Return

When you dissolve your corporation, you must notify your state tax agency of your intent to dissolve. If you fail to do so, you could face fines and penalties. Once notified, the state tax agency will send you a notice indicating whether you need to pay additional taxes. If you have already paid all of your taxes, then there is nothing else to worry about. However, if you have not yet filed your taxes, you should still contact the state tax agency to let them know you intend to dissolve your corporation.

You must file your final tax return at the end of every calendar year. You may need to file quarterly instead of annually if you are self-employed. You will also need to file an annual report with the IRS. You must file your final employment tax returns within 90 days after the end of each quarter. Failure to file timely means you could face penalties.

File the Proper Dissolution Forms

Next, go to your state’s Secretary of State or Corporations Division website to find the dissolution forms. You will need to provide basic information about yourself and your company. Some states require additional information, such as proof of payment of outstanding taxes. Fees vary by state but generally range from $10-$50. Check the form instructions for the exact requirements.

You need to get an official Certificate of Dissolution from the state. You can do this online at the Secretary of State website. Once you receive the certificate, you must file it in your LLC record books. Be sure to include your LLC number, name, and other information. Make sure you also include the filing fees, if any. There may be additional requirements depending on what type of entity you are forming. For example, you must pay taxes if you are forming a corporation. If you are forming a partnership, you must register with the IRS.

Settle Outstanding Debts

It would be best if you let your creditors know about the dissolution. You can send them a letter via certified mail and return the receipt requested. If unsure what kind of creditor you have, check with your attorney or contact your state’s Secretary of State’s office. Your state’s law will specify the proper procedure. Usually, you must provide notice within 30 days of the dissolution. Any claim filed against you after the deadline will be dismissed if you fail to provide notice.

It’s important to keep track of your debts and credit card balances. If you’re unsure whether you need to send out notices to creditors, check your credit report first. A free copy of your credit report can be found at annualcreditreport.com. You can also get one every four years through AnnualCreditReport.com. Once you’ve checked your report, you should consider sending out notices to creditors.

Distributing Assets

You may need to pay your creditors before distributing any money to your LLC members. You will also need to allocate assets among your LLC members. These allocations are usually based on an owner’s share of the company. For example, if you have three owners with a 40-30%-30% ownership split, each owner gets 30% of the company’s total value. However, you can change the distribution of your LLC’s assets at any time. Doing so will require a special meeting of your LLC’s board of directors.

Take Care of Your Employees

Employment taxes. If you have one employee, you must pay them any final wages or compensation owed. You also need to make final federal tax deposits. The trust fund recovery penalty may apply if you don’t deduct or deposit employee income, social security, and Medicare taxes.

You must pay quarterly federal income tax on all wages paid during the year. You also must pay the estimated tax if you expect to owe more than $1,000 at the end of the year. Failure to pay the required due amount may be subject to penalties and interest.

You must complete an annual return if you paid wages during the calendar year. Suppose you paid wages to any employee during the calendar year. In that case, you must report the total wages paid to all employees. You must also report the total amount of FICA taxes withheld from wages paid to all employees, including those who did not receive wages. You must attach a copy of Form W-2 to the return. For more information about reporting wages, see Publication 1546, Reporting Employee Compensation and Benefits.

If your company receives tips, you must file Form 8027, “Employer’s Annual Information Return,” to report the final tip income. You also need to allocate tips to each employee. If you don’t, you may face penalties.

Conduct Other Wind Down Processes

A proper conclusion to your business involves closing out your accounts, including your business bank account, federal employer identification number (FEIN), and any state tax ID number, if applicable. You should also cancel any contracts and leases that may still be active and let your customers know when your last day of business will be.

Further Steps

If you register an LLC, you will automatically get a tax ID number in many states. You need to keep track of this number and update it when you change your name or state of incorporation. If you fail to do this, you may not be able to claim certain deductions or credits.

When you close your LLC, you’ll file your federal and state income taxes. You’ll also need to file any employment taxes owed. The IRS has a checklist of tax-related actions you need to take when dissolving an LLC. You’ll help avoid future fees, obligations, and lawsuits when you dissolve your LLC.

Contact The McGuire Law Firm to discuss your business questions and issues with a Denver business attorney.