Category: Internal Revenue Service

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Tax Considerations For Inbound Investors in US Property

Flags of the world
Come one come all

Tax Considerations for Inbound Investors in US Property

Foreign Investments In US Real Estate

The United States has enjoyed a resurgence in foreign money coming to our shores to invest in stocks, businesses and, perhaps most of all, real estate.  Whether this is to scoop up real estate deals or simply find a safe place your money a key first step is proper tax planning.  The tax code provisions dealing with such “inbound” investments are very complicated and there’s always a lot of variables at play.  Key considerations include the type of property you want, for how long you want to hold it, and what type of income you expect it to produce.  While there is no substitute for professional advice here are some key concepts to keep in mind.

Regulations for Regulations

Be prepared to answer a number of questions dealing with who you are, where you’re from and where you got your money, especially if you are borrowing from any “financial institution” as part of the deal.  The United States government, particularly the IRS, has for years tightening the noose on international banking and trade.  Opening bank accounts or forming companies in many cases require you to complete “know your customer” style questionnaires asking about all manner of things including who will be the beneficial owners of your investments.  Unfair as it may be this is even more difficult if you come from a country that shows up on certain lists, such as the OECD “gray list” of countries deemed uncooperative in sharing bank account and tax information, or the Financial Action Task Force (FATF) “black list”, a list of countries deemed not to be doing enough to combat money laundering.  In the end, however, you can still achieve a measure of asset protection and anonymity by selecting the right entity and tax structure that will protect you while still keeping you in compliance with the thicket of regulations.

Euros
Moving your money

Withholding Your Money

The Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) was designed to prevent foreign investors in US real property from selling and taking their proceeds abroad without paying tax.  At the time there was no way at the time for the IRS to collect tax from people who did not have a presence in the US other than the property they sold.  FIRPTA changed this by putting the burden on the buyer (or other transferee) to withhold part of the proceeds of the sale (10% as to individuals) to put against any tax liability the foreign buyer may have.  Typically it is the settlement officer / escrow agent who would bear this burden.  The burden is even higher (35%) for a foreign corporation that sells a US property and then sends the proceeds to the corporation’s shareholders.  Again, though, fortunately, going about both the buying and the selling the right way can reduce or even eliminate FIRPTA obligations.

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Your silent partner

Your United States Tax Return

I would be hard pressed to think of one of my foreign investor clients who wants to get into the messy business of filing a US tax return.  There are options, however.  Even if you have to file a US tax return that doesn’t mean that you have to do so individually, rather, there are corporate structures that allow you to limit what “you” have to report to the business of that entity.  Second, in real estate it sometimes makes sense to consider yourself to be “effectively connected” to the United States and file a US return.  These are just words that mean that in the eyes of the law you are, in summary, doing business here and agree to file a US tax return.  The upside of this is that you are then able to fully deduct your expenses like property maintenance, interest expense, taxes and fees from your gross rents or spec properties.

Contact Us For Help

No matter what path you follow it is essential that you do it right the first time.  This requires careful attention to all of the filing and election requirements.  Failing to do this correctly could cost you some or all of your profits on the deal.  I am here to help.

Ari Good, Esq.

(786) 235-8371

Bitcoin

Bitcoins Are Property, Sayeth The IRS

Bitcoin
IRS says Bitcoins are property

IRS States Bitcoins Are Property

So the IRS has issued a Notice on the virtual currency known as Bitcoin:  It’s not a currency, it’s property. Jolly good, you say, so what? Well, that decision has some major tax implications for the future of what adherents will insist is a virtual currency, or “cryptocurrency”.  That has a number of important tax considerations, but for the uninitiated let’s start with the basics, that is, what the heck is Bitcoin?

For these purposes let’s ignore the IRS and grant Bitcoin respect as a “virtual currency”, that is, a medium of exchange, something intangible asset that people can trade for other goods or services (or, other Bitcoins). It owes its existence to computer programmer Satoshi Nakamoto, who created the algorithms related to Bitcoin in and around 2009.  It has no tangible existence – one cannot carry a Bitcoin in one’s wallet – but rather depends upon two types of technology for its existence:  “peer to peer networking” and “public key encryption”.  If you find the technical stuff boring, skip down to “Bitcoins Are Property” below.

Bitcoin Technology

Peer to peer communication is, put simply, stuff that lots and lots of different people on lots and lots of computers do in a “distributed” or decentralized manner, that is, there is no single computer or person that controls what goes on.  Napster was one of the first and best known peer to peer networks for sharing music.  Millions of different people had songs on their computers.  These people used Napster’s software, which you could download onto your computer for free, to share the files over the internet with anyone else also running Napster.

No one was in charge – you simple stood up to be recognized as a “node” on the Napster network, sort of like establishing your own bus stop along a busy route.  Then you shared what you had in the same way as you might conduct a pot luck dinner at your local church.  The church opens its doors, provides the meeting space (and perhaps one of those big silver coffee makers), and everyone brings their own dishes to share.  There are rules:  clean up after yourself, don’t show up empty handed, but otherwise no one is in charge of the event.  Simple.

Then there’s part two – public key encryption. The deep specifics of this system are beyond the scope of this article (and my comprehension), but in simplest terms PKI is a system by which people can share information securely using a “public” key, an external reference that functions a bit like a PO Box, combined with each user’s “private” key, like the key to that box. You send someone a private letter by referencing their PO Box (which is public), but only the owner can open (or “decrypt”, in the computer world) the letter by using their private key.

These technologies are critical to Bitcoin in that its creators needed a system that allowed them to be traded and exchanged using a decentralized (peer-to-peer) secure (PKI-based) system. When Mr. Nakamoto created his alogrithm he set a finite limit on the number of Bitcoins that will ever exist: 21 million. There are currently around 12 million in circulation, with about 9 million more to be discovered. They are created just as virtually as they are traded: anyone so inclined, and with the computer resources and knowledge to do it, can “mine” Bitcoins by verifying existing Bitcoin transactions. The miners get a commission, in essence, for adding value to the entire virtual monetary world.  So, whether you bought your Bitcoins, received them in exchange for goods or services, or mined them you have created or received something of value.

Bretton Woods participants
Tea time at Bretton Woods

What is Currency?

In addition to technology what makes up a currency is, put simply, that people think its a currency, or a “medium of exchange”.  If I give you a dollar for a lollipop there’s an immediate understanding that what I am giving you has some intrinsic, quantifiable value (that is, a dollar is worth, surprisingly, $1), that the dollar has an equivalent value in goods or services (lollipops), and that the recipient of my dollar can reuse it to exchange for something else that he might want (say, balloons).  This latter part is important.  Part of what makes a currency a currency is not only what the original two transacting parties think (our agreement to exchange dollar for lollipop), but that everyone else understands that what both of the parties got has some measurable value.  In monetary terms the dollar is therefore not only our “medium of exchange”, but is also recognized as “legal tender” for the transaction.  Who decides what is “legal tender”?  The simple answer is the government, in part because of the United States Constitution and in part under policies that have evolved over the years.   For a fascinating history on what makes money what is it (and who gets to decide that) read up on the exceptional Heritage website.

IRS Rules Bitcoins Are Property

As the use (and trading) of Bitcoins has grown so has the government’s interest in them.  Part of why the IRS would care involves whether someone has “acceded to wealth” when they create, sell or exchange a Bitcoin.  In other words, has someone to the transaction gotten richer by dealing in Bitcoins rather than a “true” currency?  It is a longstanding principle of tax law that such accessions to wealth are “income” which might be taxable to the recipient.  I have acceded to wealth, for example, if someone gives me a dollar (for nothing in return), a share of stock or a piece of real estate

Having looked at the issue the IRS came down to the conclusion that Bitcoins are property, not a “currency”.  In so doing the US government made using Bitcoin as a medium of exchange much more complicated.  This is because, put simply, you, the Bitcoin user, must now keep track of what you paid for your Bitcoin, where it came from, and whether you have tax consequences when you use it to purchase something.  This is a whole host of worries you never have to deal with when you use a “true” currency.

The Tax Consequences of Using Bitcoins

So what exactly do you have to track and bother with?  The answer, in short, is your “basis”.  Basis is just a word.  It means “what is my investment in this thing”.  If  you paid $10 for a share of stock, that is your basis in it (more technically, your “cost basis”).  If that stock appreciates to $15 and you sell it, you have “acceded to wealth” by $5, on which you pay tax.  So, when it comes to Bitcoins, according to the IRS, go forth and buy, sell and exchange it however you like, however, be sure you track your basis and report your gain (or loss) each time you do it.

This is a huge pain, perhaps by design.  Tracking one’s basis in readily exchangeable, intangible things like stock, or now Bitcoins, is extremely complicated.  Stock brokers use highly sophisticated software that tracks stock transactions, accounting for all of the Byzantine and upside down rules that govern these transactions.  Few, if any, Bitcoin users are prepared for this level of reporting.  Figuring out your gain or loss also assumes that you are able to trace exactly which Bitcoin you purchased to use for your cup of coffee.  This is similarly difficult given that Bitcoins are “tumbled” into “blocks”, that is, virtually sliced and diced so that it is unclear which Bitcoin you got, or who created or received it.  This serves to protect Bitcoin users’ privacy, something the government is viewing with increasing hostility.

Philosophically I am disappointed, though hardly surprised, with this decision.  Our entire banking system, really, the entire global economy is in large part based on the dollar as a medium of exchange.  That serves an important purpose in that it lends predictability to how oil, carrots or lollipops are priced.  There are many “data points”, that is, places to compare, contrast and get an idea of what something should cost.  The downside, however, is that it preserves a government’s monopoly on how you do business.  Again, this is desirable in many ways, but has a dark side:  the government, not you, decides what the currency is worth.  The more currency the government prints, the less it can buy or earn in the form of interest.  You, the buyer, might not see that the dollar you had yesterday is not the dollar you have today, but those who are exchanging their oil, carrots and lollipops do.  Words you hear a lot like “purchasing power” and “inflation” can be tricky to grasp, but are very important to how people live.

What Now?

The matter is not entirely settled.  Changing how things work depends on how good the idea is, how strong are the forces against it and who has more patience.  Congress, not the IRS, has the ultimate constitutional authority to determine what is considered a “true” currency, and in time this may be the case.  Further, the IRS may have done recent Bitcoin purchasers a service.  Where you have gains you can also have losses.  Just as you accede to wealth through appreciated Bitcoins, you can claim a loss when you didn’t buy so well.  As a practical matter, the IRS is entirely unprepared to enforce its new position regarding Bitcoins, as it is unlikely that more than a tiny fraction of this bureaucracy understand them.  So, time will tell.

I want to hear from you!  Should Bitcoin be considered “currency”?  Does the confidentiality of Bitcoin transactions outweigh the risk that they could be used for illicit purposes?  Leave a comment, or contact me for a stimulating discussion over a cup of coffee.

 

Racing cars - IRS Fast Track Audit Dispute

IRS Fast Track Dispute Resolution

IRS Institutes Fast Track Dispute Resolution

The IRS announced a new Fast Track Settlement program (“FTS”) allowing self-employed and small business owners to shorten the time it takes to resolve audit disputes.

How To Arbitrate a Tax Dispute

The new FTS program resembles a program that had been available to larger taxpayers (with assets exceeding $10M) for some time.  The program allows small businesses and the self-employed to cut the time it takes to resolve an IRS audit dispute to as few as 60 days in some cases by allowing people to dispute audit findings in arbitration while the audit is still ongoing.  This is a departure from what has been the case to now, which is that the taxpayer had to wait until the audit was over to dispute it.  This process typically meant going to the Appeals division (technically a separate division from the other organs of the IRS), and then, if that didn’t work out, to tax court.  The process could take months, if not years, with penalties and interest accruing on the alleged liability all the while.

Racing cars - IRS Fast Track Audit Dispute
Well, sort of fast

Small business and self-employed taxpayers apply to the FTS program by filing a Form 14017 along with a brief summary of the their position regarding the auditor’s findings.  The IRS then refers the tax audit dispute to an Appeals officer who, as stated, is supposed to act as a neutral third party.

Your Friendly IRS Appeals Officer

Going to Appeals in general, and especially early in the process, has some definite advantages.  First, the Appeals Division represents another “bite of the apple” on the issues presented during the audit.  Audits can be rocky, especially where the taxpayer isn’t responsive to the auditor’s requests, or conversely, where the auditor is overly demanding or intrusive, or fails to explain the process in a meaningful way.  As a practical matter the IRS often takes very aggressive positions at the audit level, leaving them room to negotiate later.  The Appeals officer is not as close to the ground and therefore may serve as a fresh set of eyes on the disputed issues.  Appeals officers can also take certain considerations into account in their analysis, such as whether the IRS faces “hazards of litigation”, that is, whether they would lose if the taxpayer went to court.

This is a welcome change to a difficult process, and levels the playing field for hard working small businesses and individuals facing a very technical and burdensome process.  It takes skill and experience to use these tools, and an experienced tax lawyer can make a major difference in the audit result.

Call us for information on how to use the FTS in your tax audit and how to defend yourself aggressively against the IRS.

Ari Good, JD LLM, a tax, aviation and entertainment lawyer, is the shareholder of Good Attorneys at Law, P.A. He graduated from the DePaul University College of Law in 1997 and obtained his L.L.M. in Taxation from the University of Florida.  He has helped hundreds of clients to defend themselves against the tax authorities and negotiate their liabilities.

Contact us toll free at (877) 771-1131 or by email to info@goodattorneysatlaw.com

Actor Stephen Baldwin Forks Over Another $100K In Back Taxes to New York

Stephen Baldwin Paid Another $100,000 To New York; Tab Still At $243,068

Actor Stephen Baldwin, of “Celebrity Apprentice” and the “The Usual Suspects” fame, exited a courthouse last week another $100,000 lighter in the wallet.

Back Taxes
If only it was $200 in back taxes

The 47 year-old actor’s tax troubles began with an criminal investigation by New York’s Tax Department and District Attorney, Thomas P. Zugibe. Their inquiry uncovered his failure to file state income tax returns from 2008 to 2010. Back taxes due to the state of New York at the time were over $300,000, including penalties and interest. Police arrested Baldwin in December of 2012 and prosecutors charged him with the felony of “Repeated Failure to File Personal Income Tax Returns.”

Baldwin ended up pleading guilty to the felony charge in March of 2013. He also agreed to pay $400,000 in restitution within one year as part of a plea deal. The arrangement gives him a conditional discharge and no jail, but only if he keeps his end of the bargain. Baldwin, including a prior $100,000 payment, has now paid the State $200,000. District Attorney Zugibe, however, intends on asking Judge Apotheker to jail Baldwin if he can’t meet his March 2014 deadline to pay the entire $400,000 in restitution.

Due to the magic of interest and penalties, New York State Tax Commissioner Thomas H. Mattox also announced that Baldwin still owes $243,068 in back taxes.

Bad Tax Advice

Baldwin claims that his dirty deed was the result of “some really bad suggestions and advice” from lawyers and accountants, according to the New York Post. Commissioner Mattox publicly responded to Baldwin’s dilemma by noting that his Tax Department can arrange installment payment agreements to help people voluntarily resolve back taxes and avoid criminal prosecution.

We work diligently with taxpayers to address issues before they escalate [into criminal charges]. If you have a tax debt, don’t hesitate—take action and contact us to resolve your sitaution.”

Solutions for Back Taxes

Florida residents don’t have to worry about being in Baldwin’s shoes. Florida doesn’t collect state income tax (there are other state taxes, though). Commissioner Mattox’s advice, however, still rings true when it comes to federal income taxes. Short on manpower, the IRS has promoted tax resolution options for unpaid, federal tax debt. The IRS recently made these options more appealing to entice delinquent taxpayers.

Owing back taxes won’t often lead to criminal prosecution. As the Baldwin case illustrates, though, penalties and interest will continue to grow a taxpayers debt until it’s paid off. Ignoring tax debt only makes the problem worse.

Ari Good, JD LLM, a tax, aviation and entertainment lawyer, is the Shareholder of Good Attorneys At Law, P.A. He graduated from the DePaul University College of Law in 1997 and received his LL.M. in Taxation from the University of Florida.

Contact us toll free at (877) 771-1131 or by email to info@goodattorneysatlaw.com.

Tax Implications of SCOTUS’ DOMA Decision

Tax Implications of U.S. Supreme Court’s Decision on Same Sex Marriage (DOMA)

Surviving Spouse of Same-Sex Marriage Sues U.S. Government over Taxes

Edith Windsor and Thea Spyer were lawfully married in 2007 in Ontario, Canada but lived in New York. Spyer died two years later and left her estate to Windsor. Windsor attempted to claim a the “surviving spouse” exemption from the death tax when Spyer passed. The Defense of Marriage Act (DOMA), however, prevented her from taking the exemption. The term “spouse,” according to DOMA, applies only to the marriage between a man and woman. The IRS relied upon DOMA to rule that the surviving spouse exemption did not apply to Windsor, no matter where she married. Windsor ended up with a $363,053 death tax bill, causing her to sue the federal government.

U.S. Supreme Court Strikes Down DOMA’s Definition of “Spouse”

SCOTUS DOMA Decision
SCOTUS’ DOMA Decision Provides New Tax Benefits for Same-Sex Couples

The U.S. Supreme Court heard Windsor’s case and ruled that DOMA’s definition of “spouse” violated a myriad of Constitutional principles. The Court’s decision authorized same-sex couples, who are legally married, to claim the surviving spouse exemption. The U.S. Treasury Department and IRS changed its tax policy as a result of the decision. They will recognize same-sex married couples as married for federal tax purposes.  This is true even if the couple moves to a state that doesn’t recognize same-sex marriage. This treatment applies to all federal taxes, not just the surviving spouses exemption.

Tax Implications of Federal Recognition of Married Same-Sex Couples

The U.S. v. Windsor case will provide a number of new tax benefits for same-sex couples:

  • Annual Gift Tax Exemption: An individual can give another person up $14,000 (as of 2013) without tax consequences. The gift can be cash, property, or other assets. Anything above $14,000 must be reported to the IRS. Married couples, however, may give unlimited amounts to their spouse without tax consequences.
  • Death Tax Exemption: An individual can leave a non-spouse up to $5.25 million upon their death without tax consequences. A married individual, however, can leave their spouse an unlimited amount without tax consequences.
  • Unified Credit: Tax law combines the annual gift tax exemption and death tax exemption to create the “Unified Credit.” Untaxed amounts given annually as a gift count towards the $5.25 million that is exempt from the death tax. Married couples, however, don’t face limits on annual or lifetime gifts or transfers of property to the spouse. This includes the Unified Credit limitation.
  • Portability of Marital Exemption: The unused portion of $5.25 death tax exemption passes from the deceased spouse to the surviving spouse. This means a surviving spouse can give up to $10.5 million before the death tax kicks in (depending on how much of the death tax exemption the deceased spouse used).
  • Gift Splitting: A gift by a married individual only counts 50% towards the annual gift tax exemption. The IRS treats the married couple as a single tax entity when it comes to this exemption. This means a married individual can give up to $28,000 without tax consequences. Their spouse, though, could not give any amount as a gift that particular year without facing tax consequences.

Ari Good, JD LLM, a tax, aviation and entertainment lawyer, is the Shareholder of Good Attorneys At Law, P.A. He graduated from the DePaul University College of Law in 1997 and received his LL.M. in Taxation from the University of Florida.
Contact us toll free at (877) 771-1131 or by email to info@goodattorneysatlaw.com.