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July 31, 2010

NEW HIRE-FATCA ACT PASSED IN EARLY 2010 HAS SOME CHANGES FOR FOREIGN TRUSTS AND FIDEICOMISOS

A widely distributed article recently published by some attorneys contains some dire warnings about the  adverse income tax  consequences of the new foreign trust provisions in the HIRE-FATCA Act passed early in 2010 with respect to Fideicomisos (which the IRS currently requires file Forms 3520 and 3520A  because the IRS currently holds Fideicomisos  to be foreign trusts).  The conclusions in this article are  most likely not correct if the Fideicomiso has no income and contains property held for investment or held for personal use by the beneficiary (not a rental property). The IRS has not at this time ( nor is it likely to  in the near future)  issued any regulations further explaining the effect of the provisions of the new law on Fideicomisos and foreign trusts.  What the regulations or further guidance may say is pure speculation.  The general principles of trust taxation which are most likely to apply are stated in the next paragraph.

Under general trust tax law involving income and distributions from trusts to beneficiaries, unless the trust generates taxable income, the mere fact that personal use of foreign trust real property by a beneficiary is treated as a distribution to that beneficiary, will not cause the personal use to be taxed to the owner or beneficiary of the Fideicomiso because distributions from trusts are only taxable to the extent of the trusts DNI (Distributable Net Income).

You must keep in mind that  until the IRS issues further guidance and regulations on this new law, you cannot be certain they will not "twist" its interpretation of the new changes in a manner which is not consistent with prior long standing us trust tax principles. Therefore some uncertainty will exist until then.

July 23, 2010

FIVE TAX SCAMS LISTED BY IRS INCLUDE HIDING ASSETS AND INCOME OFFSHORE

The Internal Revenue Service issues a list of the top 12 tax scams each year – known as the Dirty Dozen. The scams are illegal and can lead to problems for taxpayers including significant penalties, interest and possible criminal prosecution. These scams don’t just happen during the tax filing season, they can happen anytime during the year. Here are five scams from the 2010 Dirty Dozen list every taxpayer should be aware of this summer.
  1. Phishing Phishing is a tactic used by scam artists to trick unsuspecting victims into revealing personal or financial information in an electronic communication. Scams can take the form of e-mails, tweets or phony websites and they try to mislead consumers by telling them they are entitled to a tax refund from the IRS and they must reveal personal information to claim it. Regardless of how official this e-mail may look and sound, the IRS never initiates unsolicited e-mail contact with taxpayers about their tax issues. Phishers use the personal information obtained to steal the victim’s identity, access bank accounts, run up credit card charges or apply for loans in the victim’s name. If you receive an e-mail that you suspect is a phishing attempt or directs you to an imitation IRS website, please forward it to the IRS at phishing@irs.gov. You can also visit IRS.gov and enter the keyword phishing for additional information.
  2. Return Preparer Fraud Dishonest tax return preparers can cause trouble for taxpayers who fall victim to their ploys. Such preparers are skimming a portion of their clients’ refunds, charging inflated fees for tax preparation or are attracting new clients by promising refunds that are too good to be true. To increase confidence in the tax system, the IRS is requiring all paid return preparers to register with the IRS, pass competency tests and attend continuing education.
  3. Hiding Income Offshore Taxpayers have tried to avoid or evade U.S. income tax by hiding income in offshore banks and brokerage accounts. IRS agents continue to develop their investigations of these offshore tax avoidance transactions using information gained from more than 14,700 voluntary disclosures received last year. Taxpayers also evade taxes by using offshore debit cards, credit cards, wire transfers, foreign trusts, employee-leasing schemes, private annuities or life insurance plans.
  4. Abuse of Charitable Organizations and Deductions The IRS continues to observe the misuse of tax-exempt organizations. This includes arrangements to improperly shield income or assets from taxation and attempts by donors to maintain control over donated assets. The IRS also continues to investigate various schemes where donations are highly overvalued or the organization receiving the donation promises that the donor can purchase the items back at a later date at a price the donor sets.
  5. Frivolous Arguments Promoters of frivolous schemes encourage people to make unreasonable and outlandish claims to avoid paying the taxes they owe. If a scheme seems too good to be true, it probably is. The IRS has a list of frivolous legal positions that taxpayers should avoid on IRS.gov. These arguments are false and have been thrown out of court.
For the full list of 2010 Dirty Dozen tax scams or to find out how to report suspected tax fraud, visit IRS.gov.