Spaghetti Taxes

Let's say you were advised to set up an International Business Corporation (IBC) in, say, Nevis which owns an S.A. in Chile and a Limitada in Spain.  Add any number of other incestuous, interlocking companies to get a complicated picture. Kinda' like a bowl of spaghetti in appearance.  Lots of people do this to avoid taxes in the United States.  The problem is, it doesn't work, at least not legally.  Instead of me explaining all the ins and outs of what would be called a Controlled Foreign Corporation have a look at this web site which explains things really well.

Introduction to Controlled Foreign Corporations | Family Office ...

http://www.integratedwealth.com Wed, 17 Oct 2012 22:12:48 GMT

Investors in what Congress calls Controlled Foreign Corporations are not permitted to indefinitely defer or avoid US taxation. Such corporations are treated as pass-through to US Shareholders.

Read more ...

One more complication would be if the income from a CFC is passive (which has its own definitions in tax law) which leads to several complications not the least of which is taxation on undistributed income.

On top of that, there are special form that have to be filed like Forms 5471 and 8865 for CFCs and Limitadas that are treated as partnerships.  Failure to file EACH FORM can result in a $ 10,000 penalty...per occurrence.  

It isn't easy to avoid all this either.  If you set up family members as owners to divide responsiblity, you still are in control per the IRS using 'constructive ownership' rules.

Therefore, maybe you should make a different plan.  There are options and maybe I'll mention one or two in a future post.  If you're in hurry, send me an email and we'll talk.

Service with a Smile!

Who says the IRS isn't helpful?  Well, look at this.  The IRS will allow individuals to file for themselves BEFORE the January 31 official opening of the tax year with Free File!  um..YAY?!

IRS releases Free File to help taxpayers get jump on filing returns - MLive.com

http://news.google.com Sun, 19 Jan 2014 14:34:46 GMT

New York Daily NewsIRS releases Free File to help taxpayers get jump on filing returnsMLive.comGRAND RAPIDS, MI -- While the tax season doesn't officially begin until the end of the month, Internal Revenue Service says its Free File brand-name softwa ...

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This is to let you know so you can file sooner than usual if you don't need help.  Supposedly it started on the 17th of January.  Well, no time to lose!  

If, however, you are one of those who does need help, feel free to contact me at ken@pokingthedragon.com

Cheers!

Year end tax planning thoughts

As the year ends, some of you may be thinking of what you will do in 2014 for business.  Maybe you will start a new one.  If you do, give careful thought to how to structure things, especially if you are a U.S. citizen in Chile (or anywhere overseas).  The U.S. tax code has some difficult to understand sections that can make your life miserable if you don’t plan properly.  A number of qualification tests start with the ownership percentage of “10% or more”.  If you own 10% or more of a Sociedad de Responsabilidad Limitada (Ltda), for instance, you have special reporting requirements, especially if others like  you own “more than 50%” of the Ltda.  The IRS (Internal Revenue Service) can and will impute “Controlled Foreign Corporation”  (CFC) status to your Ltda, even though it’s not technically a corporation.  There are some rather onerous reporting requirements in this case that are avoidable.  Even if the Limitada does not pass the CFC test, 10% or more ownership in a foreign partnership has its own problematic filing issues. It doesn't necessarily mean you'll pay more in taxes but the non-filing penalties are draconian.  The above does not consider any imputed control based on  “constructive ownership” rules, which only adds to the confusion.  Consider owning less than 10% right from the start, if it doesn’t interfere with your business purpose.  This is a very complicated area of law that should be examined closely before any decisions are made. You can file a form with the IRS to treat the Ltda as a “pass-through” (or invisible) entity but that’s for another entry.

If you are interested in more detail about this, consider signing up for the free update service to receive more details of how this can be handled.

10% Problem (and Solution)

FATCA implementation may be delayed again. Let's hope we get a Christmas present of yet another delay to some of the worst legislation ever created. Here is a little blurb from the nice folks at Forbes:

 Will FATCA Ever Go Into Effect? - Forbes

http://news.google.com Thu, 12 Dec 2013 15:42:10 GMT

Channel TelevisionWill FATCA Ever Go Into Effect?ForbesThe Foreign Account Tax Compliance Act seems to be revolutionizing the way governments share tax information. Other nations are using intergovernmental agreements to piggyback on FATCA informatio ...

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But this is an aside.  The real reason I am writing this is because it's near the end of the year and even though Christmas is upon us, you need to know a little something for planning purposes.  A number of times I've been presented with tax situations that have been complicated by the fact that the US citizen involved owns 10% (or more) of a company, whether it's an S.A., Sp.A., Limitada or other.  Ten percent seems to be a magic number in several different ways and I'd like to point out that you will save yourself a lot of trouble if you only own 9.99% instead.  Tax law and regulations seem to look for 10% over and over again.  If you want specifics, subscribe to my free update service.  I'll be explaining things in more detail with my next broadcast.

FATCA Woes

FATCA is a slow implementation.  Much like Obamacare, FATCA is off to a slow start.  If you remember, the idea is to collect taxes on money that has previously evaded taxes.  The operative word is, 'evaded'.  In the US tax system, evasion is a crime, avoidance is not.  The difference is that the latter uses the regulations and tax law itself to reduce taxes through various means.  Evasion ignores the law.  The US has indicated it expects to recover something like $87 billion over the next ten years.  Likely the loss of taxes on falling international trade (as a result of FATCA compliance difficulties) will more than offset any gain.  For a good take on things read this link:  International Tax Evasion Crackdown: Slow, Tricky, And Only First Step in ... - International Business Times

http://news.google.com Wed, 30 Oct 2013 18:17:40 GMT

InsideCounselInternational Tax Evasion Crackdown: Slow, Tricky, And Only First Step in ...International Business TimesAttempts to implement the 2010 Foreign Account Tax Compliance Act (FATCA) have repeatedly stalled, partly because the sweeping law r ...

Read more ...

I'm hearing more and more stories of people renouncing their US citizenship because of the business difficulties caused by FATCA.

In my humble opinion, FATCA is bad law whose intended purposes cannot be realized without massive damage to international trade.  It needs to be repealed.

Filing taxes for free

Having recently received inquiries as to locating web sites that let you file income tax returns for free, I did a little research and this is what I've uncovered.  The IRS has a free filing option and you can get to it by clicking 'IRS Free Filing'.  There is another site you can investigate named FreeTaxUSA which may be of some help to you.  Be advised that all is not roses with this system as evidenced here: Pros & Cons of E-Filing Income Tax Return | The Classroom ...

http://classroom.synonym.com Fri, 20 Sep 2013 05:03:16 GMT

The Internal Revenue Service requires most income earners to file tax returns each year to make sure that it receives correct amount of tax. ... E-filing is a free service offered by the IRS, so you don't have to pay to submit your federal return.

Read more ...

The bottom line with these services is that YOU have to know what you are doing.  If you do your homework and are careful, these could be excellent services for you.

If you are not confident, you could always contact me.....

Here it comes again!

The new year will be starting soon and with it the flurry of activity that means people are trying to minimize taxes.  The IRS has published new, inflation adjusted numbers and you can see the official publication here. The threshold minimums haven't changed for tax year 2013 to be filed in 2013, (see prior posting in www.pokingthedragon.com Dec. 18, 2012).  Here is a new posting for tax year 2014 to be filed in 2015, just FYI.

IRS Announces 2014 Tax Brackets, Standard Deduction Amounts And More - Forbes

http://news.google.com Fri, 01 Nov 2013 15:22:13 GMT

BloombergIRS Announces 2014 Tax Brackets, Standard Deduction Amounts And MoreForbesAll together, the IRS posted more than 40 updates. You can read more about them at Revenue Procedure 2013-35 (downloads as a pdf). And kudos to the folks at CCH, part ...

Remember that you need to make any adjustments BEFORE the end of December (with only a few exceptions).

Soft landing!