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Overseas Account Penalties, IRAs Siphoned, REIT Clarity

07.02.2014 | eVisor

International Tax

IRS Broadens the Scope and Gets Tougher on Failing to Report Overseas Accounts

The IRS has extended and streamlined the process for taxpayers who unintentionally failed to report and pay tax on overseas income. At the same time, it will be taking a deeper financial bite out of those who willfully avoided the income reporting laws.

The Service has modified compliance procedures offered in 2012 to those who come forward of their own accord under the Offshore Voluntary Disclosure Program. Those using the Streamlined Domestic Offshore Procedures or the Streamlined Foreign Offshore Procedures must certify that their failure to report the income, pay the tax, and submit required returns was not done willfully.

Among the more significant changes are:

  • Extending requirements to U.S. taxpayers residing both in and outside the United States and the inclusion of their estates.
  • Eliminating penalties for U.S. taxpayers residing overseas. Those who live in the U.S. will pay a 5% penalty.
  • Eliminating the $1,500 tax threshold. Previously only those who owed $1,500 in unpaid tax in a particular year could qualify for lower penalties.
  • Eliminating the risk assessment process required under the 2012 offer.

Taxpayers under a civil examination by the IRS, even if it does not relate to undisclosed foreign accounts, cannot qualify for the streamlined procedures. 

The Service has been very aggressive and successful in getting the cooperation of overseas banks in revealing the names of U.S. taxpayers who have accounts. For taxpayers who do not come forward in advance of a U.S. investigation,  penalties increase from 27.5% of the balance in the particular account to 50%.

Questions? Contact your Berdon advisor or Saul Brenner at 212.331.7630 or sbrenner@berdonllp.com.

 

Federal Tax

U.S. Supreme Court Grants Creditors Access to Some IRA Funds

In a unanimous ruling written by Justice Sotomayor, the Supreme Court held that IRA funds inherited by someone other than the deceased individual’s spouse are not protected in bankruptcies. 1 These funds can then be accessed by creditors.  This ruling puts a crack in the armor of retirement accounts which, typically, are not open to creditors in bankruptcy proceedings.

The ruling is specific to inherited IRAs and does not address other retirement accounts. The Court’s decision was based on the meaning of retirement funds.  It noted that such funds are “properly understood to be sums of money set aside for the day an individual stops working.”

However, for an inherited IRA, nothing would prevent or discourage an individual from using the entire balance for other purposes — a “vacation home or sports car” noted Sotomayor. 

1 Clark et ux. V. Rameker, Trustee, et al certiorari to the United States Court of Appeals for the Seventh Circuit No. 13-299. Argued March 24, 2014 — Decided June 12, 2014

Questions? Contact your Berdon advisor or Saul Brenner at 212.331.7630 or sbrenner@berdonllp.com.

 

Real Estate Investment Trusts (REITS) 

Clarity Coming for Definition of Real Property

The IRS has proposed regulations to clarify what is real property for purposes of real estate investment trust (REIT) rules.  Long overdue, it noted that no guidance has been published on this topic since 1975.  The proposals define real property to include land, inherently permanent structures, and structural components.  Safe harbors are provided for determining whether certain assets are or are not real property.  The proposed regulations also identify certain types of intangible assets that are real property or interests in real property for REIT purposes.

Here are some significant aspects of the proposal:

Land.  This would include water and air space directly above the land as well as natural products and deposits such as ores, minerals, and crops that are not cut, extracted, or removed from the land.

Inherently Permanent Structures.  Defined as buildings and other structures that are permanently affixed to the land or to another inherently permanent structure and serve a passive function. Assets that have an active function, i.e. machinery, are not considered permanent structures.

Structural Components.  These are assets that are a part of an inherently permanent structure, serve the structure in a passive function, and do not produce or contribute to the production of income other than consideration for the use or occupancy of space. Examples include plumbing and electricity.  

Intangible Assets.  These assets, which include intangible assets established under generally accepted accounting principles (GAAP), qualify as real property for REIT purposes if they:

  • Get their value from real property or interests in real property;
  • Cannot be separated from the real property or interest in real property; and
  • Do not produce or contribute to the production of income other than considerations for the use or occupany of the space, e.g. an easement in real property.

The proposals are subject to revision and a public hearing to elicit comments is scheduled for September 18, 2014.

Questions? Contact your Berdon advisor or Marc Ausfresser at 212.331.7639 or mausfresser@berdonllp.com