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How to Handle Dual Residents: The I.R.S. View on Treaty Tie-Breaker Rules

How to Handle Dual Residents: The I.R.S. View on Treaty Tie-Breaker Rules

The first step in advising a foreign individual who is neither a U.S. citizen nor a green card holder on U.S. income tax laws is to determine the person's residence for income tax purposes. But what is to be done when the individual is resident in multiple jurisdictions? A recent LB&I International Practice Unit offers a quick understanding of the tax issues I.R.S. examiners raise when dealing with individuals who are dual residents for tax purposes. Virtually all income tax treaties entered into by the U.S. contain a tiebreaker rule under which the exclusive residence of an individual is determined for purposes of applying the income tax treaty. Fanny Karaman and Beate Erwin explain how these rules are applied. One point to remember is that the tiebreaker test for treaty residence purposes does not affect an individual's obligation to file an F.B.A.R. form.

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F.A.T.C.A. – Where Do We Stand Today?

F.A.T.C.A. – Where Do We Stand Today?

When F.A.T.C.A. was adopted in 2010, the hoopla from the U.S. Senate promoted the idea that the I.R.S. would become invincible in rooting out recalcitrant Americans not wanting to pay tax and the financial institutions willing to assist them. In principle, information in U.S. tax returns could be compared with F.A.T.C.A. reporting by foreign financial institutions to identify which taxpayers remained offside and which banks had insufficient reporting systems. A recent report by the Treasury Inspector General for Tax Administration (“T.I.G.T.A.”) concluded that after spending nearly $380 million, the I.R.S. is still not prepared to enforce F.A.T.C.A. compliance. In their article, Rusudan Shervashidze and Nina Krauthamer summarize the principal shortfalls and possible solutions identified by T.I.G.T.A. and which suggested action plans the I.R.S. will contemplate.

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Vol. 5 No. 5: Updates and Other Tidbits

Vol. 5 No. 5: Updates and Other Tidbits

This month, Rusudan Shervashidze and Nina Krauthamer look at several interesting updates and tidbits, including (i) limited relief for transition tax, (ii) a new twist to phishing that involves fake I.R.S. calls, (iii) another twist on phony correspondence requesting W-8BEN information that is used to obtain persona information often used by banks to confirm identities of customers, and (iv) new FinCEN money transmitter rules that apply to I.C.O.’s.

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Insights Vol. 4 No. 11: Updates & Other Tidbits

Insights Vol. 4 No. 11: Updates & Other Tidbits

This month, Sheryl Shah and Nina Krauthamer look briefly at two I.R.S. actions: (i) the roll out of a long-awaited passport denial program and (ii) the end of favorable rulings on certain worthless stock deductions and spinoffs.

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When the (Fake) I.R.S. Calls – Memoirs of the Tax Phishing World

When the (Fake) I.R.S. Calls – Memoirs of the Tax Phishing World

“Phishing.”  Many have heard the word, which is used to describe scams intended to acquire sensitive information.  Few are prepared to be its target.  Unwary individuals are often drawn in by scammers pretending to call from the I.R.S. and threatening imprisonment unless a bogus tax bill is paid promptly.  Rusudan Shervashidze offers insights into the workings of these scammers, relaying her personal experience with an “I.R.S.” phishing call and providing tips to avoid falling into one of these traps.

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I.R.S. Information Exchanges & the Coordinated Tax Raids on Credit Suisse

I.R.S. Information Exchanges & the Coordinated Tax Raids on Credit Suisse

In April, coordinated tax raids targeted three separate offices Credit Suisse involved in tax fraud examinations by the Netherlands, France, Germany, the U.K., and Australia.  Was it merely a coincidence that these are countries with which the U.S. regularly cooperates in the exchange of tax information?  Rusudan Shervashidze and Stanley C. Ruchelman discuss the many avenues through which the I.R.S. furnishes and receives information.  One thing is clear: The I.R.S. had the means to transfer information to the relevant tax authorities.

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Insights Vol. 3 No. 10: Updates & Other Tidbits

Insights Vol. 3 No. 10: Updates & Other Tidbits

This month Sultan Arab, Nina Krauthamer, and Galia Antebi look briefly at several timely issues, including (i) a Swiss court order granting UBS the right to appeal an administrative order to disclose French client information to French tax authorities, (ii) the expansion of I.R.S. offshore tax avoidance investigations to banks in countries other than Switzerland, and (iii) a continuing controversy over the Common Consolidated Tax Base, known as the C.C.T.B., proposed by the E.U. Commission.

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Treasury Attacks European Commission on State Aid – What Next?

On August 30, 2016, the European Commission ordered Ireland to claw back €13 billion ($14.5 billion) plus interest from Apple after favorable Irish tax rulings were deemed to be illegal State Aid.  The U.S. Treasury Department issued a white paper shortly before the decision staking out the reasons why the European Commission crusade is unjustified, especially in relation to its retroactive effect.   This trans-Atlantic conflict is placed in context in an article by Kenneth Lobo and Beate Erwin.

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IRS Faces House Concerns About BEPS Initiative’s Impact on U.S. Companies

Published in GGi FYI International News No. 4, Spring 2016 (p.12).

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I.R.S. Argues Mylan's Contract is a License of Drug Rights – Not a Sale

The question of the proper treatment of a contract transferring exclusive rights to the use of a patent – as a sale or a license – is one that has been addressed many times in U.S. jurisprudence.  It has recently popped up again in a case before the U.S. Tax Court involving the generic pharmaceutical giant Mylan Inc., a company that has been the subject of much negative publicity arising from its inversion and subsequent re-immersion as a U.S. domestic company. In September, the I.R.S. filed a memorandum in support of a motion for summary judgment. We explain the basis for the I.R.S. position and comment on its merits.

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Insights Vol. 2 No. 6: F.A.T.C.A. 24/7

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F.A.T.C.A.’S FIRST ANNIVERSARY: AN ASSESSMENT

On July 1, the Foreign Account Tax Compliance Act (“F.A.T.C.A.”) celebrated the first anniversary of its implementation. F.A.T.C.A. was created to improve international tax compliance and combat offshore tax evasion. Notwithstanding dire predictions about its impact on the financial community when F.A.T.C.A. was first enacted in 2010, the sky has not yet fallen as of its first anniversary.

P.L.R. 201446025 – A Change of I.R.S. Direction?

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INTRODUCTION

U.S. charities are required to obtain I.R.S. approval in order to be exempt from federal income tax under §501(a) of the Internal Revenue Code (the “Code”). Under Code §508(a), new organizations must notify the Secretary of the Treasury that they are applying for recognition of Code §501(c)(3) status. In order to establish such exemption, Treasurey Regulation §1.1501(a)-1(a)(2) requires that an organization must file an appropriate application form with the district director for the internal revenue district in which the principal place of business of the organization is located. Furthermore, any rulings or determination letters holding the organization exempt are effective so long as there are no material changes in the organization’s character, purposes, or methods of operation. To be tax-exempt under §501(c)(3), an organization must be organized and operated exclusively for exempt purposes and none of its earnings may inure to any private shareholder or individual.

This begs the following question: If a charity changes its organizational structure or state of incorporation, will a new application be required?

Taxpayer Advocate Asks I.R.S. to Simplify Foreign Asset Reporting

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On April 13, the Office of the National Taxpayer Advocate (“N.T.A.”) urged the Internal Revenue Service (“I.R.S.”) to reduce foreign asset reporting requirements magnified by the Foreign Account Tax Compliance Act (“F.A.T.C.A.”). The N.T.A. is an independent organization within the I.R.S. that aids taxpayers in resolving issues with the I.R.S. It identifies issues and suggests changes to the I.R.S. and Congress to aid both the I.R.S. and all taxpayers.

Currently, U.S. persons with foreign bank accounts file two reports relating to such accounts: one report for the I.R.S. and the other report for the Treasury Department. In a recommendation to the I.R.S., the N.T.A. said on April 13 that taxpayers shouldn’t have to report assets on Form 8938, Statement of Foreign Financial Assets, if those assets are already reported or reflected on a Financial Crimes Enforcement Network (“FinCEN”) Report 114, Report of Foreign Bank and Financial Accounts (“F.B.A.R.”).

Form 8938 has been expanded to reflect changes under F.A.T.C.A., which requires foreign financial institutions to report U.S.-owned accounts to the I.R.S. or face, in some cases, a 30% withholding tax on their U.S.-source income.

In addition, the N.T.A. urged the I.R.S. to reduce the burden on taxpayers with accounts abroad who are bona fide residents of the foreign countries in which they live, suggesting that it should not require banks organized under the laws of those countries to report such accounts under F.A.T.C.A.

I.R.S. Defines Measure for Tax Rate Disparity Test

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In order to reduce its overall foreign tax rate, a company may attempt to separate its foreign manufacturing from its foreign sales operations. If a foreign manufacturing entity sells products at a low margin to a related foreign sales entity in a lowtax jurisdiction, less foreign taxes are paid than if the foreign manufacturing entity sold the products directly to customers. This type of transaction would generally trigger foreign base company sales income (“F.B.C.S.I.”) for the sales entity, while the manufacturing entity could rely on the exception whereby income produced by certain manufacturing activities is not included in F.B.C.S.I. (the “Manufacturing Exception”).

New Centralized Approach to International Audits

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Federal budget cuts have resulted in a new risk-based approach to international audits by the Large Business & International (“L.B.&I.”) division of the I.R.S.

On February 27, Sharon Porter, acting director of International Business Compliance within the L.B.&I., announced that the I.R.S. will “re-engineer” its approach to international audits and begin implementing a pilot program utilizing an experimental centralized method of risk assessment.

Exchanges of Information: What Does the IRS Receive? With Whom Does the IRS Speak?

Published in Intertax, Volume 42, Issue 8&9: August 2014.

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