Thursday, August 6, 2015

New FBAR Extension and Due Dates: Surface Transportation and Veterans Health Care Choice Improvement Act

New FBAR Extension and Due Dates:

  • Surface Transportation and Veterans Health Care Choice Improvement Act changes the deadline for FBAR Reporting from June 30th to April 15th, the same due date as an individual tax return. 
  • Under new law FBAR (FinCEN Form 114) can be extended for a period of six months ending October 15th, just as an Individual tax return. 
  • IRS and/or FinCEN need to provide further clarification on the format or forms for such extensions, which may be similar to Form 4868, the form used to request extensions on Individual tax returns. There may be a requirement that these extensions be filed on the BSA E-filing Website as in the case of the FBAR forms. 
  • For those who are not resident in the United States and have to file a US tax return, there is an automatic 2-month extension until June 15th, under §1.6081-5. Under new law, this extension is available to any FBAR filing as well. 
  • For those who are filing an FBAR for the first time, new law specifically states that, "for any taxpayer required to file [an FBAR] for the first time, any penalty for failure to timely request or file an extension, may be waived by the Secretary." 
  • The above due dates are applicable for returns filed after December 31st, 2015.
Due dates for Trust returns: Foreign trusts with US Owners and transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, Form 3520-A and Form 3520.
  • Form 3520 and Form 3520-A Deadlines: 
    • The due date for Form 3520-A is March 15th with a maximum 6-month extension until September 15th. Form 3520 is due with the tax returns on April 15th and the maximum extension allowed is 6-months ending October 15th.
    • file a Form 3520, if the following apply:
      1. Gifts or bequests more than $100,000 from a nonresident alien individual or a foreign estate (including foreign persons related to that nonresident alien individual or foreign estate); or
      2. Gifts more than $15,102 (for 2014) from foreign corporations or foreign partnerships (including foreign persons related to such foreign corporations or foreign partnerships).
    • The due date for Form 3520 tax return is the same as the individual tax filing date (April 15th) including extensions (October 15th). You need to include copies of appraisals; copies of documents showing transfer; documentation of unusual items.
    • file a Form 3520-A 
      • Any foreign trust with a US owner must file Form 3520-A in order for the US owner to satisfy its annual information reporting requirements under IRC §6048(b). Each US person treated as an owner of any portion of a foreign trust under §§671 through 679 is responsible for ensuring that the foreign trust files Form 3520-A and furnishes the required annual statements to its US owners and US beneficiaries. 

Saturday, August 1, 2015

Effective Tax Administration (ETA) Offer-in-Compromise (OIC)

Effective Tax Administration (ETA) Offer-in-Compromise (OIC)

Submitting an Offer-in-Compromise (OIC) under doubt as to collectibility even though the client could full pay using equity in the home is plausible if the client could not afford to pay a home equity loan or a mortgage loan and the client had applied and been rejected for a home equity loan in the amount of the tax liability. (OIC's submitted under ETA have a much higher reject rate those submitted under doubt as to collectibility). 

If your OIC is rejected under doubt as to collectibility because the client would not take out a reverse mortgage you can appeal. During negotiations with the Appeals Officer who conducts the CDP hearing, make the following argument:
  • First, calculate reasonable collection potential (RCP) by determining future income and equity/assets. 
  • Calculate the monthly deficit over the life expectancy of the client and arrive at a lump sum deficit. Use the actuary tables at for life expectancies to calculate the lump sum number. Look closely at the Porro and Crosswhite cases for guidance. 
Under IRM, a taxpayer's RCP is defined as net equity plus future income. Under this financial analysis, ability to pay is calculated by determining future income minus allowable expenses. Additionally, Rev. Proc. 2003-71 states that special circumstances are:
  1. circumstances demonstrating that the taxpayer would suffer economic hardship if the IRS were to collect from him/her an amount equal to RCP and
  2. compelling public policy or equity considerations that provide a sufficient basis for compromise. 
In Porro v. Commissioner, TC Memo 2014-81, the Court held it was proper for the Settlement Officer (SO) when calculating RCP to consider the taxpayer's monthly deficit and acknowledge the taxpayer would need to spend over $200,000 of assets in order to meet the taxpayer's future basic living expenses.  The SO excluded net equity/assets of $200,000 (extrapolating living expenses over ten years) from the taxpayer's RCP calculation.

In Crosswhite v. Commissioner, TC Memo 2014-179, the Court sent back to the Appeals Office a case where the Appeals Officer rejected an OIC and only considered net equity,  but failed to determine the taxpayer's RCP by considering future income and monthly deficits.  The Court in Crosswhite cited the Porro case.  Finally, clients operating at a deficit, who need any potential equity to meet future living expenses have a zero RCP. 

When the home needs repairs, and the terms of a reverse mortgage require the recipient to keep the home compliant with various housing standards, a reverse mortgage is not a smart solution because of all the unaffordable costs involved in procuring one. 

Strangely enough, an OIC can be rejected mainly based upon the fact that the client can get a reverse mortgage. 
  • File an ETA OIC on behalf of a client when her current expenses exceed her monthly income even though the equity in her condominium may be in excess of the tax liability due. The taxpayer will be unable to borrow against this equity by way of a conventional home equity loan because she wouldn't be able to repay the amount borrowed.  
  • If the IRS forces the sale of the house, severe adverse consequences would result as it's unlikely the taxpayer could afford replacement housing at the same reasonable cost she's paying now. 
  • If the ETA OIC is rejected meet with the SO in Appeals. If the SO still believes the taxpayer should secure a reverse mortgage, it needs to be explained that a reverse mortgage would shred the only safety net this elderly taxpayer has. 
    • She's 72 years old, in ill health and will likely need all the equity she has in her condo if/when she is forced to move into an assisted living facility.
Question: Can a potential reverse mortgage be a factor considered by the IRS in denying an ETA OIC? The example in paragraph 7 of IRM dealing with equity in real estate seems only to refer to a conventional equity loan, and not a reverse mortgage.

Borland, Tamara, Project Manager, Low-Income Taxpayer Clinic - Iowa Legal Aid