The IRS has dropped the second shoe, giving taxpayers guidance through the complex procedural machinations they must follow to avoid the 2010 estate tax.

The IRS released two pieces of guidance for estates of 2010 decedents. Advisor’s Journal covered Notice 2011-66 in a previous edition [see IRS Finally Issues Guidance on 2010 Estate Tax (CC 11-160)]. Today we discuss the second component, Revenue Procedure 2011-41, which provides a safe-harbor for executors of estates of 2010 decedents and beneficiaries of those estates. If the safe-harbor procedure is followed and the executor doesn’t take a contradictory position on a return, the IRS will not challenge the election against the estate tax or the basis allocations made by the executor.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of estates of 2010 decedents in Advisor’s Journal, see IRS Finally Issues Guidance on 2010 Estate Tax (CC 11-160), What Next? ILITs and Estates under 5MM (CC 11-114), & Does the New Estate Tax Make the Bypass Trust Obsolete? (CC-10-122).

For in-depth analysis of the estate tax, see Advisor’s Main Library: Estate, Gift and GST Taxes

Estates of decedents who died in 2010 finally have guidance from the IRS on how to opt out of estate tax treatment and allocate carryover basis to estate property. The guidance is long overdue, and leaves little time for estates to make decisions that could have a massive tax impact.

Under the guidance, Notice 2011-66, to opt out of the estate tax and apply the new carryover basis rules, an executor must file Form 8939, Allocation of Increase in Basis for Property Acquired From a Decedent. The due date for the form is November 15, 2011. But despite the November deadline, Form 8939 and its instructions will not be available until early this fall. The IRS has, however, released a draft version of the form.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of the new estate tax in Advisor’s Journal, see What Next? ILITs and Estates under 5MM (CC 11-114), Does the New Estate Tax Make the Bypass Trust Obsolete? (CC-10-122), 2010 Estates: To Elect or Not to Elect (CC 10-124) & Obama Tax Agreement Passed by House (CC 10-117).

For in-depth analysis of the estate tax, see Advisor’s Main Library: Estate, Gift and GST Taxes.

The IRS launched the Large Business and International Division’s high-wealth industry group (“HNW Initiative”) in October 2009 with the purpose of examining high-net worth individuals for income tax compliance. But the Service may be “using more rhetoric than resources,” according to Syracuse University’s Transactional Records Access Clearinghouse (TRAC). TRAC’s April 14 report, based on information compiled from public records, accuses the IRS of having “very skimpy” audit goals for the HNW initiative.

TRAC’s report indicates that the HNW initiative plans on auditing only 122 returns for the 2011 fiscal year and claims that it will fail to meet even this modest target. According to the report, the IRS will meet only 19% of its audit objectives for the first six months of 2011.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber)

For previous coverage of Tax Court Rulings in Advisor’s Journal, see Tax Court Revives Partnership Self-Employment Tax Debate (CC 11-56), Tax Court Calculates FMV of Policies Distributed from Terminated 419 Plan (CC 11-35), and Tax Court Holds Employee Taxable for Value of Life Insurance Owned by Welfare-Benefit Plan (CC 11-14).

For in-depth analysis on filing income tax returns, see Advisor’s Main Library: G – Income Tax Procedure.

Why is this Topic Important to Wealth Managers?   A wealth manager should be able to present Advanced Market Intelligence on the long-term economic impact of government spending and its ability to raise revenues with clients.

The United States faces daunting economic and budgetary challenges. The economy has struggled to recover from the recent recession, which was triggered by a large decline in house prices and a financial crisis—events unlike anything this country has seen since the Great Depression.

For the federal government, the sharply lower revenues and elevated spending deriving from the financial turmoil and severe drop in economic activity—combined with the costs of various policies implemented in response to those conditions and an imbalance between revenues and spending that predated the recession—have caused budget deficits to surge in the past two years. The deficits of $1.4 trillion in 2009 and $1.3 trillion in 2010 are, when measured as a share of gross domestic product (GDP), the largest since 1945—representing 10.0 percent and  8.9 percent of the nation’s output, respectively. [1]

Also, the recovery in employment has been slowed not only by the moderate growth in output in the past year and a half but also by structural changes in the labor market, such as a mismatch between the requirements of available jobs and the skills of job seekers, that have hindered the employment of workers who have lost their job. Payroll employment, which declined by 7.3 million during the recent recession, gained a mere 70,000 jobs (or 0.06 percent), on net, between June 2009 and December 2010. [2]

However, under current law, CBO projects, budget deficits will drop markedly over the next few years—to $1.1 trillion in 2012, $704 billion in 2013, and $533 billion in 2014. Relative to the size of the economy, those deficits represent 7.0 percent of GDP in 2012, 4.3 percent in 2013, and 3.1 percent in 2014. From 2015 through 2021, the deficits in the baseline projections range from 2.9 percent to 3.4 percent of GDP. [3]

Nevertheless, the deficits that will accumulate under current law will push federal debt held by the public to significantly higher levels. Just two years ago, debt held by the public was less than $6 trillion, or about 40 percent of GDP; at the end of fiscal year 2010, such debt was roughly$9 trillion, or 62 percent of GDP, and by the end of 2021, it is projected to climb to $18 trillion, or 77 percent of GDP. [4]

With such a large increase in debt, plus an expected increase in interest rates as the economic recovery strengthens, interest payments on the debt are poised to skyrocket over the next decade. CBO projects that the government’s annual spending on net interest will more than double between 2011 and 2021 as a share of GDP, increasing from 1.5 percent to 3.3 percent.

Beyond the 10-year projection period (though 2012), further increases in federal debt relative to the nation’s output almost certainly lie ahead if current policies remain in place. The aging of the population and rising costs for health care will push federal spending as a percentage of GDP well above that in recent decades. Specifically, spending on the government’s major mandatory health care programs—Medicare, Medicaid, the Children’s Health Insurance Program, and health insurance subsidies to be provided through insurance exchanges—along with Social Security will increase from roughly 10 percent of GDP in 2011 to about 16 percent over the next 25 years. [5] If revenues stay close to their average share of GDP for the past 40 years, that rise in spending will lead to rapidly growing budget deficits and surging federal debt.

Next week’s blogticles will discuss relevant topics for wealth managers in 2011.

We invite your opinions and comments by posting them below, or by calling the Panel of Experts

 

NB: This work or parts thereof originated from previous official Federal Government publication available to the public.

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[1] See generally Congressional Budget Office. “The Budget and Economic Outlook: Fiscal Years 2011 to 2021”.  January 2010.  http://www.cbo.gov/ftpdocs/120xx/doc12039/SummaryforWeb.pdf.  Last Accessed 2/17/2010.

[2] Id.

[3] See generally Office of Management And Budget. “Budget of the U.S. Government Fiscal Year 2012”-Summary Tables.  http://www.whitehouse.gov/omb/budget/Overview.  Last Accessed 2/16/2011.

[4] Congressional Budget Office. “The Budget and Economic Outlook: Fiscal Years 2011 to 2021”.  January 2010

[5] See Congressional Budget Office, The Long-Term Budget Outlook (June 2010), revised August 2010.

Why is this Topic Important to Wealth Managers? Presents discussion on the national debt and national future financial outlook.  A client wants to know what YOU think about Treasury Notes versus other types of government debt, even foreign government debt.  An understanding of the annual federal national deficit, and its impact on the federal national debt, will provide you a helpful starting point to educate your client, without providing investment advice.

Today’s release of the new federal budget has us at Advanced Markets excited.  We thought an introduction to the current economic condition would therefore be appropriate.  As of September 30, 2010, the federal debt managed by Bureau of the Public Debt totaled about $13,551 billion primarily for borrowings to fund the federal government’s operations.  A Government Accountability Office (GAO) Study recently showed the Federal Debt balances consisted of approximately (1) $9,023 billion as of September 30, 2010, of debt held by the public and (2) $4,528 billion as of September 30, 2010 of intragovernmental debt holdings. [1]

Debt held by the public primarily represents the amount the federal government has borrowed to finance cumulative cash deficits.  To finance a cash deficit, the federal government borrows from the public.  When a cash surplus occurs, the annual excess funds can then be used to reduce debt held by the public.  In other words, annual cash deficits or surpluses generally approximate the annual net change in the amount of federal government borrowing from the public.

Intragovernmental debt holdings represent balances of Treasury securities held by federal government accounts, primarily federal trust funds, that typically have an obligation to invest their excess annual receipts (including interest earnings) over disbursements in federal securities.

The federal debt has been audited since fiscal year 1997. Over this period, total federal debt has increased by 151 percent.  During the last 4 fiscal years, managing the federal debt has been a challenge, as evidenced by the growth of total federal debt by $5,058 billion, or 60 percent, from $8,493 billion as of September 30, 2006, to $13,551 billion as of September 30, 2010.

The increase to the federal debt became particularly acute with the onset of the recession in December 2007. Reduced federal revenues and federal government actions in response to both the financial market crisis and the economic downturn added significantly to the federal government’s borrowing needs.  And, due to the persistent effects of the recession, experts believe federal financing needs remain high.  As a result, the increases to total federal debt over the past three fiscal years represent the largest dollar increases over a three year period in history.  The largest annual dollar increase occurred in fiscal year 2009 when total federal debt increased by $1,887 billion.

During fiscal year 2010, total federal debt increased by $1,653 billion.  Of the fiscal year 2010 increase, about $1,471 billion was from the increase in debt held by the public and about $182 billion was from the increase in intragovernmental debt holdings.

During fiscal years 2008, 2009, and 2010, legislation was enacted to raise the statutory debt limit on five different occasions.  During this period, the statutory debt limit went from $9,815 billion to its current level of $14,294 billion, an increase of about 46 percent.

Recovery from the economic downturn is expected to be slow during the next few years and as a result, deficits are expected to remain high.  The Congressional Budget Office (CBO) estimates the annual federal deficit will be just over $1 trillion for fiscal year 2011, down from $1.3 trillion for fiscal year 2010.  Correspondingly, debt held by the public is expected to grow from an estimated 62.5 percent of gross domestic product (GDP) at the end of fiscal year 2010 to over 66 percent of GDP at the end of fiscal year 2011. The real challenge is not this year’s deficit or even next year’s; it is how best to address the nation’s unsustainable long-term fiscal path over the coming decades.

While considerable attention has been understandably given to the near- term fiscal position, the federal government faces even larger fiscal challenges that will persist long after the return to economic growth.  The budget and economic implications of the baby boom generation’s retirement have already become a factor in near-term budget projections and will only intensify as the baby boomers age.  Since fiscal year 2008, the Medicare Hospital Insurance program has paid more in benefits than it receives in cash from payroll taxes.

In addition, for the first time in over 25 years, the Social Security program, which has historically run large cash surpluses that helped reduce the need to borrow to finance other federal government activities, paid more in benefits than it received in tax income in fiscal year 2010 thereby contributing to borrowing needs.

GAO and CBO’s long-range fiscal policy simulations continue to show that, absent significant changes in policy, the federal government’s fiscal condition over the coming decades is on an unsustainable path.  The sooner action is taken to address this long-term fiscal challenge, the less disruptive and destabilizing the changes will be.  As a result, the nation’s leaders face the challenge of dealing with current economic and financial issues in the context of the need to address the long-term fiscal challenges.

Tomorrow’s Advanced Markets Intelligence blogticle will continue with discussion on the national budget in order to provide you intelligence talking points when asked about the national debt beyond the generic that you may glean from news media.

We invite your opinions and comments by posting them below, or by calling the Panel of Experts

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[1] The full study may be obtained by linking to: http://www.gao.gov/new.items/d1152.pdf.  Last Accessed 2/13/2011.

Why is this Topic Important to Wealth Managers? Discusses particulars of Section 419 plans.  Presents a situation where deduction may be limited due to non-current liabilities.

Company is an accrual basis fiscal year taxpayer.  Company pays severance benefits in its discretion on an ad hoc basis, and vacation benefits pursuant to its established policy.

Historically, Company has paid both severance and vacation pay from its general assets.  Due to a decline in the Market over the past few years, Company has paid significant severance and expects to continue to pay additional severance over the next few years.  Effective Jan 1, 2009 Company established Trust to pay this anticipated severance and vacation pay.  Trust intends to submit an application for recognition of exempt status in 2010.  On 1/1/2009 Company contributed over $1,000,000 to the Trust and deducted that amount on its tax return for 2009.  Company indicates that beginning in 2010, Company will make payments for vacation and severance and will seek reimbursement from the Trust.

Company computed the amount deducted based on the limitation set forth in the Code.

Company has not provided any information documenting any severance claims incurred in 2009 that it expects to pay in 2010.  Company indicates that because the Trust was established “to pay severance that they anticipate they will have to pay over the next few years …”, and because the amount deducted is within the limit set forth in the Code that the deduction is proper.

Assuming the addition to the reserve is within the limit for severance benefits as a “safe harbor”, Company is not required to have actuarial certification of the amount.  This amount does not provide an alternative for determining the account limit, but rather the 75% limit is an upper limit on the amount that an employer may treat as an addition to a reserve for severance pay benefits without actuarial certification.

Thus, to deduct the amount contributed under section 419 in 2009, Company must demonstrate that the amount contributed and deducted in 2009 for severance benefits is not greater than the sum of qualified direct costs plus permitted additions to the qualified asset account, minus after-tax income of the fund.  Accordingly, the amounts either had to be used for benefits paid in 2009 (qualified direct costs), or be within the general limit for severance pay benefits of an amount reasonably and actuarially necessary to pay the claims incurred but unpaid as of the end of 2009.

Whether an amount is reasonably and actuarially necessary to pay the claims incurred but unpaid as of the end of 2009 is a determination that should be made based upon the particular facts and circumstances.

Among factors to take into consideration is whether there is an established obligation to make severance payments for a fixed amount of time, or whether continuation of any severance payments is in the Company’s discretion.  In this example, Company “pays severance benefits in its discretion and on an ad hoc basis”.

Accordingly, Company’s employees do not have an automatic right to severance benefits if they are terminated.  To establish that the severance benefits were “incurred” by the end of 2009, at minimum, Company would need to demonstrate that as of the end of 2009, some of its employees had been terminated, and also demonstrate that it reasonably expected to pay severance benefits to those employees beyond 2009.  In any event, the amount of the deduction in 2009 should not exceed amounts paid in severance benefits in 2009 plus the amount that Company can demonstrate it reasonably expected, as of the end of 2009, to pay beyond 2009 in severance benefits for those terminated employees.

This “reserve for incurred but unpaid claims” as of the end of 2009 would not take into account benefits expected to be paid to employees who as of the end of 2009 were still employed by Company.  The reserve should not take into account any benefits for employees that were expected to be severed in 2010 and beyond, because any severance claims for such employees were not “incurred” by the end of 2009.

Lastly, the reserve must be intended to pay severance benefits, and use for vacation or other benefits particularly within a short period of time, would tend to negate Company’s demonstration of intent, which is generally a consideration with regards to formation of a trust.

Next week’s blogticles will discuss important planning consideration for wealth managers.

We invite your opinions and comments by posting them below, or by calling the Panel of Experts

Why is this Topic Important to Wealth Managers? Provides discussion on the reporting of uncertain tax positions of clients.  Sets forth the requirements of position reporting as well as those who must file the reports. 

Recently, in a series of Announcements the Internal Revenue Service stated that it was developing a schedule requiring certain business taxpayers to report uncertain tax positions on their tax returns. 

Now the new requirements have been finalized, businesses and wealth managers have a better idea of the direction of Uncertain Tax Position reporting.

Reported under Schedule UTP for Form 1120 series, the Uncertain Tax Position reporting currently applies to a select number of corporations (however phase-in provisions will change this by 2012 and 2014). 

Who must file a Schedule UTP?

The class of organizations that must file is limited (for now).   Generally, for 2010 tax year returns most small businesses will not be included in the reporting, but that will probably change.    Nevertheless, a corporation must file Schedule UTP with its 2010 income tax return if:

1. The corporation files Form 1120, U.S. Corporation Income Tax Return; Form 1120-F, U.S. Income Tax Return of a Foreign Corporation; Form 1120-L U.S. Life Insurance Company Income Tax Return; or Form 1120-PC, U.S. Property and Casualty Insurance Company Income Tax Return; (does not include Subchapter S corporations in 2010 but the Service is considering whether to extend all or a portion of Schedule UTP reporting to other taxpayers for 2011 or later tax years, such as passthrough entities and tax-exempt entities).
2. The corporation has assets that equal or exceed $100 million; (the Service has implemented a five-year phase-in of the Schedule UTP for corporations with total assets under $100 million.  Corporations that have total assets equal to or exceeding $100 million must file Schedule UTP starting with 2010 tax years.  The total asset threshold will be reduced to $50 million starting with 2012 tax years and to $10 million starting with 2014 tax years.   
3. The corporation or a related party issued audited financial statements reporting all or a portion of the corporation’s operations for all or a portion of the corporation’s tax year; and 
4. The corporation has one or more tax positions that must be reported on Schedule UTP. [1]

What is a reportable tax position under Schedule UTP?

Schedule UTP requires the reporting of each U.S. federal income tax position taken by an applicable corporation on its U.S. federal income tax return for which the two following conditions are satisfied: 

1. The corporation has taken a tax position on its U.S. federal income tax return for the current tax year or for a prior tax year.  
2. Either the corporation or a related party has recorded a reserve with respect to that tax position for U.S. federal income tax in audited financial statements, or the corporation or related party did not record a reserve for that tax position because the corporation expects to litigate the position. 

An uncertain tax position is loosely defined as a transaction falling under Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109 (FIN 48).  [2]

Tomorrow’s blogticle discusses additional changes wealth managers can expect in 2011. 

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

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[1] Internal Revenue Service. 2010 Schedule UTP Instructions. “Uncertain Tax Position Statement”.  http://www.irs.gov/pub/newsroom/2010_instructions_for_sch_utp.pdf.  Last Accessed 1/16/2011. 

[2] Internal Revenue Service. Announcement 2010-9.  http://www.irs.gov/pub/irs-drop/a-10-09.pdf.  Last Accessed 1/16/2011. 

Why is this Topic Important to Wealth Managers?  As the end of the calendar and personal tax year approaches, Advanced Market Intelligence will focus on end-of-the-tax-year issues that every wealth manager may relay as helpful information to his and her clients.

“How are business expenses reported for income tax purposes?” may initially seem like an easy question for many wealth managers.  But normally, the easiness of answering this question is a result of referring to an information pamphlet by a service provider or perhaps a newspaper article.  Unfortunately, these public sources of information are not always accurate.  Also, because they are trying to present very complex information in understandable terms, these types of sources gloss over finer, yet very important elements, that if known, would impact a decision.

Seldom does the wealth manager take the initiative to undertake his own initial research of the actual rules and how the rules may be applied.  Advanced Market Intelligence has been committed to empowering the wealth manager with the necessary information to efficiently find the important rules and provide examples of how the rules are applied to various example scenarios.  Thus, let us first turn to the legislative rule applying to business expenses.

The Internal Revenue Code (the “Code”), legislated by Congress, establishes rules regarding ‘if and when’ a taxpayer may choose to deduct certain expenses from income.  Congress grants the authority to the Treasury department to write corresponding “Regulations” to address the administration and enforcement surrounding the ability of taxpayers to take such deductions allowed by the Code.  Business expenses are one type of such expense Congress has established for a taxpayer to reduce his gross income.

The Code section establishing the ability of a taxpayer to deduct a business expense is Section 162.  The first part of the first paragraph of Section 162 reads:

(a) In general

There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including— …

In that most taxpayers do not hold a degree specialized in taxation, many will find the Code’s terminology and sentences confusing. An obvious example of a term and a phrase in the first part that may confuse a taxpayer is “ordinary” and “necessary”.  What makes an expense “ordinary” instead of “not” ordinary?  The same can be asked of “necessary”.  And the phrases contains the word “and” which normally is a ‘conjunctive’ (recalling back to high school grammar lessons), meaning that the taxpayer must determine if an expense is both ordinary “and” necessary in order to claim it as a deduction.

The Federal government’s business portal Business.gov provides the following response to the question of what is an ordinary and a necessary expense:  ”An ordinary expense is one that is common and accepted in your field of business.  A necessary expense is one that is helpful and appropriate for your business.”

We can spend a week just digesting the terms “ordinary” and then “necessary”.  But that’s just the start of our investigation and the exercise of assisting a client.  We would require several days examining the terms “paid” or “incurred”; another few days on “taxable year” and finally “trade” or “business”.  By example, because Congress includes the possibility of deduction for either a “trade” or a “business”, a taxpayer will be inclined to ask: “What’s the difference between a trade and a business?”  A taxpayer may think Congress is being repetitive, but normally each word has its own, even important, significance on the application of the Code Section to the taxpayer’s specific situation.

And it quickly goes downhill from there.  The Code Section evolves from this, albeit not simple, somewhat manageable part into a morass of limitations, exceptions to the limitations, and exceptions to the exceptions.  This Code section continues for more than 5,000 words and more than 10 pages to establish when a taxpayer may deduct a business expense.

So by example, immediately following the above part, Congress includes:

(1) a reasonable allowance for salaries or other compensation for personal services actually rendered;

(2) traveling expenses (including amounts expended for meals and lodging other than amounts which are lavish or extravagant under the circumstances) while away from home in the pursuit of a trade or business; and

(3) rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity.

Over this next week, Advanced Market Intelligence will distill this Code Section in relation to  some of the common scenarios that a wealth manager and his client will face.  By example – when is my travelling the “travelling” that Congress includes under (2) above?

Fortunately, for the 173,000 insurance industry and wealth management subscribers of National Underwriters publications and information services, they can obtain access to Advanced Market Intelligence (AdvisorFX) to be able to present to clients and prospects opportunities for deduction of business expenses, and respond to clients and prospects questions before bringing in the tax expert (and the costs associated).

Read the key information you need to know and relate to your client at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber):

Tax Facts 7537. How are business expenses reported for income tax purposes?

Main Library - Section 19. Income Taxes B4—Business Income And Deductions

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

Why is this Topic Important to Wealth Managers? Presents wealth managers with relevant law and analysis related to the HIRE Act and foreign trusts.  Also, discusses important reporting requirements regarding foreign trusts owned by U.S. persons. 

Use of Foreign Trust Property and Deemed Distributions

The new FATCA law expands 26 U.S.C. § 643(i) to provide that any use of trust property by a U.S. grantor or U.S. beneficiary, or any U.S. person related to a U.S. grantor or U.S. beneficiary, is treated as a distribution equal to the fair market value of the use of the property. [1] 

“Thus, the rent free use of real estate, yacht, art work or other personal property (wherever located including the United States) or an interest-free or below-market loan of cash or uncompensated use of marketable securities will trigger a distribution equal to the FMV for the use of such property to the extent of distributable net income”. [2]

However, if the trust is paid the fair market value, within a reasonable period of time, for the use of property or the market rate of interest on a loan by the trust, the new law does not create a deemed distribution. [3]

This provision is effective after March 18, 2010. 

When does a foreign trust have a U.S. beneficiary?

The new also law creates a rebuttable presumption that the trust has a U.S. beneficiary when a U.S. person directly or indirectly transfers property to a foreign trust. [4]

This presumption can be overcome by submitting information (as the Treasury may require) and by demonstrating to the satisfaction of the IRS that (i) under the terms of the trust no part of the income or corpus of the trust may be paid or accumulated during the tax year to or for the benefit of a U.S. person, and (ii) if the trust were terminated during the tax year, no part of the income or corpus could be paid to or for the benefit of a U.S. person. [5]

The presumption becomes effective after March 18, 2010.

Reporting requirement by U.S. owners of foreign trusts.

The new FATCA law also requires U.S. persons, “when treated as an owner of any portion of a foreign trust under the grantor trust rules, to provide information as may be required with respect to the trust, in addition to ensuring that the trust complies with its [traditional] reporting obligations.” [6]

“In other words, if a U.S. person is treated as the owner of a foreign trust under the grantor trust provisions, the U.S. person is responsible for ensuring that the trust files an information return for the year and that the trust provides other information to the IRS as the Treasury may require to each U.S. person who is treated as the owner of any portion of the trust or receives any distribution from the trust.” [7]

The provision is effective for tax years beginning in year 2011.

General reporting rules

If a U.S. person creates or transfers property to a foreign trust, the U.S. person generally must report this event and certain other information by the due date for the U.S. person’s tax return, including extensions, for the tax year in which the creation of the trust or the transfer occurs. [8]

If a U.S. person directly or indirectly receives a distribution from a foreign trust, the U.S. person generally must report the distribution by the due date for the U.S. person’s tax return, including extensions, for the tax year during which the distribution is received. [9]

If a U.S. person is the owner of any portion of a foreign grantor trust at any time during the year, the person is responsible for causing an information return to be filed for the trust, which must, among other things, give the name of a U.S. agent for the trust. [10]

Penalties

The new law increases penalties if the reporting requirements with respect to certain foreign trusts are not met. [11]

“Under the new law, an initial minimum penalty of $10,000 or 35 percent of the gross reportable amount may be imposed for failing to report where the Treasury has insufficient information to determine the gross reportable amount of the property transferred to a foreign trust under [26 U.S.C. § 6048].” [12]

This provision is effective to notices and returns required to be filed after December 31, 2009.

Tomorrow’s blogticle will conclude this week’s discussion of international tax compliance. 

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

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[1] Section 531. HIRE Act. H.R. 2847. 2010.; See generally, TAXES – The Tax Magazine, FATCA: The Global Financial System Must Now Implement a New U.S. Reporting and Withholding System for Foreign Account Tax Compliance, Which Will Create Significant New Exposures—Managing This Risk (Part III). CCH. Sept. 1, 2010. ; See also Dean Marsan. FATCA: An Analysis.  21 JITAX 24, 63-64. 2010. 

[2] TAXES – The Tax Magazine. FATCA. Sept. 1, 2010.

[3] Id.       

[4] Section 532. H.R. 2847;TAXES – The Tax Magazine. FATCA. Sept. 1, 2010.; 21 JITAX 24, 63-64. 2010. 

[5] Id.

[6] 21 JITAX 24, 63.; See also, Section 534. H.R. 2847.

[7] TAXES – The Tax Magazine. FATCA. Sept. 1, 2010.; See also, Section 534. H.R. 2847.

[8] TAXES – The Tax Magazine. FATCA. Sept. 1, 2010. Citing, 26. U.S.C.§ 6048(a).

[9] Id. Citing, 26. U.S.C.§ 6048(c).

[10] Id. Citing, 26. U.S.C.§ 6048(b).

[11] Section 535. H.R. 2847.

[12] TAXES – The Tax Magazine. FATCA. Sept. 1, 2010.; See generally, Section 535. H.R. 2847.