Foreign Financial Accounts Reporting Requirements

Foreign Financial Accounts Reporting Requirements

FS-2007-15, February 2007 With the globalization of the economy, more and more people in the U.S. have foreign financial accounts. While there are many legitimate reasons to own foreign financial accounts, there are also responsibilities that go along with owning such accounts. Foreign account owners must remember that they may have to report their accounts to the government, even if the accounts do not generate any taxable income. Who is required to report their foreign accounts to the government, and how do they do so? The Bank Secrecy Act requires U.S. persons who own a foreign bank account, brokerage account, mutual fund, unit trust, or other financial account to file a Form TD F 90-22.1, Report of Foreign Bank and Financial Authority (FBAR), if: The person has financial interest in, signature authority, or other authority over one or more accounts in a foreign country, and The aggregate value of all foreign financial accounts exceeds $10,000 at any time during the calendar year. A U.S. person is: A citizen or resident of the United States, or Any domestic legal entity such as a partnership, corporation, estate or trust. A foreign country includes all geographical areas outside the United States, the Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands, and the territories and possessions of the United States (including Guam, American Samoa, and the United States Virgin Islands). An account in an institution known as a United States “military banking facility” is not considered to be an account in a foreign country. The FBAR is not an income tax return and should not be mailed with any income tax returns. The FBAR must be mailed on or before June 30 of the following year to: U.S. Department of the Treasury, P.O. Box 32621, Detroit, MI 48232-0621. Unlike with federal income tax returns, requests for an extension of time to file an FBAR are not granted. A person having signature or other authority over, but no financial interest in, a foreign financial account may be excepted from filing an FBAR if they are an officer or employee of a federally-regulated bank or a federally-regulated publicly traded corporation. See the FBAR instructions for more information about this exception. Why is it important to file the FBAR? The FBAR is required because foreign financial institutions that do not conduct business in the United States may not be subject to the same reporting requirements that domestic financial institutions are subject to (such as the requirement to file a Form 1099 to report interest paid to an account holder). Although there are legitimate purposes for having a foreign account, the FBAR is a tool to help the U.S. government identify persons who may be using foreign financial accounts to circumvent U.S. law. Such individuals may be participating in economic crimes such as income tax evasion or embezzlement, or they may be trying to fund other illegal activity like drug trafficking or even terrorist activities. Also, there are serious consequences for foreign account holders who choose not to honor their FBAR filing requirements. Account holders who do not comply with the FBAR reporting requirements may be subject to civil penalties, criminal penalties or both. For an FBAR violation occurring after Oct. 22, 2004, the maximum civil penalty for a willful violation of the FBAR reporting and recordkeeping requirements is the greater of $100,000 or 50% of the balance in the account at the time of the violation. Non-willful violations can result in a penalty as high as $10,000 for each violation. Criminal violations of the FBAR rules can result in a fine and/or five years in prison. More information on FBAR filing exceptions can be obtained on this Web site, the Money Services Businesses’ Web site at www.msb.gov and the Financial Crimes Enforcement Network’s Web site at www.fincen.gov. Help in completing Form TD F 90-22.1 is available at 1-800-800-2877, option 2. The form is available online at www.irs.gov and www.msb.gov or may be ordered by telephone at 1-800-829-3676. Questions regarding the FBAR may also be sent to FBARquestions@irs.gov.

Deducting Rent and Lease Expenses

Deducting Rent and Lease Expenses

FS-2007-14, February 2007 The Internal Revenue Service reminds taxpayers to follow specific guidelines when deducting rent and lease expenses incurred as part of a trade or business. In order to educate taxpayers regarding their filing obligations, this fact sheet, the ninth in a series, explains the rules for deducting these expenses. Rent and lease expenses account for just part of the overstated adjustments, deductions, exemptions and credits that add up to $30 billion per year in unpaid taxes, according to IRS estimates. In general, taxpayers may deduct ordinary and necessary expenses for renting or leasing property used in a trade or business. An ordinary expense is an expense that is common and accepted in the taxpayer’s trade or business. A necessary expense is one that is appropriate for the business. Rented or leased property includes real estate, machinery, and other items that a taxpayer uses in his or her business and does not own. Payments for the use of this property may be deducted as long as they are reasonable. However, special rules and limitations apply to business use of the taxpayer’s rented personal residence and leased automobiles. More information on these topics is in Publication 587, Business Use of Your Home and Publication 463, Travel, Entertainment, Gift, and Car Expenses. Conditional Sales Contract Sometimes payments are listed as “rent” when in reality they are actually for the purchase of the property. A conditional sales contract generally exists when at least part of the payments are applied toward the purchase or entitle the taxpayer to acquire the property under advantageous terms. Payments made under a conditional sales contract are not deductible as rent expense but qualify for depreciation expense over the useful life of the asset. Chapter 4 of Publication 535, Business Expenses, discusses the circumstances under which a conditional sales contract generally exists. Capitalizing Rent Expenses Under certain conditions taxpayers who are in the business of producing real property or tangible personal property for resale, or who purchase property for resale, may not claim rental or lease expenses as a current deduction. Instead, they must include some or all of these costs in the basis of the property they produce or acquire for resale under the uniform capitalization rules. These costs are recovered when the property is sold. More information on this topic is in Publication 538, Accounting Periods and Methods. Business and Personal Use If a taxpayer has both business and personal use of rented or leased property he or she may deduct only the amount used for business. To compute the business percentage, compare the size of the property used for business to the entire size of the property. Use the resulting percentage to figure the business portion of the rent expense. Two commonly used methods for figuring the percentage are: Divide the area (length multiplied by width) used for business by the total area of the property. If the rooms in the property are all about the same size, divide the number of rooms used for business by the total number of rooms. Further Information Further information on this subject is available in the following IRS publications: Publication 535, Business Expenses Publication 587, Business Use of Your Home Publication 463, Travel, Entertainment, Gift, and Car Expenses Publication 538, Accounting Periods and Methods

Eligibility Rules Outlined for EITC

Eligibility Rules Outlined for EITC

FS-2007-13, February 2007 The Earned Income Tax Credit (EITC) is a tax credit for people who work but do not earn high incomes. The EITC is a valuable tool helping eligible taxpayers to lower their taxes or to claim a refund. The IRS wants all eligible taxpayers to claim this credit. Many taxpayers who qualify for EITC may also be eligible for free tax preparation and electronic filing by participating tax professionals and volunteers. Taxpayers and tax professionals should review the rules before attempting to claim the EITC. Do You Qualify for EITC? To qualify, you must meet certain requirements and file a U.S. Individual Income Tax Return. As described below, some EITC rules apply to everyone. There are also special rules for people who have children and for those who do not. Individuals and families must meet certain general requirements: You must have earned income. You must have a valid Social Security Number for yourself, your spouse (if married filing jointly) and your qualifying child. Investment income is limited to $2,800. Your filing status cannot be “married filing separately.” Generally, you must be a U.S. citizen or resident alien all year. You cannot be a qualifying child of another person. You cannot file Form 2555 or Form 2555-EZ (related to foreign earned income). Your income cannot exceed certain limitations. For Tax Year 2006, you must have adjusted gross income of less than: $36,348 ($38,348 if married filing jointly) with two or more qualifying children. $32,001 ($34,001 if married filing jointly) with one qualifying child. $12,120 ($14,120 if married filing jointly) with no qualifying children. If you claim a child, he or she must meet three eligibility tests: Residency Test — The child must have lived with you in the United Statesfor more than half of 2006. Relationship Test — The child must be your son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, or a descendant of any of them. Your child includes: A foster child who was placed with you by an authorized placement agency, or by judgment, decree, or other order of any court of competent jurisdiction. A legally adopted child or a child lawfully placed with you for legal adoption Age test — At the end of 2006, the child must have been under age 19, a full-time student under age 24 or any age if permanently and totally disabled at anytime during 2006. Your qualifying child cannot be used by more than one person to claim EITC. If a child meets the rules to be a qualifying child of more than one person, only one person can treat that child as a qualifying child and claim EITC. If you don’t have a child, you must meet three additional tests: At the end of 2006, you must have been at least age 25, but under age 65. You cannot qualify as the dependent of another person. You must have lived in the United States for more than half of 2006. Credit Limits for 2006 Tax Year Income and family size determine the amount of the EITC. The Earned Income Credit Table, which shows the credit amounts, is included in the Instruction booklet for Form 1040 and in Publication 596, Earned Income Credit. For 2006, the maximum credit amounts are: Two or more children — $4,536 One child — $2,747 No children — $412 Combat Zone Pay Members of the military have the option to include their tax exempt combat zone pay when computing their earned income for EITC. The combat pay remains exempt for federal taxes. However, families should be aware that they must include all of the combat pay or none of it. For example, if the inclusion of combat pay would push a taxpayer’s adjusted gross income above the EITC income limit, taxpayers should leave it out of their EITC calculations. If, however, the inclusion of combat pay would enable a taxpayer to obtain a higher refund, then combat pay should be included. On-Line Tools If you are in doubt about your eligibility, you or your tax preparer may use the new EITC Assistant on the IRS Web site. The EITC Assistant, available in English and Spanish, will help you determine your eligibility by answering a few simple questions. For tax professionals, there is an electronic tool kit at www.eitcfortaxpreparers.com. Avoid Common Errors You are responsible for the accuracy of your tax return. The rules for EITC can be complicated, so you should seek assistance if you are unsure of your eligibility. Some common EITC errors are: Claiming a child who is not a qualifying child. Filing as “single” or “head of household” when the taxpayer actually is married. Reporting incorrect income amounts. Missing or Incorrect Social Security numbers — for both taxpayers and qualifying children. The IRS continues to work on ways to reduce these errors. If you receive a letter from the IRS requesting additional information about your EITC, please reply immediately to avoid delaying your EITC refund. If you need assistance or if you have questions, you should call the number included in the IRS letter. Beware of Scams A deliberate error can have lasting impact on your eligibility to claim EITC. Beware of scams that claim to increase your EITC refund. Scams that create fictitious qualifying children or inflate income levels to get the maximum EITC could leave you with a penalty. If your EITC claim was reduced or denied after tax year 1996 for any reason other than a mathematical or clerical error, you must file Form 8862, Information To Claim Earned Income Credit After Disallowance, with your next return if you wish to claim the credit. How to Claim EITC Publication 596, Earned Income Credit, explains the process. The publication is available at IRS.gov or by calling 1-800-829-3676. Pub. 596 also is available in Spanish. The Instructions for Form 1040 can help you determine your eligibility. The instructions contain a worksheet and the earned income credit table to help you determine the amount of your credit. If you are claming the EITC with a qualifying child, you must complete Schedule EIC and attach it to your tax return. Schedule EIC provides IRS with information about your qualifying children, including their names, ages, SSNs, relationship to you and the amount of time they lived with you during the year. How to Get Tax Help Taxpayers can find help in determining eligibility by using the new EITC Assistant on the IRS Web site. Taxpayers who qualify for EITC should explore available free tax preparation services. The IRS provides assistance to low-income taxpayers at more than 400 IRS offices nationwide. We also partner with local community and non-profit organizations to provide free tax return preparation for low-income and elderly taxpayers at more than 12,000 volunteer sites nationwide. Other options include the use of Free File, the free tax preparation and electronic filing program provided by software companies. Many e-file software providers and tax professionals also provide free services for low income taxpayers. To find a free tax site in your area, call the IRS at 1-800-906-9887. EITC recipients should remember they can get faster access to their refund by using direct deposit. If you use IRS e-file and direct deposit, you could have your refund in half the time of a paper return. Advance Earned Income Tax Credit If you received advance EITC payments in 2006, you must file a tax return to report the payments. Your W-2 form will report your advance EITC amount. You cannot use a Form 1040-EZ to report advance payments. The advance EITC payment program allows you to receive part of the credit through your employer. If you would like to participate for 2007, you must work and receive taxable wages. If you qualify for EITC and you have at least one qualifying child for 2006, give your employer a Form W-5, Earned Income Credit Advance Payment Certificate, and your employer will include part of the credit regularly in your pay. Related Items: IR-2007-24, Paulson, IRS Launch Campaign to Help Low-Income Taxpayers Take Advantage of Tax Credit, Free Tax Help EITC Press Kit IR-2007-23, Free Tax Help Available at Sites Nationwide