Philip Falco, Attorney, CPA Tax Law Blog

Foreign Parent Dies Owning U.S. Investments: Estate Tax and Form 706-NA

Date
Posted by
Philip Falco
Foreign Parent Dies Owning U.S. Investments: Estate Tax and Form 706-NA

When a parent who was neither a U.S. citizen nor U.S.-domiciled dies owning U.S. investments, the estate may have a U.S. estate-tax filing obligation. That question is separate from a beneficiary’s reporting of an inheritance.

Start With Citizenship, Domicile, and Ownership

Estate-tax residence is based on domicile, which differs from the income-tax residence tests. Determine the decedent’s status at death and what the decedent actually owned. An account title alone may not resolve marital-property rights or another person’s ownership. See the IRS Form 706-NA instructions.

A U.S. Brokerage Account Can Hold Different Types of Property

Review the holdings individually. U.S. real estate and stock of corporations organized under U.S. law generally count as U.S.-situated assets. Qualifying bank deposits and certain debt obligations may receive different treatment. A brokerage balance should not be treated as one uniform asset category. See the IRS overview of nonresident estates with U.S. assets.

When Is Form 706-NA Required?

The general filing threshold is exceeded when U.S.-situated assets at death, plus the specified gift-tax exemption and adjusted taxable gifts described in the instructions, exceed $60,000. Filing does not necessarily mean tax is due. Treaty provisions and allowable deductions require separate review.

The return is generally due nine months after death. Form 4768 provides a procedure for requesting an extension; an extension to file does not automatically extend payment. Use the forms and law applicable to the death involved, following the IRS filing instructions.

The Estate’s Return and the Heir’s Return Are Separate

A qualifying foreign bequest can require a U.S. recipient to file Form 3520 even though the receipt is not itself taxable income. Foreign-estate bequests generally use the more-than-$100,000 reporting threshold, subject to applicable aggregation rules. A foreign-trust distribution requires a different analysis. See IRS guidance on foreign gifts and bequests and our Form 3520 guide.

Build an Accounting From the Date of Death

Today’s account balance is not a substitute for a date-of-death inventory. Assemble a reconciliation showing opening ownership, subsequent income and gains or losses, expenses, distributions, and the remaining assets. Keep the surviving spouse’s pre-existing property separate from property passing through the estate.

When foreign probate remains open, ask local counsel to establish the heirs’ rights and the status of any distributions. If an heir has also died, identify the interest passing through that heir’s estate. Coordinate those findings with the U.S. tax analysis before assigning the entire current balance to one person or trust.

Documents for a Cross-Border Estate Review

  • Death certificate and citizenship and domicile history.
  • Wills, trusts, marital-property agreements, and probate records.
  • Statements around the date of death, with individual securities identified.
  • Ownership and contribution records for joint accounts.
  • Prior gift and estate filings and records of foreign taxes.
  • A ledger of later earnings, expenses, reimbursements, and distributions.

For a related question about a family living abroad with a U.S. trust, read Can a U.S. Living Trust Become a Foreign Trust?

Philip Falco, Attorney and CPA, can evaluate U.S. estate-tax and international-reporting issues alongside the estate accounting. Schedule a tax attorney consultation.

This article provides general information. Ownership, domicile, treaty provisions, and the law applicable at death can change the result.

Can a U.S. Living Trust Become a Foreign Trust?

Date
Posted by
Philip Falco
Can a U.S. Living Trust Become a Foreign Trust?

A living trust created under U.S. state law can be a foreign trust for federal tax purposes. U.S. accounts, a U.S. mailing address, and a U.S.-citizen grantor do not resolve the question by themselves. Conversely, a trustee moving abroad does not automatically make the trust foreign.

Two Tests Determine Whether a Trust Is Domestic

The court test asks whether a U.S. court can exercise primary supervision over trust administration. The control test asks whether U.S. persons control every substantial trust decision. Both must be satisfied. Review the trust instrument, applicable law, and actual administration together. See Treasury Regulation Section 301.7701-7 and its explanatory guidance.

Overseas Administration and the Court-Test Safe Harbor

The safe harbor generally requires that the instrument not direct foreign administration, that administration actually occur exclusively in the United States, and that the trust lack a disqualifying automatic migration clause. Failing this safe harbor does not automatically fail the court test: the broader question remains whether a U.S. court has the required supervisory authority.

A U.S.-Citizen Trustee Living Abroad

A U.S. citizen generally remains a U.S. person while living abroad. Location alone therefore does not decide the control test. Examine voting arrangements, vetoes, distribution powers, and trustee-replacement authority. Analyze court supervision separately.

Domestic or Foreign Is Different From Grantor or Nongrantor

These are separate classifications. A foreign trust can have a U.S. owner under the grantor-trust rules, with income taxable to that owner and additional information returns required. Reporting investment income on Form 1040 does not itself satisfy foreign-trust reporting. See the IRS overview of foreign trust taxation and reporting.

Questions to Resolve Before Preparing Returns

  • Which version of the trust governed during each period?
  • Who could make or veto distributions, investment decisions, or trustee appointments?
  • Where were records maintained and administrative responsibilities performed?
  • What changed when a trustee moved, resigned, died, or became unable to serve?
  • Which people funded the trust, received payments, or benefited from trust property?

A useful review creates a dated history instead of applying today’s facts to every prior year. A later amendment should be examined for its actual effect and effective date; it should not be assumed to settle earlier reporting.

Which Forms May Apply?

Form 3520 addresses specified ownership and transactions involving foreign trusts. Form 3520-A generally addresses annual reporting for a foreign trust with a U.S. owner, subject to applicable exceptions. Its filing and extension rules differ from those for Form 3520. See the IRS Form 3520-A instructions.

Separate Form 8938 or FBAR analysis may also be necessary. Classifying a trust as foreign does not turn an account maintained in the United States into a foreign bank account.

What If Earlier Returns Were Missed?

Begin with classification, the relevant years, ownership, and transactions. Then evaluate the appropriate delinquent-return procedure and any related income omissions. Discuss uncertainty and any proposed protective filing with counsel; a label alone does not establish that a submission is complete or eliminates penalties.

What to Bring to a Trust Classification Consultation

  • The original trust, all amendments, and trustee appointment or resignation documents.
  • A timeline of trustee locations, responsibilities, and significant decisions.
  • Account statements, prior returns, and trust tax-identification records.
  • A transfer ledger with invoices, reimbursement records, and supporting correspondence.
  • Any prior written advice or IRS notices.

Philip Falco, Attorney and CPA, can evaluate trust classification together with the related tax filings. Schedule a tax attorney consultation. For related planning, see Wills, Trusts, and Estate Planning.

This article provides general information; the result depends on the governing documents, applicable law, and facts for the period involved.

Form 7203: Who Must File and How It Relates to Form 1120-S

Date
Posted by
Philip Falco
Form 7203: Who Must File and How It Relates to Form 1120-S

Form 7203 is filed by an S corporation shareholder with the shareholder’s own tax return when a filing requirement applies. For an individual shareholder, that generally means the Form 1040 return. It is not an attachment that the S corporation files with Form 1120-S on every shareholder’s behalf.

The form tracks stock and debt basis and helps determine the treatment of losses, distributions, and loan repayments. Philip Falco, a Denver tax attorney and CPA, coordinates these issues with S corporation tax return preparation and the owner’s individual return.

Is Form 7203 required to be filed with Form 1120-S?

No. The corporation files Form 1120-S and provides Schedule K-1 information to shareholders. A shareholder uses that information, together with their own basis records, to determine whether Form 7203 must accompany their return. The form itself states that it is attached to the shareholder’s tax return. See IRS Form 7203.

This distinction is especially important when different professionals prepare the corporation’s and owner’s returns. The preparers need to coordinate the information, but the filing obligations remain separate.

Who must file Form 7203?

The IRS instructions identify four filing triggers for an S corporation shareholder:

  • Claiming a deduction for the shareholder’s share of an aggregate loss, including a loss previously limited by basis;
  • Receiving a non-dividend distribution;
  • Disposing of stock, whether or not gain is recognized; or
  • Receiving repayment of a loan made to the S corporation.

Receiving a Schedule K-1, by itself, is not a substitute for checking those triggers. Do not assume the form is unnecessary merely because the business is profitable or because an owner expects a distribution to be tax-free.

Must you maintain basis in a year when filing is not required?

Basis remains important even in a year with no filing trigger. The IRS says it may be beneficial to complete and retain Form 7203 in those years so basis is consistently maintained. Keeping the calculation in the records is different from saying that every shareholder must file the form every year.

An incomplete history can become a problem when a later year involves losses, distributions, a stock sale, or repayment of shareholder debt. Reconstructing several years at that point can require old returns, K-1s, contribution records, and loan documentation.

Stock basis and debt basis answer different questions

Stock basis reflects the shareholder’s investment and applicable adjustments over time. Debt basis concerns qualifying indebtedness of the corporation to the shareholder. They are tracked separately, and sufficient debt basis does not automatically make a distribution tax-free.

A guarantee of the corporation’s bank debt does not, by itself, create shareholder debt basis. The IRS instructions discuss the different treatment when a guarantor actually makes a payment. Review how an advance or payment was documented instead of relying solely on a bookkeeping label.

A simple stock-basis example

For illustration, assume a shareholder begins with $20,000 of stock basis, contributes $5,000, is allocated $10,000 of income, and receives an $8,000 non-dividend distribution. With no other adjustments, ending stock basis is $27,000. Actual calculations must account for the applicable ordering rules and all relevant transactions.

Why the K-1 and the balance sheet may not be enough

A current K-1 reports the year’s items; the shareholder’s starting basis may depend on transactions from earlier years or the way stock was acquired. The business’s book equity is not necessarily the shareholder’s tax basis.

For example, an owner may have contributed cash, received distributions, and used losses across several years. Looking only at the latest K-1 can omit the history needed for the current calculation. A useful workpaper traces the opening balance, relevant changes, and closing balance, with support for each.

Basis is only one limit on deducting an S corporation loss

A loss allowed by the basis calculation can still be affected by other rules, including at-risk, passive-activity, or excess-business-loss limitations. The IRS stock and debt basis guidance explains why these limitations need to be considered separately.

Records to provide with the S corporation return

  • Current and prior K-1s, Forms 7203, and suspended-loss schedules;
  • Records of stock purchases, contributions, gifts, inheritances, or sales;
  • Distribution details and the dates of ownership changes;
  • Shareholder loan documents, advances, repayments, and guarantee payments; and
  • The corporation’s financial statements and the shareholder’s prior tax returns.

Our Denver tax preparation services coordinate business and owner reporting. Related Colorado obligations are discussed in our DR 0106 filing guide.

Schedule a $500 Tax Attorney Consultation to discuss basis records and coordinated return preparation. The fee covers up to one hour of total attorney time, including review, analysis, preparation, and the telephone consultation. Return preparation requires a separate engagement.

General information; filing requirements and tax treatment depend on the shareholder’s transactions and circumstances.

Related S Corporation Tax Resources

S corporation basis affects loss deductions, distributions, taxable gain, return preparation, and the treatment of shareholder transactions.

S Corp 1120S and Partnership 1065 Colorado filing Requirement DR 0106

Date
Posted by
Philip Falco
S Corp 1120S and Partnership 1065 Colorado filing Requirement DR 0106

S Corps 1120S & Partnerships 1065 that meet Colorado Revised Statute 39-22-301(1) must file Colorado DR 0106. If your S Corp or Partnership was organized or commercially domiciled in Colorado, among others, then it must file DR 0106. CRS 38-22-201(1).

The DR0106 effectively captures Colorado state income tax on nonresident shareholders and partners. In addition, it enables taxpayers who wish to use the SALT Parity Act.

Colorado House Bill 23-1277, “CONCERNING THE FILING OF INCOME TAX RETURNS BY BUSINESS ENTITIES” made changes to CRS 39-22-601. The good news is that pursuant to CRS 39-22-302, “An S corporation shall not be subject to taxation under this article.” This is the flow-through S Corp tax concept written into Colorado law.

However, nonresident shareholders are subject to Colorado income tax. In the instance where an S Corp or Partnership has Colorado nonresident shareholders it generally must pay income tax on their behalf. They could also file an agreement.

Pursuant to CRS 39-5-102, county assessors must beam a list of nonresident property owners to the Colorado Department of Revenue (CDR). If the nonresident is running a short term rental, you could be sure they will get notice from the CDR. If the nonresident is a shareholder of an S Corp, the CDR can then file a DR 0106 and assess tax. There is also a hefty penalty for nonpayment of Colorado tax that surely will be applied.

There is a new focus to tax nonresidents of Colorado income. This focus is embodied in the changes to 39-22-601.

Colorado DR 0106 reporting should be coordinated with the federal return. We prepare both S corporation Form 1120-S returns and partnership Form 1065 returns, including related Colorado reporting.

Colorado pass-through entity reporting is one part of broader business tax preparation, which should coordinate the federal entity return, Colorado filings, shareholder or partner reporting, and the owner’s individual return.

Related Colorado Business Tax Resources

Colorado pass-through entity filing requirements should be coordinated with federal returns, ownership reporting, shareholder basis, and entity classification.

Missing IRS Refund

Date
Posted by
Philip Falco
Missing IRS Refund

If you did not receive IRS refunds, check the refund status here: https://www.irs.gov/wheres-my-refund.

If you are sure about the missing refund, you need to start a refund trace by calling and speaking to an IRS agent 800-829-1040. You could also fill out IRS form 3911. You could fax the form to the appropriate number here: https://www.irs.gov/forms-pubs/about-form-3911.

You should place an identity protection pin on your file with an agent.

Related IRS Collection Options

The appropriate collection strategy may depend on the taxpayer’s finances, filing compliance, assets, collection deadlines and current IRS enforcement activity.

The real problem with Colorado graduated tax proposal

Date
Posted by
Philip Falco
The real problem with Colorado graduated tax proposal

The real problem with the Colorado graduated tax proposal is that it converts a Colorado Constitution limitation to a statutory enablement.

The proposal would permit the Colorado legislature to increase taxes on income at any time. This would be very dangerous for the State of Colorado. The proposal deletes a key provision of the Colorado Constitution that limits the Colorado legislature from changing the approximate 4.5% tax rate. The Colorado Constitution provision that would be deleted is as follows: “Any income tax law change after July 1, 1992 shall also require all taxable net income to be taxed at one rate, excluding refund tax credits or voter-approved tax credits, with no added tax or surcharge.”

Once deleted, the Colorado legislature could raise the tax rate as they see fit. The proposal entices voter approval of the key Constitution provision by proposing a tax cut on approximately 98% of Coloradans. Yes this is enticing. However, going forward the legislature could raise taxes on those 98% at any time since the key Colorado Constitution would be gone forever.

As such, the proposal enables the Colorado legislature to tax at will, while deleting the Colorado Constitution limitation to tax.

Whether you are for or against this is up to you. You decide.

Related Colorado and Federal Tax Resources

These related articles address additional Colorado, federal and business-tax issues that may affect planning or compliance.

Related Colorado Tax Resources

Colorado tax policy affects individuals, businesses, real estate owners, and the preparation of Colorado income tax returns.

Form 1065 and 1120-S Filing Deadlines and Late Filing Penalties

Date
Posted by
Philip Falco
Form 1065 and 1120-S Filing Deadlines and Late Filing Penalties

Updated September 12, 2026. Covers calendar-year 2025 returns filed in 2026.

For calendar-year 2025 partnership and S corporation returns, the regular federal filing deadline was March 16, 2026. A timely, valid extension generally moves the deadline to September 15, 2026. The March date shifts because March 15 falls on a Sunday. Fiscal-year businesses and taxpayers covered by special relief may have different deadlines. See the IRS instructions for Form 1065 and Form 1120-S.

Missing the deadline can create a substantial penalty even when the business owes no federal income tax. Before calculating exposure, establish the return year, whether an extension was valid, and how many people held ownership interests during the year.

When are partnership and S corporation returns due?

Federal return for calendar year 2025 Regular filing deadline Extended filing deadline with a timely, valid extension
Partnership Form 1065 March 16, 2026 September 15, 2026
S corporation Form 1120-S March 16, 2026 September 15, 2026

For a fiscal-year entity, the general deadline is the 15th day of the third month after its tax year ends, subject to applicable exceptions. Do not use the calendar-year dates without confirming the business’s tax year. IRS Form 1065 instructions, IRS Form 1120-S instructions.

How does Form 7004 extend the deadline?

Most partnerships and S corporations use Form 7004 to request an automatic six-month filing extension. It generally must be filed by the original return deadline. Keep proof of timely filing and, for an electronic submission, the acceptance acknowledgment.

A business extension does not extend an owner’s individual return. An owner’s personal extension likewise does not extend the business return. Filing Form 7004 also does not extend the time to pay tax that is due. IRS Form 7004 instructions.

September 15 is normally the end of the regular extension for a calendar-year entity. However, an IRS disaster postponement or other applicable special relief can change the deadline. Check the relief announcement’s covered taxpayers, locations, and filing periods before relying on a later date. IRS disaster tax relief.

How much is the late-filing penalty?

For returns required to be filed in 2026, the basic federal late-filing penalty is generally $255 per partner or shareholder for each month or part of a month, for up to 12 months. Count everyone who was a partner or shareholder at any time during the tax year, rather than just the owners remaining at year-end. The amount is adjusted for inflation, so use the rate applicable to the return’s required filing year. IRS failure-to-file penalty guidance.

For the basic penalty, the calculation is:

$255 × number of partners or shareholders × months or partial months late, up to 12.

Owners during the tax year 1 penalty month 2 penalty months 12 penalty months
2 $510 $1,020 $6,120
4 $1,020 $2,040 $12,240

These examples exclude other penalties and assume no relief applies. An S corporation owing tax can face additional tax-based penalties. Missing or incorrect Schedules K-1 can also create separate exposure. IRS Form 1120-S instructions.

Does October 1 start a second penalty month?

No. Penalty months are measured from the applicable due date, rather than by counting calendar months touched by the delay.

For a return validly extended to September 15, 2026, the first penalty month runs September 16 through October 15. Filing on October 2 falls within that first period. With four owners, the basic penalty would therefore be $1,020, assuming no special relief or other penalties. Filing on October 16 enters a second penalty month and increases that amount to $2,040. These examples apply the IRS’s due-date-based method for counting penalty months. IRS penalty computation guidance.

Can a penalty apply when no tax is owed?

Yes. The partnership filing penalty concerns the required information return and can apply even without entity-level income tax. An incomplete return can also trigger a penalty. IRS Form 1065 instructions.

S corporations generally pass income and other tax items through to shareholders, but some owe entity-level taxes, including certain built-in gains taxes. Saying that no tax is ever due with Form 1120-S would be inaccurate. IRS Form 1120-S instructions.

What should you do after missing the deadline?

  1. Verify the filing history. Locate the return, extension, electronic acceptance records, and any IRS notices.
  2. Finish the required filing. Reconcile the books and prepare complete returns and owner schedules promptly.
  3. Check the penalty calculation. Compare the IRS’s due date, owner count, applicable rate, and number of late months against the records.
  4. Evaluate relief. Identify the applicable relief provision and gather the evidence it requires.

Keep a dated chronology of what prevented filing and what steps the business took to resolve the problem. If a notice has arrived, preserve it and track its response deadline. For assistance with overdue filings, see our unfiled tax returns service.

Can the IRS remove the penalty?

Depending on the facts, reasonable cause may support relief. Certain small partnerships may qualify under Revenue Procedure 84-35. Having ten or fewer partners is only one condition: partner eligibility, consistent proportional allocations, timely owner reporting, and the other IRS requirements must also be checked. This partnership provision is not an S corporation exemption. IRS CP162A notice guidance.

Administrative relief may also apply. The IRS describes a transition beginning in summer 2026 from First Time Abate to Automatic Exemption from Penalty for eligible returns, including Forms 1065 and 1120-S. Eligibility depends on the applicable period and compliance history. If a penalty was assessed, check whether relief was applied or needs to be requested. IRS administrative penalty relief.

For help evaluating a notice and supporting a request, see our tax penalty abatement service.

Colorado DR 0106 has a different deadline

The federal September deadline should not be confused with Colorado’s filing schedule. For calendar-year 2025, Colorado DR 0106 is generally due April 15, 2026, with an automatic six-month filing extension to October 15, 2026. The state extension does not extend the payment deadline. Colorado’s 2025 DR 0106 instructions.

See our separate discussion of Colorado partnership and S corporation filing requirements for the state return.

Help with a partnership or S corporation return

If your business needs a return prepared, review our Form 1065 partnership tax services or Form 1120-S S corporation tax services. If you received a penalty notice, bring the notice, extension confirmation, filed return, and ownership history to a consultation so the filing obligation and potential relief can be evaluated together.

Employment Tax Audit – 941, 940, W2. Footnote on IRS downsizing

Date
Posted by
Philip Falco
Employment Tax Audit – 941, 940, W2. Footnote on IRS downsizing

We recently represented several taxpayers in employment tax audits stemming from discrepancies between Forms 941 and W-2.

Employment tax should have zero errors: quarterly 941s should match year-end W-2s and the W-3. The 940 should also match. Finally, the income tax return (1040 schedule C, 1120S, 1065, 1120) should match as far as wages, payroll tax. If any of these are inconsistent, a payroll tax audit could follow suit.

Typically there are gaps in 941s filed. There might be gaps in 941 payments. In other words, if the tax shown in the W-2 plus the employer side (15.3 percent) does not match deposits, an audit could be triggered.

Once an audit is triggered, it is more expansive in scope and years. The income tax return is reviewed for irregularities, and the number of years reviewed is expanded. In addition, state issues are reviewed such as state unemployment tax payment, rate. Employee benefits are reviewed such as health insurance, pension/profit sharing plans, automobile use, allowances, reimbursements.

Employee records are checked triggering potential illegal alien employment audit such as with employee Forms I-9 and W-4. Cash disbursements are checked, vendor payments, 1099s. All books and records can be checked, including accounting software. These audit exams are handled by IRS Revenue Agents with vast power.

It has been my recent experience that the IRS downsizing efforts have taken a toll. I have heard repeatedly from various agents about the stress and effects throughout the entire country. I recently heard of an effort of 40% downsizing. Many agents do not know if they can complete an audit because they might be terminated. I just thought it was interesting to note the real time effect.

Payroll filings should be reconciled with the underlying business income-tax return before inconsistencies attract IRS attention. Our tax compliance review can examine returns, payroll filings, information returns, and supporting records for discrepancies before an examination begins.

Related Employment Tax and IRS Audit Resources

Employment tax examinations can involve Forms 941 and 940, payroll deposits, worker reporting, trust-fund taxes, penalties, and possible collection action.

Paid Tax Return Preparer Audits

Date
Posted by
Philip Falco
Paid Tax Return Preparer Audits

Over the years we have represented several tax preparers who the IRS selects for examination as part of the Paid Preparer Due Diligence Program. The IRS has gotten better at zeroing in on the preparers who abuse refundable tax credits. These audits can be frightening with the serious potential to lead to criminal investigation.

If you file returns with PTIN and/or EFIN, the IRS is tracking you. These are very effective audits. The IRS can select one preparer with a pattern of abuse and audit several hundred returns. Oftentimes, the preparers are unlicensed. They are not CPAs, attorneys, or enrolled agents. They may have taken some courses over the years but really do not know what they are doing.

The preparers are often high volume preparers with clients in the hundreds. Oftentimes, their clients have earned income credit, head of household, or the child tax credit along with Schedule C. The dependents may be questionable, such as being on more than one return or not living with the taxpayer. A pattern of using Schedule C to optimize these credits is identified, examined, and seriously questioned. Schedule C abuse is serious in the eyes of the IRS.

The legal basis for these audits is the requirement to be compliant with the due diligence requirements by the regulations under the Internal Revenue Code Section 6695(g). There are penalties under IRS 6695(g) and they quickly add up to be draconian.

Form 8867, Paid Preparer’s Due Diligence Checklist, is implicated. Retention of records and substantiation of credits, schedule C. Various records will be probed by the agent under different scenarios. Worksheets and documentation are critical to persuade the agent of the exercise of due diligence. The credibility of the preparer is on the line.

Feel free to call us if you would like representation.

Related IRS Audit and Tax Preparer Resources

Tax preparer examinations may involve due diligence, return patterns, substantiation, client files, penalties, and potential civil or criminal exposure.

Charitable Remainder Annuity Trust – High Value, Low Basis Property for Income Stream

Date
Posted by
Philip Falco
Charitable Remainder Annuity Trust – High Value, Low Basis Property for Income Stream

So you are getting older and have been successful in life. Now you own property, perhaps real estate, that has substantially increased in value but has a low adjusted basis. If you were to liquidate that property you would incur a large tax liability.

You want to tap into that value by way of an income stream. One solution is to contribute that property to a Charitable Remainder Annuity Trust (CRAT), the CRAT then sells the property tax free and purchases an annuity. But is the receipt of the annuity income tax free (perhaps a single premium immediate annuity SPIA)? That would be too good to be true, unfortunately per Internal Revenue Code 664. Here’s how that breaks down.

What is a Charitable Remainder Annuity Trust – CRAT?

The basic concept of a CRAT involves a grantor’s transfer of property to an irrevocable trust, the terms of which provide for the payment of a specified amount, at least annually, to the grantor or other designated noncharitable beneficiaries for life or another predetermined period of time up to twenty years. I.R.C. § 664(d). What remains in the trust after the expiration of that period (which cannot be less than 10 percent of the initial net fair market value of all property placed in the trust, I.R.C. § 664(d)(1)(D)) must be transferred to one or more qualified charitable organizations or continue to be held in the trust for the benefit of such organizations. In short, unlike an immediate gift to charity, a contribution to
a CRAT blends the philanthropic intentions of a donor with his or her financial needs or the financial needs of others.

As a rule, the grantor recognizes no gain when transferring appreciated property to a CRAT. Moreover,
because CRATs are exempt from income tax, a CRAT can sell appreciated property without itself paying tax on the sale. See I.R.C. § 664(c)(1); Treas. Reg. § 1.664-1(a)(1)(i).

But that does not mean that the grantor or other noncharitable CRAT beneficiaries do not have to pay tax with respect to distributions from the CRAT. “Although a [CRAT] is itself exempt from income tax
and, therefore, pays no tax on any of its taxable income, the annuity . . . payments made to the noncharitable beneficiaries carry out taxable income that is subject to tax at the beneficiary level.” Alpha I, L.P. v. United States, 682 F.3d 1009, 1015 (Fed. Cir. 2012) (stating the rule and citing section 664(b) and (c)(1)). This is so because when property is transferred to a CRAT, the basis of the property in the CRAT’s hands generally is the same as it would be in the hands of the grantor. See I.R.C. § 1015(a) and (b); Treas. Reg. §§ 1.1015-1(a)(1), 1.1015-2(a)(1).

And when the CRAT sells the property, it realizes gain to the extent the amount realized from the sale exceeds its adjusted basis. I.R.C. § 1001; see also Treas. Reg. § 1.664-1(d)(1)(i) (discussing the assignment of income to categories at the CRAT level). Although not taxable to the CRAT, that gain must be tracked and affects the treatment of distributions from the CRAT. See, e.g., Treas. Reg. § 1.664-1(d)(1)(viii)
(providing examples illustrating the rules).

Congress has established specific ordering rules that govern the characterization and reporting of annuity amounts distributed by a CRAT to its income beneficiaries. See I.R.C. § 664(b). Under this regime, distributions from a CRAT to income beneficiaries are deemed to have the following character and to be distributed in the following order:
(1) as ordinary income, to the extent of the CRAT’s current and previously undistributed ordinary income;
(2) as capital gain, to the extent of the CRAT’s current and previously undistributed capital gain;
(3) as other income, to the extent of the CRAT’s current and previously undistributed other income; and
(4) as a nontaxable distribution of trust corpus.

CRATs are subject to strict reporting requirements to ensure compliance with the statutory ordering rules. See I.R.C. § 4947(a); Treas. Reg. § 1.664-1(a)(1)(ii). A CRAT must file an annual information return on Form 5227 reflecting its income, deductions, accumulations, and distributions for the year. See I.R.C. § 6011(a); Treas. Reg. § 53.6011-1(d). And it must issue to each income beneficiary a Schedule K–1 properly describing the tax character of all distributions. See I.R.C. § 6034A(a); Treas. Reg. § 1.6034-1(a).

For example, what CRAT earned was ordinary income because the properties the CRATs sold were subject to the rules of section 1245—hence, distributions to grantor would be ordinary income.

Charitable remainder trusts can affect capital-gain reporting, basis, Schedule K-1 income, charitable deductions, and the beneficiary’s individual tax return. These issues often arise as part of high-net-worth tax preparation and planning.

Transactions involving highly appreciated property, charitable structures, trusts, or the timing of a sale can also benefit from advance tax strategy and planning before the structure or disposition is finalized.

Related Trust, Asset Protection, and Tax Planning

Charitable remainder trust planning may involve appreciated property, income taxation, estate planning, asset protection, and the timing of a sale.

Gotcha: IRS Tax Return Proposed Changes CP2000 – Omitted 1099

Date
Posted by
Philip Falco
Gotcha: IRS Tax Return Proposed Changes CP2000 – Omitted 1099

We have handled the following situation many times so I figured I would write a post about it. This is very common.

The bad news. Taxpayer receives CP2000 from the IRS, which is IRS’s proposed changes to the 1040 tax return. IRS has a before (shown on return) and after column (as corrected by the IRS). Typically taxpayer has forgotten to include a 1099, such as a 1099-S from the sale of a home, or perhaps a 1099-MISC as to schedule C income.

Taxpayer is scratching his/her head thinking well no tax is owed since the gain from the sale of my home was less than the principal residence tax exclusion of $250,000 or $500,000 for married couples. True but the IRS wants to see the steps.

Also, you might think that the 1099-MISC income was included in schedule C gross income. True but the IRS wants to see the 1099 tied to gross income and reported with the return. In truth, IRS proposed change would double include that 1099 income since it was already included on your schedule C, but the IRS does not know that.

The IRS does not give taxpayers the benefit of the doubt. Taxpayers must apply appropriate tax rules in their return. The IRS assumes worst case scenario when proposing changes, which must then be disproved by the taxpayer. Give us a call to handle this for you.

If you go at it alone, you would have to correct the return and provide the correct documentation to the IRS. If the IRS accepts your corrections, the assessment will be adjusted correctly and you win, or at least set the record straight.

Related IRS Notice and Audit Resources

A CP2000 proposed adjustment may require document review, reconciliation of information returns, amended reporting, penalty analysis, and a timely response.

Tax Debt Collection: Statute of Limitations Tolling

Date
Posted by
Philip Falco
Tax Debt Collection: Statute of Limitations Tolling

The IRS has a limited amount of time to collect your tax debt. This blog post discusses some of your actions or reasons why that time period could be extended (tolled). To put it in simple terms, tolling is bad or hurts the taxpayer.

The IRS through the United States Department of Justice can file an action in the United States District Court pursuant to 26 U.S.C. 7401 to reduce your tax debt to judgment on the very last day of the expiration of the statute of limitations. If the action is timely, the statute of limitations is no longer relevant since (assuming a judgment is entered) the tax debt is reduced to judgment. As such, exact calculation of the statute of limitations is critical. Here are some matters that could have extended your period.

Absent events that toll the statute of limitations, 26 U.S.C. § 6502(a) provides a general ten-year collection statute of limitations starting on the date a tax is assessed. The collection statute of limitations is tolled under 26 U.S.C. § 6330(e) anytime there is pending a collection due process hearing under 26 U.S.C. § 6330(a)(3)(B). A taxpayer is entitled to request such a hearing before the IRS levies. See 26 U.S.C. § 6330(e).

The collection statute of limitations is further tolled under 26 U.S.C. § 6330(e) for 90 days after the day on which there is a final determination of a collection due process hearing under 26 U.S.C. § 6330(a)(3)(B).

The collection statute of limitations is also tolled when an offer to enter into an installment agreement is pending between the taxpayer and the IRS. See 26 U.S.C. §§ 6502(a)(2), 6331(i), (k). The collection statute of limitations is tolled for thirty days following the rejection or termination of an installment agreement. See 26 U.S.C. § 6331(i), (k).

So if your installment is pending for a year and then terminated, the statute of limitations would be tolled for a year plus thirty days.

The statute of limitations tolling begins on the day you, the taxpayer, request an installment agreement even though it could take months for the IRS to accept or reject that request. For example, assume the IRS receives your request on July 20, 2015, to enter into an installment agreement for tax years 2011 and 2012. That request was pending until December 16, 2015 when the IRS granted the installment agreement request for tax years 2011 and 2012. Accordingly, the pending installment agreement request tolled the collection statute of limitations for tax years 2011 and 2012 for at least 149 days (July 20, 2015 to December 16, 2015).

There is some debate over the 90 day period. Under 26 U.S.C. § 6330(e), the statute of limitation period shall not expire “before the 90th day after the day on which there is a final determination in such hearing.” The collection statute of limitations is not further tolled for 90 days but if the final determination is less than 90 days from the date the period expires, then the statute of limitation period is from the 90th day after the date of final determination. See also Reg. § 301.6330-1(g)(3).

related content:

Unpaid taxes – Offers in Compromise

Tax Liens, Tax Levies, Collection Due Process Hearings

If you would like an analysis of your collection period statute of limitations, please contact me (303) 626-7000 phil@coloradolegal.com.

New Entity EIN and Tax Classification

Date
Posted by
Philip Falco
New Entity EIN and Tax Classification

This is one of the most important steps that could impact the entire future of your new business. Take your time before applying for an EIN with the Internal Revenue Service. Severe adverse tax consequences could impact the future of your entity.

Entity classification is a tax-planning decision, not merely an administrative filing. Our tax strategy and planning service evaluates entity choice and other decisions before they create long-term tax consequences.

Name selection. If you choose a name with Corp, or Inc, the default entity will likely be a C Corporation. Taxpayers almost always do not intend on being C Corporations.

If you choose LLC (limited liability company) and you are a sole owner it will most likely default to schedule C on your 1040.

In addition, if you answer questions indicating that you will have payroll, and you very well could, it will trigger the filing of payroll forms typically 940 and 941 with automatic filing dates required, which in turn trigger Colorado state withholding filings, Colorado Department of Labor and Employment, and possibly the Denver Head Tax. In addition, it could trigger worker’s compensation insurance.

Save the letter you get from the IRS SS-4 or IRS CP 575 A for the life of your business.

Tax Tips:

  • Avoid Corp or Inc unless you know exactly what you are doing
  • Be prepared to set up State and local payroll accounts if you have employees
  • Most LLCs will be on schedule C of your 1040, or form 1065 if you have more than just you as a partner

Once the entity classification is established, the ongoing filing obligations should be coordinated with the business and owner returns. See our business tax preparation service for LLC, S corporation, partnership, and closely held business filings.

Related Business Legal and Tax Services

Business decisions often involve overlapping legal, tax, financial-reporting, ownership and entity-structure considerations.

S Corp Requirements (disproportionate distributions)

Date
Posted by
Philip Falco
S Corp Requirements (disproportionate distributions)

S Corporations can only have one class of stock. An argument can be unsuccessfully made that uneven de facto distributions to shareholders would be more than one class of stock. However, so long as the corporate documents call for even distributions all is ok even if uneven distributions subsequently occur.

The legal basis for this is found in the regulations: the regulation tells the IRS to focus on shareholder rights under a corporation’s governing documents, not what shareholders actually do. The regulation states that uneven distributions don’t mean that the corporation has more than one class of stock. Treas. Reg. § 1.1361-1(l)(2) (“[A] corporation is not treated as having more than one class of stock so long as the governing provisions provide for identical distribution and liquidation rights . . . .”).

Taking a step back, the first rule is that shareholders have to choose to be taxed as an S corporation. Shareholders do so by filling out a Form 2553, Election by a Small Business Corporation, that they file with the IRS. See Treas. Reg. § 1.1362-6(a)(2)(i). Once the IRS approves, the election remains effective indefinitely. § 1362(c); see Mourad v. Commissioner, 121 T.C. 1, 4 (2003), aff’d, 387 F.3d 27 (1st Cir. 2004).

A great many small and medium-sized businesses elect S corporation status because the Code affords them special treatment—income earned by the corporation escapes corporate-level taxation. Mourad, 121 T.C. at 3; see §§ 1363, 1366. That income is instead “passed through” to its shareholders pro rata. See §§ 1363, 1366. But electing to be an S corporation is not enough. The Code has several other requirements. These include having no more than 100 shareholders, having only shareholders who are individuals—or certain trusts or nonprofits—and not having any nonresident alien shareholders. § 1361(b)(1). The parties don’t dispute that Schricker met these requirements.

There’s one other requirement. Section 1361(b)(1)(D) allows a corporation to be an S corporation only if it has no more than one class of stock. What does that mean? Section 1361 doesn’t say, but we know that run-of-the-mill debt isn’t a second class of stock. § 1361(c)(5)(A). And neither are differences in common-stock voting rights. § 1361(c)(4).

The regulation gives us a little more help. It generally treats a corporation as having only one class of stock so long as all the shares confer equal rights to dividends and liquidation proceeds. Treas. Reg. § 1.1361-1(l)(1) (“[A] corporation is treated as having only one class of stock if all outstanding shares of stock of the corporation confer identical rights to distribution and liquidation proceeds”).

The regulation also tells us to determine whether stock confers identical rights to distributions and liquidation proceeds based on the corporation’s governing provisions. Id. subpara. (2)(i). These are
documents like a corporate charter, articles of incorporation, and bylaws. Id. The IRS has said it won’t treat any disproportionate distributions made by a corporation as violating the one-class-of-stock requirement if the governing provisions provide for identical rights. Rev. Proc. 2022-19, § 3.02, 2022-41 I.R.B. 282, 286.

As you can see this topic is a Pandora’s box. Luckily we have some common-sense regulations to pave the way forward, thank you Department of Treasury 🙂

Distribution issues should also be reviewed as part of S corporation tax return preparation, because distributions interact with shareholder basis, Schedule K-1 reporting, and the shareholder’s Form 1040.

Related Business Legal and Tax Services

Business decisions often involve overlapping legal, tax, financial-reporting, ownership and entity-structure considerations.

Guilty until Proven Innocent? Tax Court Burden of Proof

Date
Posted by
Philip Falco
Guilty until Proven Innocent? Tax Court Burden of Proof

Who has the upper hand in Tax Court, the IRS or the Taxpayer? You decide.

You are considering filing a petition with the United States Tax Court perhaps regarding your Notice of Deficiency post IRS audit. Here are a few rules of play to be aware of.

The IRS’s determinations in a notice of deficiency are generally presumed correct, and taxpayers bear the burden of proving them erroneous. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). This puts the main hurdle on the Taxpayer. To put it in common terms, the Taxpayer is presumed guilty, not innocent (these are civil matters, not criminal so this is an analogy). Walking into Tax Court, Taxpayer must prove the IRS’s position is wrong.

All is not hopeless. However, if a taxpayer produces credible evidence with respect to one or more factual issues relevant to the taxpayer’s tax liability, the burden of proof may shift to the IRS as to that issue or issues. § 7491(a)(1). Likewise, the IRS’s determination does not receive a presumption of correctness if the determination is shown to be arbitrary and capricious. Helvering v. Taylor, 293 U.S. 507, 514 (1935); Cohen v. Commissioner, 266 F.2d 5, 11 (9th Cir. 1959), remanding T.C. Memo. 1957-172. Also, the IRS bears the burden of proving new matters asserted in its answer. See Rule 142(a).

Tax Court proceedings are conducted in accordance with the Federal Rules of Evidence. § 7453; Rule 143(a).

Section 7491(a)(1) provides that if, in any court proceeding, a taxpayer introduces credible evidence with respect to any factual issue relevant to ascertaining the liability of the taxpayer for any tax imposed by subtitle A or B, the IRS shall have the burden of proof with respect to that issue. See Higbee v. Commissioner, 116 T.C. 438, 440–41 (2001). For the burden to be placed on the IRS under this section, however, the taxpayer must demonstrate that he has: (1) complied with the requirements under the Code to substantiate any item, (2) maintained all records required under the Code, and (3) cooperated with reasonable requests by the Secretary for witnesses, information, documents, meetings, and interviews. See § 7491(a)(2); Higbee, 116 T.C. at 440–41.

Related IRS Audit and Tax Controversy Resources

Tax Court disputes often arise from audits, notices of deficiency, evidentiary issues, penalties, and the taxpayer’s obligation to substantiate return positions.

CFO and Board Service

Date
Posted by
Philip Falco
CFO and Board Service

Chief Financial Officer for your company. Given the dual licensing as a Certified Public Accountant and Attorney, this background and 30 years of business experience is a good fit. Your company could add tremendous value in terms of tax guidance, financial planning, and legal guidance.

For larger companies:

-keeping track of internal audits

-integrating recommendations into policy

-internal fraud prevention and detection

-Legal exposure prevention.

Smaller companies:

-tax compliance and strategy

-legal compliance

-legal structure

Give us a call to discuss (303) 626-7000

Ongoing CFO and advisory work is most effective when financial reporting, payroll, tax planning, and annual returns are coordinated. Our business tax preparation service handles that annual filing component for closely held businesses and their owners.

Businesses that need recurring tax guidance without a full CFO engagement may also use our year-round tax advisory service for proactive tax planning and ongoing coordination throughout the year.

Related Business Legal and Tax Services

Business decisions often involve overlapping legal, tax, financial-reporting, ownership and entity-structure considerations.

City & County of Denver Taxes

Date
Posted by
Philip Falco
City & County of Denver Taxes

So what are these mysterious taxes? Here they are:

Sales Tax – On the purchase price for all sales and purchases of tangible personal property, etc. Return due on or before the twentieth (20 th ) day of each month for sales occurring in the preceding calendar month

Use Tax – There is levied and there shall be collected and paid a tax in the amount stated in this article, by every person exercising the taxable privilege of storing, using, distributing or consuming in the city tangible personal property, or a product or service subject to the provisions of this article, purchased at retail, for said exercise of said privilege, etc. Return due on or before the twentieth (20 th ) day of each month for sales occurring in the preceding calendar month.

Lodger’s Tax –  There is hereby levied and shall be collected and paid a tax by every person exercising the taxable privilege of purchasing lodging, etc. Return due on or before the twentieth (20 th ) day of each month for sales occurring in the preceding calendar month.

Employee Occupational Privilege Tax – There is hereby levied by the city upon and there shall be collected monthly from and paid to the manager by each employee who performs services within the city for any period of time in a calendar month for an employer, an employee’s occupational privilege tax, at the rate of five dollars and seventy-five cents ($5.75) per month for each and every month in which such employee is, for any period of time, so employed. Return due on or before the last day of each month for the taxes required to be remitted for the preceding calendar month.

Business Occupational Privilege Tax – There is hereby levied by the city upon, and there shall be collected monthly from and paid to the manager by, every person engaged in any business, trade, occupation, profession or calling of any kind having a fixed or transitory situs within the city, for any period of time in a calendar month within the city, a business occupational privilege tax in the sum of four dollars ($4.00) per month for the first owner, partner, manager or employee, and the additional sum of four dollars ($4.00) per month for each and every additional owner, partner, manager or employee who performs within the city for any period of time in a calendar month any services or other activities in the operation of such business, trade, occupation, profession or calling within the city. Return due on or before the last day of each month for taxes required to be withheld for the preceding calendar month.

Facilities Development Admissions Tax – “Admission” shall mean the right to an entrance and an occupancy of a seat or an entrance alone, of a person who, for a consideration by whatever name known, including involuntary “contributions,” uses, possesses or has the right to use or possess entrance and occupancy of a seat or an entrance alone to any entertainment, amusement, athletic event, exhibition or other production or assembly staged, produced, convened or held at or on any facility or property owned or leased by the city, including, but not limited to, the following facilities: the Denver Coliseum Complex; the Red Rocks Theatre; Phipps Auditorium; the Denver Performing Arts Complex; the National Western Stock Show Complex; and the Colorado Convention Center. Return due on or before the fifteenth day of each month for sales occurring in the preceding calendar month

Telecommunications Tax – There is levied a tax on the privilege of engaging in the telecommunications business within the city upon each business so engaged one and twelve-hundredths dollars ($1.12) for each account of such business regarding a customer for which local exchange telecommunications are provided by said business within the city. Return due on or before the twentieth (20 th ) day of each calendar month for taxes required to be remitted for the preceding calendar month.

Buyer beware!  Returns required upon sale of business; purchaser subject to lien. (a) Any taxpayer who shall sell out a business or stock of goods or shall quit business shall be required to make out a return as provided in this chapter within ten (10) days after the date the taxpayer sold out the business or stock of goods or quit business, and a successor in business shall be required to withhold sufficient of the purchase money to cover the amount of the tax due and unpaid until such time as the former owner shall produce a receipt from the manager showing that the taxes have been paid or a certificate that no taxes are due. (b) If the purchaser of a business or stock of goods shall fail to withhold the purchase money as provided in subsection (a), and the tax shall be due and unpaid after the ten (10) day period allowed, the purchaser, as well as the taxpayer, shall be personally liable for the payment of the taxes unpaid by the former owner. Likewise, anyone who takes any stock of goods or business fixtures of or used by any employer under lease, title-retaining contract or other contract arrangement, by purchase, foreclosure sale or otherwise, takes same subject to the lien for any delinquent taxes owed by such employer and shall be liable for the payment of all delinquent taxes of such prior owner, not, however, exceeding the value of the property so taken or acquired.

Related Denver and Colorado Tax Resources

Denver businesses and residents may encounter local taxes in addition to Colorado and federal filing obligations.

Cryptocurrency Tax Compliance

Date
Posted by
Philip Falco
Cryptocurrency Tax Compliance

We are now performing tax compliance for taxpayers with Cryptocurrency, the Cryptocurrency net worth of which exceeds 1 million (U.S. convertible).  We are the best at what we do.

Tax year 2017 is a critical tax year for Cryptocurrency.  Getting 2017 correct will provide a foundation for huge gains in later years.  You must seize the moment.

The Internal Revenue Service is focusing on noncompliant taxpayers in this space.  This is evident by the John Doe Summons issued on Coinbase.  As many of us have read, the Internal Revenue Service has obtained information about 14,355 Coinbase account holders.  Coinbase has been ordered to provide the IRS with the taxpayer’s name, etc., for those individuals who have bought, sold, sent, or received more than $20,000.  In addition, the Securities and Exchange Commission is paying attention, which is evident by statements made about Initial Coin Offerings (ICO’s).

The day of tax reckoning is inevitable.  Time is of the essence to properly disclose huge transactions.  Please feel free to call us.  (303) 626-7000.

 

 

 

Related Cryptocurrency and International Tax Resources

Cryptocurrency reporting can involve basis, transaction history, foreign accounts, information reporting, return preparation, and IRS examination exposure.

S.A.L.T. deduction cap of $10,000 effect in Colorado

Date
Posted by
Philip Falco
S.A.L.T. deduction cap of $10,000 effect in Colorado
The State and local tax (SALT) deduction is limited to $10,000 for tax years beginning 2018.  As such there has been confusion as to whether a taxpayer can prepay 2018 SALT in 2017 and take a full deduction in 2017 thereby avoiding the $10,000 limitation in 2018.  As to Colorado, this has been my experience. To put this in context, this refers to cash method taxpayers.  Under certain circumstances, cash method taxpayers may prepay liabilities to take a deduction in the year paid as compared with year accrued.  As such, if a Colorado county would not accept payment of a 2018 tax due, then the cash method defeats the prepayment strategy, not the new tax bill. The cap includes both real estate and income tax.  State income tax cannot be prepaid because of the second to last sentence of the amendment below.  However, real property tax can possibly be prepaid.  Whether the real property tax can be prepaid depends on whether 2018 real property tax has been assessed by that particular county.  Denver has assessed 2018 and it is payable now so Denver could be prepaid.   I checked some other counties and visibility is not clear so call to check with your particular county as to whether the real property tax has been ASSESSED.  If so, and the combined anticipated 2018 SALT (income and property tax) exceeds $10,000, go pay that real estate tax for some tax savings. It has been my experience in real estate transactions to provide a credit to purchasers for the prior year real estate taxes because they were assessed although not yet due.  This provides further basis to make the case that prepaying 2018 tax is a deduction in 2017. I have received a case example from a reader of this post.  Taxpayer went to the Arapahoe County Treasurer today, December 29, 2017.  The Treasurer informed taxpayer that Arapahoe considers the tax assessed on May 1, when they value properties.  He promptly paid his 2017 taxes due 2018 and the treasurer gave him a receipt with 2017 printed on it. Colorado does seem perfectly aligned to prepay your taxes due 2018 in 2017 for a deduction in 2017 to thereby avoid the $10,000 cap in  the new bill.  Of course, there is AMT! Here’s the text: SEC. 11042. LIMITATION ON DEDUCTION FOR STATE AND LOCAL, ETC. TAXES. (a) IN GENERAL.-Subsection (b) of section 164 is amended by adding at the end the following new paragraph: ”(6) LIMITATION ON INDIVIDUAL DEDUCTIONS FOR TAXABLE YEARS 2018 THROUGH 2025.-In the case of an individual and a taxable year beginning after December 31, 2017, and before January 1, 2026- ”(A) foreign real property taxes shall not be taken into account under subsection (a)(1), and ”(B) the aggregate amount of taxes taken into account under paragraphs (1), (2), and (3) of subsection (a) and paragraph (5) of this subsection for any taxable year shall not exceed $10,000 ($5,000 in the case of a married individual filing a separate return). The preceding sentence shall not apply to any foreign taxes described in subsection (a)(3) or to any taxes described in paragraph (1) and (2) of subsection (a) which are paid or accrued in carrying on a trade or business or an activity described in section 212. For purposes of subparagraph (B), an amount paid in a taxable year beginning before January 1, 2018, with respect to a State or local income tax imposed for a taxable year beginning after December 31, 2017, shall be treated as paid on the last day of the taxable year for which such tax is so imposed.”.  (b) EFFECTIVE DATE.-The amendment made by this section shall apply to taxable years beginning after December 31, 2016. Also review the IRS bulletin on this topic: https://www.irs.gov/newsroom/irs-advisory-prepaid-real-property-taxes-may-be-deductible-in-2017-if-assessed-and-paid-in-2017.

Related Colorado and Federal Tax Resources

State and local tax deductions interact with Colorado filing obligations, federal return preparation, real estate ownership, and business taxation.

Panama Papers: The Case for FATCA Global Adoption

Date
Posted by
Philip Falco
Panama Papers: The Case for FATCA Global Adoption

The disclosure of the Panama Papers promises to cause global unrest as exemplified by the recent protests in Iceland.  As more and more leaders are tied to illicit offshore bank accounts, continued unrest is sure to follow.  FATCA, the Foreign Account Tax Compliance Act, at first appeared to be a time-consuming nuisance for banks is now proving to be a potent weapon of democratic society.

FATCA was implemented to target non-compliant United States taxpayers by forcing banks around the world to report bank balances of U.S. taxpayers to the United States government. U.S. taxpayers of every type must come forward and not only declare foreign accounts but also pay undeclared tax.  It forces all U.S. taxpayers to play by the same rules.  A true democracy cannot be had unless monetary rules are leveled for all involved.

The reportable bank balances are those of United States taxpayers, but not of foreign nationals who have no duty to report under United States laws.  As a result, many of those identified in the Panama Papers were unlikely reportable taxpayers pursuant to FATCA.  Consequently, countries throughout the world would find it prudent to contemplate adopting a FATCA-like disclosure model to maintain peace, disrupt political corruption, and level the monetary playing field.

Related Offshore Account and International Tax Resources

Foreign account reporting may involve FATCA, FBAR filing, willfulness, voluntary disclosure, penalties, and possible criminal-tax exposure.