A new tax reporting obligation is being imposed on U.S. individuals that have an interest in specified foreign financial assets when the total aggregate value of those assets exceeds an applicable reporting threshold. This reporting obligation is effective starting for tax year 2011 and is satisfied by attaching Form 8938, Statement of Foreign Financial Assets, to the individual taxpayer’s 2011 Form 1040. The penalties for failing to file a required Form 8938 are severe. Thus, U.S. individuals with interests in foreign assets must carefully analyze their potential obligation to report such interest on a Form 8938 attached to their 2011 Form 1040.

Only Individuals … For Now

The IRS anticipates issuing regulations that will require certain domestic entities to file Form 8938 if such entity were formed or availed of to hold specified foreign financial assets. Until the IRS issues such regulations, only individuals must file Form 8938. The IRS has stated that they intend to issue regulations applicable to domestic entities during 2012. Thus, some domestic entities may have this filing obligation starting with their 2012 tax returns. However, the obligation will only be imposed on individuals with respect to 2011 tax returns.

Specified Foreign Financial Assets

Individuals must identify whether they have an interest in any specified foreign financial assets. For this purpose, a specified foreign financial asset is defined as:

• Any financial account maintained by a foreign financial institution; and
• The following assets to the extent that they’re held for investment and not held in a financial account:
  • Any interest in a foreign entity;
  • Any stock or securities issued by someone that is not a U.S. person; and
  • Any financial instrument or contract with an issuer or counterparty that is not a U.S. person.

The term “held for investment” encompasses all assets that are not used in, or held for use in, the conduct of any trade or business. Stock is never considered used or held for use in the conduct of a trade or business.

There are exceptions to the definition of “specified foreign financial asset” for assets that are subject to the mark-to-market accounting rules and for assets held in a domestic bankruptcy trust.

Applicable Reporting Threshold

Individuals that own an interest in specified foreign financial assets must then value each interest based on the highest fair market value of each asset during the tax year as well as the value of each asset as of the last day of the tax year. The Form 8938 is required if the aggregate fair market value of all the individual’s specified foreign financial assets exceeds certain thresholds. Married individuals that file a joint income tax return file a single Form 8938 that reports all the specified foreign financial assets of both spouses. The filing thresholds vary based on the individual’s filing status and whether or not the individual lives within the U.S. The following table summarizes the filing thresholds:

Penalties

The failure to comply with the Form 8938 reporting obligation can result in significant penalties. The penalties can be waived by the IRS if the failure to file was due to reasonable cause and was not willful. However, there can be no guarantees that the failure to file penalties will be waived. There are at least seven different penalties that can be imposed with respect to Form 8938. The general failure to file penalty is $10,000 per failure. The IRS can impose an additional $10,000-per-month penalty if the failure continues after the taxpayer is notified by the IRS. If unreported income is associated with the undisclosed specified foreign financial assets, there is a 40% accuracy related penalty. The statute of limitations remains open for all or part of the tax return until three years after the date on which the required Form 8938 is filed. Furthermore, there is a special six-year statute of limitations for unreported income associated with disclosed specified foreign financial assets. Finally, fraud and criminal penalties can be imposed when there is a willful failure to file that is part of a tax evasion scheme.

The above client alert provides a brief summary of this new reporting obligation. There are significant nuance and details that are beyond the scope of this alert. Please contact your Katz, Sapper & Miller advisor to discuss specific questions that may be applicable to you.

Idaho Updates Guidance Regarding Sales Tax on Interstate Vehicles – Effective 7/1/12, HB 361 provides that, in the context of the tax exemption for motor vehicles and trailers substantially used in interstate commerce and registered under the International Registration Plan (IRP), “substantially used in interstate commerce” means that the vehicle or trailer is operated in a fleet that logs at least 10% of its fleet miles outside of Idaho in the four fiscal quarters beginning July 1 and ending June 30 of each year (previously, in an annual registration period) under the IRP. If such motor vehicle or trailer is not substantially used in interstate commerce during the four fiscal year quarters beginning July 1 and ending June 30 of each year (previously, during an annual registration period), it is deemed to be used in Idaho and it is subject to the Idaho use tax.

Illinois Issues Ruling on Independent Contractor and Nexus - The Illinois Department of Revenue determined that a taxpayer's contracting sales of services in Illinois on a regular basis would “likely” subject the taxpayer to Illinois income taxation. The taxpayer operates a 24/7 call center for national retailers with multi-site locations. The business consists of coordinating contracted labor on an as-needed basis for its national customers, some of them located in Illinois. The “contracted” work is done by independent contractors as the taxpayer does not have payroll, inventory, personal property or a physical presence in Illinois. However, Ill. Admin. Code 86 § 100.9720(c)(6) provides that the use of independent contractors may only afford a nonresident immunity from taxation for “limited activities.” The IL DOR indicated that the fact that the taxpayer's business is entirely set up around using independent contractors on a regular basis may jeopardize the protections otherwise afforded. See IT 12-0001-GIL for details.

 

Over the past decade, the transportation industry has been transformed by the simultaneous hit of the Great Recession and the sting of stiffer EPA standards. These factors have caused several interesting byproducts, including the resurgence of glider kits. Read more

To read the full text of the Truck Times newsletter, go here.


 

The VOW to Hire Heroes Act of 2011 provides an expanded Work Opportunity Tax Credit (WOTC) to businesses that hire eligible unemployed veterans and for the first time also makes the credit available to certain tax-exempt organizations.

The Act allows employers, including qualified tax-exempt organizations, to claim the credit for qualified veterans who begin work on or after Nov. 22, 2011, and before January 1, 2013.

The credit is claimed as a credit against the employer's share of social security tax by separately filing Form 5884-C, Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans.

IRS Notice 2012-13 contains additional guidance for tax-exempt employers claiming the credit.

Note: For purposes of the credit, a qualified tax-exempt organization is "an employer that is an organization described in section 501(c) and exempt from taxation under section 501(a)."

For more information, including how to claim the credit, read the IRS news release and related materials (including FAQs), or contact your KSM advisor.

Source: Internal Revenue Service


 

Indiana Use Tax Not Due on Promotional Items: An Indiana corporation was not liable for use tax on items it manufactured and pulled from its inventory in Indiana for use as promotional items in other states because the items were only temporarily stored in Indiana for subsequent use outside Indiana. The items were consumed in the course of demonstrations at non-Indiana locations. The products did not return to Indiana. This is temporary storage for use outside Indiana and does not constitute storage subject to Indiana use tax. See LOF 04-20110134 for more information.

Connecticut To Issue Debit Cards for Refunds: The CT Department of Revenue Services will issue personal income tax refunds in the form of debit cards, rather than checks, to taxpayers who do not use direct deposit. DRS has contracted with JP Morgan Chase to administer the debit card program. Taxpayers will have to call Chase to activate the card and select a PIN. The debit card can be used at ATMs; banks and credit unions displaying the VISA logo; gas stations and retail locations that accept VISA. If the taxpayer does not activate the debit card within 365 days, the debit card account will be closed and the available balance will be returned to DRS. If the debit card is activated and a balance remains, after the 12th consecutive month of inactivity (365 consecutive days of inactivity), Chase will begin charging an inactivity fee of $1.00 per month. Visit the FAQs for more information on the program.

Kentucky Requires Estimates of Nonresident Withholding for 2012: Effective for taxable years beginning after December 31, 2011, every pass-through entity required to withhold Kentucky income tax will be required to make a declaration and pay estimated tax if : (1) the nonresident individual owner's tax liability can reasonably be expected to exceed $500; and/or (2) a corporate owner doing business in Kentucky only through its ownership interest in a pass-through entity has a tax liability that can reasonably be expected to exceed $5,000. When withholding on the distributable share income of nonresident individuals, estates, trusts and corporations, no withholding is made for partners or members that are pass-through entities. The distributive share income will continue to pass through as Kentucky source income requiring withholding at each level of each pass-through entity of multiple tier structures. Therefore, withholding, as well as the calculation to determine if an entity is required to make declaration payments, will be at each level of the structure using only the nonresident individual and corporations doing business in Kentucky only through their ownership interest in the pass-through entity. Trusts and estates are entities treated as individuals and are included in the withholding requirement. See KY Tax Alert 1 for additional information.