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IRS NQDC ATG – Helpful, Once You Get Through the Initialism

The Internal Revenue Service (IRS) recently updated its Audit Technique Guide (ATG) for Nonqualified Deferred Compensation (NQDC) plans.  An NQDC plan is an elective or non-elective plan, agreement, method, or arrangement between an employer and a service provider (an employee or independent contractor) to pay the service provider in the future.  NQDC plans do not provide employers and service providers (generally employees) with the tax benefits associated with qualified plans that meet all the requirements of Section 401(a) of the Internal Revenue Code.

While an ATG is published to give guidance to IRS agents in the field, this ATG is very helpful to tax advisors and employers (as are many ATGs).  It provides a good roadmap to insure that NQDCs are in compliance with the rules that allow the deferral of income for employees and to appropriately apply the rules for FICA, FUTA and federal withholding on nonqualified deferred compensation.

Recently, I have had discussions with oil and gas exploration and production companies about setting up NQDCs and incentive compensation plans for key employees.  This ATG does a good job of covering many issues of the more typical nonqualified deferred compensation plans.  Also, the nature of the exploration and production business, unique taxation provisions associated therewith, and the risk-tolerance of many participants in the E&P business combine to provide ample opportunities for developing creative incentive compensation plans.

Start your research of NQDCs with this ATG.  Thank you, IRS.

 

VKM

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Texas Comptroller: It’s good to do business in Texas. It’s not so good to be poor in Texas.

The Texas Comptroller just released a “50-State Scorecard” that compiled from many different sources a list of 26 different measures involving business climate, tax burdens, entrepreneurial activity, unemployment, population characteristics and more.  You can find this compilation of state rankings on the comptroller’s website at http://www.comptroller.texas.gov/fiscalnotes/50states/.

On many business-related measures, Texas ranks among the best of the 50 states.  For example, it is ranked as the best state for business and the second best state in which to make a living.  Texas ranks in the top quartile of states for many economic indicators.

With respect to various “societal” indicators, Texas does not rank so well.  For example, the state ranks in the lower quartile of states for (1) economic opportunity and financial security, (2) income poverty rate, and (3) unbanked households.  Texas ranks 49th – only ahead of California – in residents over 25 having a high school diploma.  More than 18 percent of Texans over age 25 lack this credential, without which it is hard to escape poverty.

Of course, Texas has no personal income tax.  (Despite what we say, people outside of Texas call the Texas Franchise Tax an income tax on business.)  However, we have the third highest residential property tax among the states.  While Texas has the sixth lowest state debt per capita, it has the third highest local government debt per capita.

After carefully reading all the diverse statistics, I reach a conclusion.  I am proud to be a Texan and glad to live in the Lone Star State, except during the summer, tornado season, 100-year floods, and years-long droughts.

 

VKM

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2014 FBARs Must Be Received by Treasury by June 30, 2015 and Other Important Information

The U.S. government has become increasingly concerned about, and focused on, offshore tax evasion.  One tool the government has to combat tax evasion is the Report of Foreign Bank and Financial Accounts (FinCEN Report 114, commonly referred to as FBAR). There are strict rules and severe penalties for failure to timely file FBARs. We have communicated about FBAR requirements with most of our clients who filed their 2014 income tax returns on or before April 15, 2015, as well as many of our clients whose 2014 income tax returns have been extended.

Please read the filing requirements below. If you have any questions about whether or not you have a requirement to file an FBAR, please contact your Huselton, Morgan & Maultsby tax advisor as soon as possible.

The due date for the 2014 FBAR is June 30, 2015.  Under the law, the FBAR must be received by Treasury by June 30.  However, unlike income tax filings, the FBAR due date is not extended to the next business day when the deadline falls over a weekend.  Electronic filing of FBARs became mandatory on July 1, 2013.

The FBAR is required to be filed by two categories of U.S. filers:

  1.  owners of foreign financial accounts; or,
  2.  those U.S. persons with signature or other authority over foreign financial accounts, but no financial interest in the accounts.

The threshold for filing an FBAR is only $10,000 in aggregate for all foreign financial accounts.  The amount per account is measured at the highest point during the year.  The $10,000 threshold has not been indexed for inflation by Treasury since the early 1970s.

 

Owned Accounts

Foreign financial accounts include, but are not limited to, non-U.S. bank and brokerage accounts and foreign mutual funds.  In addition, many foreign pension accounts, such as Canadian Registered Retirement Savings Plans (RRSPs) and Australian Superannuation funds (Supers) are required to be disclosed on the FBAR.

Owners of foreign financial accounts subject to the filing requirements include, but are not limited to, individuals, corporations, partnerships, limited liability companies, estates and trusts.

Importantly, non-U.S. financial accounts that are indirectly owned must also be disclosed on the FBAR.  A typical example of indirect ownership is a U.S. company that owns a foreign subsidiary.  If the U.S. company owns more than 50% of the foreign company, then the foreign company’s bank account is considered to be “owned” by the U.S. company and the U.S. company must then disclose the foreign company’s account on its own FBAR.  The foreign financial account is required to be disclosed by the U.S. company on an FBAR even though the U.S. company does not have its name on the account in this situation.

Unfortunately, in the case of owned accounts, duplicative filings are frequently required.  A U.S. shareholder who owns more than 50% of the U.S. company discussed above would also have to report on his own FBAR the foreign subsidiary’s bank account even though the U.S. company files its own FBAR.  The indirect ownership percentage is more than 50% for the individual U.S. shareholder.  The one bright spot is that attribution for FBAR purposes is limited to situations where there is control.  There is no family attribution, even between spouses.

Once past the $10,000 threshold, all accounts that were open for even one day during calendar 2014 must be reported even if the value of the account was zero.

 

Signature or Other Authority

As for signature or other authority over foreign financial accounts in which the signatory has no financial interest, there is a narrow exception in the case of accounts owned by a U.S. public company.  If a U.S. public company files its own FBAR, then the U.S. employees and officers who are signatories on foreign financial accounts that are directly owned by the U.S. public company do not have to also file their own FBARs if they have no financial interest in the company-owned account(s).  Employees and officers of U.S. companies who have signature or other authority over accounts owned by foreign subsidiaries are not covered by the above exception.

Accordingly, it is vital that U.S. company employees and officers determine whether or not they have signature or other authority over any foreign accounts.  Also, be sure that the external signature cards maintained by the financial institution reflect only the names of currently authorized persons.

Only in the case of accounts owned directly by a U.S. public company, which are already disclosed by the U.S. public company on an FBAR, is there an exception from filing for employees and officers who are signatories.

FinCEN Notice 2014-1 extended the filing date for the FBAR for certain individuals with signature authority over, but no financial interest in, one or more foreign financial accounts to June 30, 2016. If you believe that this extension may apply to you, please consult FinCEN Notice 2014-1 for details or contact your HM&M tax advisor.

 

Penalties

The FBAR is required by the Bank Secrecy Act of 1970 (BSA).  The BSA is a law enforcement statute and is not part of the Internal Revenue Code.  Instead, the BSA is part of the general Treasury Department laws and regulations.  Because of this, the Departments of Treasury and Justice have the ability to impose both monetary civil as well as criminal penalties for the failure to timely file an FBAR.

The FBAR rules are highly complex and far-reaching.  Frequently accounts may be subject to duplicative reporting.  Signature authority is broadly defined and includes more than persons identified as legal signatories on the foreign account and only limited filing exceptions exist for signatories.

* * * * *

Please contact your HM&M advisor soon if you believe that you may need to file an FBAR on or before June 30, 2015.

 

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CRIMINALS OBTAINED INFORMATION ON 100,000 TAX ACCOUNTS THROUGH THE IRS “GET TRANSCRIPT” PROGRAM

The IRS announced last week that criminals had attempted to access about 200,000 accounts in its Get Transcript online application and successfully obtained information from about 100,000 of those accounts.  About 23 million taxpayers used the online Get Transcript application this past filing season.  What information was available through this IRS application depends on what was requested.   The information can include as much as every line item on a tax return, as well as other tax and personal information.

The scammers were able to access the accounts by obtaining sensitive personal information from sources outside the IRS.  Some of this information was tax return-related and other information was not tax return-related, but is information considered to be known only by the taxpayer and used to verify the personal identity of the applicant/taxpayer (called “out of wallet” questions by financial institutions that use similar verification processes).

The IRS is taking several steps to deal with this systems breach.  It temporarily has shut down its Get Transcript online application and the application will remain disabled for an undetermined length of time.  The IRS is sending a letter to all of the approximately 200,000 taxpayers whose account had attempted unauthorized accesses, since the hackers had some amount of personal information about those taxpayers in order to make the attempts, even if they were not successful in accessing the accounts.  The IRS is offering free credit monitoring for the approximately 100,000 taxpayers whose Get Transcript accounts were accessed.  It will be contacting the subject taxpayers by mail with instructions on how to sign up for the credit monitoring.  The IRS says that all the letters will be mailed this week.  The IRS will also be marking the affected taxpayers’ accounts in its core tax account system in order to protect against identity theft and the filing of false tax returns by the criminals.

The IRS emphasizes that the incident affects only one application involving transcripts, does not involve other IRS systems and affects only a small percentage of income tax return filers.  It further suggests that taxpayers do not call the IRS to find out if they are going to receive a letter, since such calls could overwhelm the IRS response capabilities.

If you do receive a letter about this from the IRS, please contact your HM&M tax advisor; it is likely that special procedures may be necessary to file your 2015 and possibly your 2016 tax returns.