The Thai Revenue Department recently issued Order No. 16/2023 (the “Order”), which marks a significant shift in Thai tax policy as it relates to Thai Residents, who derive income from foreign sources or own offshore assets. The Order, which was signed by the Director General of the Thai Revenue Authority,  mandates that effective January 1, 2024, individuals living in Thailand must report their earnings from foreign sources and pay tax on those earnings and must also report their overseas assets in the year those earnings are repatriated to Thailand.

The Order relates to the interpretation on Section 41, Paragraph 2 of the Revenue Code which provides that individuals must declare income acquired abroad if their work duties, business activities, or assets are based outside of Thailand, in the tax year in which the income is brought into Thailand.

The previous interpretation under Section 41 Paragraph 2 provided that assessable income derived by a Thai tax resident from employment, business carried on overseas, or from property situated overseas, was subject to Thai personal income tax only if taxable income was brought into Thailand in the same tax year.  Thus, Thai tax residents were previously able to park their foreign source income offshore for a year and then repatriate the income without being subject to Thai income tax. The new Order changes all that.

The Order applies to an individual subject to Section 41, Paragraph 3 of the Revenue Code who has assessable income attributable to work duties, business activities or asset located overseas.  Paragraph 3 defines a tax resident of Thailand, in relevant part, as an individual who stays in Thailand for a period or periods aggregating 180 days or more in any tax year.

The affected taxpayers are now required to report the assessable income or assets, pursuant to Section 48 of the Revenue Code.

In furtherance of implementing the Order, on September 15, 2023, the Thai Revenue Authority also issued Instruction No. Por 161/2566 (“DI No. 161/2566”) for the benefit of Thai Taxpayers to assist them in determining when they are required to include foreign source income and assets for Thai tax purposes and pay personal income tax in Thailand.

  1. No. 161/2566 effectively repeals prior rules, regulations, instructions, rulings, or practices that inconsistent with the interpretation under the new Order.

All is not lost, however.  A Thai resident is entitled to a foreign tax credit if the assessable income is subject to tax in the source country and the tax paid.  This is consistent with provisions contained in Thailand’s Tax Treaties designed to avoid double taxation.

The requirements for filing Form 5471 are quite complex and confusing.  The obligation to file Form 5471 depends upon the specific facts of each case. Hence, one size does not fit all.

In the context of the Form 5471 filing requirements, I have received a number of inquiries in connection with the application of the constructive ownership rules related  to Foreign Corporations where ownership is shared with a non-resident alien, spouse, parent or grandchild.

The following illustration and discussion considers the specific question as to whether a taxpayer who is married to a non-resident alien or has a parent, grandchild or child that is a foreign national, who share ownership of a foreign company is required to file Form 5471. For purposes of this illustration we assume that the non-resident alien spouse or immediate family member owns 50% or more of the shares in a foreign company.

Gadson, a U.S. Citizen, is married to Athena, a Kenyan National. Athena is considered a non-resident alien for U.S. Tax Purposes.   Harold and Athena jointly own and operate “Eye See You,” a foreign corporation (“ESY”) or (the “Company”) headquartered in Germany. ESY is engaged in the manufacture and sale of optical lenses. The lenses are produced in China. Gadson and Athena each own 50% of the shares of the Company’s common stock.   For purposes of this example, we assume that Gadson has been filing married filing separately, and further, that Athena does not a social security number.  Gadson’s obligation to file Form 5471 on behalf of ESY requires answering the following questions:

  1. Whether Gadson is considered a U.S. Shareholder within the meaning of 26 U.S.C. 958 (a) and (b)?
  2. Whether under the attribution rules Gadson is considered to constructively own Athena’s shares; and if so,
  3. Whether by reason of Gadson’s constructive ownership of Athena’s shares, the Company will be considered to be a Controlled Foreign Corporation.

The filing requirements for Form 5471 are dependent upon a number of factors including whether a “U.S. Person” is considered to be a “U.S. Shareholder.”  Under 26 U.S.C. § 958 (a) and (b), a “U.S. Shareholder” is a U.S. Person who owns “directly or indirectly” 10% or more of the of the total combined voting power of all classes of stock of all classes of voting stock of a Section 965 Specified Foreign Corporation (“SFC”) or 10% or more of the combined voting power or value of shares of all classes of stock of a Section 965 SFC under 26 U.S.C § 965 (a) or (b).

Generally a “U.S. Person” includes a citizen or resident of the United States, a Domestic Partnership, a Domestic Corporation; and an estate or trust that is not considered a foreign estate or trust under 26 U.S.C. § 7701(a)(3).  Based upon the foregoing Gadson is considered a U.S. Person, but Athena is not.

Gadson meets the first prong of Section 958 (a), in so far as; he owns 10% or more of the voting power of all classes of stock, for the Company. However, unless he is deemed to own Athena’s shares in ESY under the attribution rules, the Company will not considered a SFC under Sections 965 (a) or (b).

Under Section  965(a)  and (b) a SFC  is either a Controlled Foreign Corporation, as defined under section 26 U.S.C. §957 (a) (“CFC”), or any foreign corporation with respect to which one or more domestic corporations is a U.S. Shareholder. Under Section 957(a) a CFC is a foreign corporation that has U.S. Shareholders that own directly, indirectly or constructively, within the meaning of Sections 958(a) or (b) on any day of the tax year of the foreign corporation, more than 50% of either the total combined voting power of all classes of its voting stock or the total value of the stock of the corporation.

Since Gadson does not own more than 50% of either the total combined voting power of all classes of voting stock or the total value of the stock of the Company, the ESY would not be considered a CFC unless by reason of the attribution rules Gadson is deemed to constructively own Athena’s shares. If ownership of her shares is imputed to Gadson, the Company would be considered a CFC and Gadson would be required to file Form 5471.

The constructive ownership rules consider a person, in this case a Husband, to own the shares owned by someone to whom he is closely related. Section §958(b) tells us to use the default Section 318(a) constructive ownership rules to determine whether an individual is a U.S. shareholder. These rules, will determine whether Gadson is deemed to constructively own his wife’s shares under Section 958 (b), which in turn, will determine whether ESY is a CFC and whether Gadson must file Form 5471.

Section 318(a) (relating to constructive ownership of stock)  applies to the extent that the effect is to treat any United States person as a United States Shareholder within the meaning of Section 951(b) and to treat a person as a related person within the meaning of section 954(d)(3).  Accordingly, a U.S.  Person is considered to own the stock that is owned, directly or indirectly, by the Taxpayer’s spouse, children, grandchildren and parents.

The general rule under Section 318(a) (1) (A) (i) and (ii) provides in pertinent part, that:


“An individual shall be considered as owning the stock owned, directly or indirectly, by or for   .  .  .  his spouse and his children, grandchildren and parents.”


However, Section 958 (Rules for Determining Stock Ownership) provides an exception to the general rule under Section 318(a) (1) (A) (i) and (ii), in situations where a spouse, child, grandchild or parent is a nonresident alien.

Section 958(b) (1) entitled “Constructive Ownership” provides:

“In applying paragraph (1)(A) of section 318(a), stock owned by a nonresident alien individual (other than a foreign trust or foreign estate) shall not be considered as owned by a citizen or by a resident alien individual.”

Consequently, the default rule under Section 318 for treating a U.S. Person as the owner of the stock in a foreign company that is owned by a family member does not apply where the family member is a non-resident alien.

In conclusion, Gadson is not required to file Form 5471 on the basis of the following:

  1. Gadson is not considered the constructive owner of Athena’s shares in the Company, by reason of Section 958(b)(1), and Athena’s status as a non-resident alien; and
  2. Gadson currently does not own more than 50% of the Company’s shares, and as such, the Company is not considered to be a CFC.
  3. Since the foreign company is not considered a CFC, Gadson is not required to file Form 5471.

The foregoing example makes clear the need for the advice of an experienced and knowledgeable tax attorney when forming a foreign entity or when considering inbound and outbound business transactions.


A recent report (the “Report”) from The Treasury Inspector General for Tax Administration (“TIGTA”) addressing Non-Filing and Non-Reporting Compliance under the Foreign Tax Compliance ACT (“FATCA”),  the Senate Finance Committee’s recent findings related to the use of shell banks  to avoid detection by the Internal Revenue Service and increased funding in connection with Inflation Reduction Act (“IRA”) spell trouble for those who have yet to file Form 8938 (“Statement of Specified Foreign Financial Assets”)  or FinCEN Form 114, commonly referred to as an “FBAR.”

Taxpayers who have failed to file Form 8938 and/or those who have failed to file FBARS may feel that they have successfully avoided detection by the Internal Revenue Service. There are even some Expats who have concluded, given the amount of time that has passed, that the IRS has forgotten about them or that they are unwilling or incapable of chasing down delinquent Non-Compliant Taxpayers.

The following discussion addresses problems associated with the effective implementation of FATCA and FBAR enforcement efforts, recommendations by TIGTA and the impact increased funding from the IRA will have on the overall effectiveness of these efforts. The discussion follows also addresses problem identified by the Senate Finance Committee with respect to the use of shell companies as a means of avoiding IRS detection of overseas tax evasion. These recent developments should serve as a wakeup call for those who have yet to come into compliance.

Citing lack of resources and other failures on the part of the IRS, the TIGTA Report concludes that the IRS has significantly departed from its original FATCA Compliance Roadmap finalized in 2016 in favor of more limited compliance initiatives. The Report further states that despite spending $573 million dollars on FATCA compliance through fiscal years 2020,   the IRS has taken limited or no action with respect to the objectives and initiatives outlined in its FATCA Compliance Roadmap. Instead, the IRS opted to focus on narrower strategy embodied in two Campaigns.

Specifically, TIGTA evaluated two Campaigns established by the Large Business and International (“LBI”) division of the Internal Revenue Service including Campaign 896 (“Offshore Private Banking Related to Individual Taxpayers”) and Campaign 975 (“FATCA Accuracy”).

Campaign 896, which is no longer active, focused solely on Taxpayers who filed Forms 8938, but underreported their foreign assets. The Report also noted that the IRS was in the planning stages of identifying those Taxpayers, who have failed to file Form 8938. The Report cites recent IRS data, which estimates that there are over 330,000 U.S. Taxpayers with foreign accounts over $50,000 who has not filed Form 8938. The IRS data further suggests that this pool of Taxpayers would each owe a minimum of $10,000 in FATCA related penalties and that the total penalties would result in $3.3 billion in penalties.

IRC Section 6038D requires U.S. Taxpayers who meet the filing threshold to report their specified foreign financial assets to the IRS.  If the aggregate value of the assets exceed certain dollar threshold, this reporting requirements is satisfied when a U.S. Taxpayer files Form 8938 together with his or her Federal Tax Return. Specified foreign financial assets include Foreign Financial Accounts (“FFA’s”), stocks, securities, financial instruments and contracts issued by a person other than a U.S. Person as well as any interest in a foreign entity.

For its part Foreign Financial Institutions (“FFI’s) are required to file Form 8966 (“FATCA Report”). The objective of Campaign 975 is to identify FFI’s that maintain FFA’s for U.S. Specified Persons, but did not submit Form 8966 on the accounts they hold on behalf of U.S. individuals.  The LB&I Division then matches Forms 8938 with Forms 8966, and in certain cases, Forms 1099.

In order to avoid being subject  to the 30% on U.S. Source payment received made to them, FFI’s are required to register and agree to report certain information about their accounts  owned by U.S. taxpayers including  the accounts of foreign entities with substantial ownership. This information is reported on Form 8966. If the FFI fails to certify, it may be subject to termination of the entity’s FATCA status and result in the entity’s Global Intermediary Identification Number (“GIIN”) being removed from the FFI list. Should this occur the FFI would then be subject to the 30% withholding.

In addition to the TIGTA report, the findings  by the Senate Finance Committee (the “Committee”), Chair, Ron Wyden, entitled: “The Shell Bank Loophole” together with  the indictment of  Robert T. Brockman  on 39 counts, including tax evasion, failure to file foreign bank account reports, money laundering and other offenses further highlight  problems with the effective implementation of FATCA  compliance  and  the enforcement challenges by the U.S. Government  with respect to the pervasive use of shell companies. The findings conclude with a recommendation that the IRS needs to focus on increased scrutiny and that funds from the IRA should be use in this regard.

As part of its findings the Committee conducted a case study on the allegations against Robert T. Brockman that he concealed $2.7 billion in income from the IRS and evaded hundreds of millions of dollars in Federal Income Taxes. In this regard, the Committee focused its attention on defects in FATCA’s regulatory framework, and a loophole utilized by Brockman in order to carry out its nefarious scheme.

FFI’s must registered with the IRS and are required to identify and report certain information about U.S. accounts.  For purposes of implementing these requirements the United States has entered into Intergovernmental Agreements (“IGA’s”) with foreign partner jurisdictions addressing a number of issues including whether and to what extent an FFI is required to determine if an account is held by a U.S. Person.  In cases where an account holder is believed to be a non U.S. financial institution in a partner jurisdiction and where the IRS has issued the account holder a Global Intermediary Identification Number (“GIIN”), depending upon the particular IGA, no further review, identification or reporting is required with respect to the account.  The foregoing is applicable to Swiss Banks as well as others.

According to the Committee’s Report, Brockman and his associates were able to exploit the shell bank loophole, by turning these shell companies into IRS approved financial institutions capable of self-certifying their offshore accounts to the IRS.  Under the current system, a U.S. Taxpayer is able to create an offshore shell company and register that company with the IRS. By registering with the IRS as a financial institution, the shell company operates as a shell bank and is able to self-certify reporting its offshore accounts for FATCA purposes.

According to the Committee findings and the indictment, Brockman and his associates opened up accounts in Switzerland using entities that had approved GIIN numbers approved and issued by the IRS for purposes of FATCA reporting. Consequently, Brockman and his confederates were able to open accounts in Switzerland without any due diligence conducted by the Swiss Banks. In turn, the Swiss Banks, including Mirabaud and Syz were able to accept billions in wire transfers from the United States into accounts that were opened by the shell companies.

In order to carry out his nefarious scheme, Brockman and his associates took the following steps:

  1. Establish a shell company in a FATCA partner jurisdiction;
  2. Submit IRS Form 8957 to register the shell company as an FFI and obtain a GIIN Number;
  3. Open an account in Switzerland or other FATCA partner jurisdiction, in the name of the IRS registered Shell Company;
  4. Use an attorney or other intermediary as the signatory of the account; and
  5. Invest in a private equity firm or other investment vehicle and direct the fund manager to wire proceeds earned from investment activities in the U.S. to the shell company’s account in Switzerland or in another FATCA partner jurisdiction.

In its findings, the Senate Committee found that under the current system, a shell company is able to obtain a GIIN by simply completing and filing Form 8957 or by registering via an online portal. The application for a GIIN is almost always approved without any IRS scrutiny. In this regard, representatives from the IRS conceded that they never contact a financial institution’s FATCA Responsible Officer prior to the issuance of a GIIN number, nor do they ever make any inquiry into an entity’s assets, source of funds or wealth, beneficial ownership or business and investment activities.

The Senate Committee report includes a finding that there are over 128,000 entities registered with the IRS as FFI’s for FATCA purposes. Citing numerous IRS budget cuts as well as recommendations to gut the IRS, the Senate Report concluded that the IRS lacks the human resources, IT capabilities and financial resources to adequately determine whether offshore entities are properly reporting accounts belonging to U.S. Persons. In its findings, the Senate Committee recommends that the $80 billion in funding from the IRA be used to address FATCA Loophole.

The problems identified in the TIGTA Report and in the Senate Committee Findings include:

  1. Departure from the FATCA Compliance Roadmap due to budget constraints has hampered IRS efforts to improve FATCA compliance;
  2. Pervasive use of shell companies as shell banks and the absence of any meaningful due diligence in obtaining a GIIN Number promotes offshore tax evasion and hampers detection by the IRS;
  3. The IRS provided optional codes for TINs that reduced FFI compliance with FATCA requirements to report TINs for TY 2020;
  4. Campaign 896 has only recently undertaken compliance actions to address potential under reporters;
  5. Campaign 896 initially did not address potential non-filers;
  6. Campaign 975 has not reduced FFI non-compliance;
  7. The use of FATCA data for compliance;
  8. Lack of valid and complete Taxpayer Identification Numbers (TIN) and Global Intermediary Identification numbers (GIIN) reporting continues to provide challenges in matching forms;
  9. FATCA campaigns were established without milestones to determine the level of voluntary compliance; and
  10. Some FFI’s either failed to file Form 8966 of filed Form 8966 with missing or incorrect information.
  11. Lack of fields common to both Form 8938 and Form 8966.

As a result of its review of the two Campaigns, TIGTA made a number of recommendations, some of which have been adopted by the IRS. The recommendations that were agreed to or implemented by the IRS include, but are not limited to:

  1. Additional compliance actions for under-reporters identified in its matching, including assessing penalties to taxpayers based on the variance amounts or conducting examinations on taxpayers who consistently underreport;
  2. Implementing protocols to address noncompliance by the FFIs from Intergovernmental Agreement (IGA) countries and follow through with compliance action on the identified IGAs;
  3. Implementing procedures to identify non-filers of Forms 8938 and encourage compliance of non- filers through examination or penalty assessments;
  4. Establish goals, milestones, and timelines for FATCA campaigns in order to determine whether the campaigns are effective in meeting their goals and affecting tax compliance; and
  5. Partner with the Small Business/Self-Employed (SB/SE) Division Directors for the Examination and Collection functions to establish an information sharing program that would allow the SB/SE Division to conduct examinations and perform collection actions using Form 8938 data.

For its part the Senate Finance Committee recommended that Congress and the Treasury Department should consider the following:

  1. The imposition of additional due diligence requirements on transfers between FFI’s involving large transfers into small, closely held FFI’s;
  2. Improve and develop more rigorous screening of applications for GIIN numbers;
  3. Strengthen incentives for Whistleblowers to come forward and report incidence of offshore tax evasion;
  4. Increase IRS enforcement resources, including increasing human resources and IT capabilities;
  5. Increase the number of audits of partnerships;
  6. Increase disclosure of high value financial accounts domestically; and
  7. Increase information sharing and coordination among partner jurisdictions and align U.S. reporting with the Organization for Economic Cooperation and Development’s (“OECD”) Common Reporting Standards (“CRS”).

While many Taxpayers have been lulled into a false sense that they will not be detected, the TIGTA and Senate Committee reports make clear that the Government considers offshore tax evasion and unreported foreign financial assets a serious problem and is a top priority to the IRS. Given the new round of funding under the IRA and the additional 87,000 new IRS agents, there is a substantial likelihood that both non-filers as well as those who deliberately underreport there foreign financial assets will be detected.

A number of options are available for those who have yet to report their foreign financial assets and income including utilizing the Voluntary Practice Rules or making a disclosure using the Streamlined Foreign or Domestic Offshore Procedures.

Failure to come forward more than likely will result in dire consequences including additional income tax, civil tax and FBAR penalties, interest and the possibility of criminal prosecution.



The Fifth Circuit recently held in United States v. Bittner,  ___ F. 4th ___ (5th Cir. 11/30/21) that the non-willful FBAR penalty should be applied on a per account basis, rather than on a per form basis.  The Court cited 31 U.S.C. §5314 and the regulations promulgated thereunder including 31 CFR §§ 1010.306 and 1010.350 as the predicate for applying the FBAR penalties on a per account basis. The Taxpayer in Bittner had a financial interest in over 25 foreign financial accounts over a three year period. The assessment of the FBAR penalty by the IRS resulted in an aggregate per account penalty of $1.77 million.

The unanimous decision in Bittner,  directly conflicts with the holding in United States v. Boyd, 991 F.3d 1077 (9th Cir. 2021) where the Ninth Circuits ruled that the non-willful FBAR penalty should be assessed per form and not per account.

The Bittner and Boyd decisions may set the stage for a showdown in the U.S. Supreme Court in the event Bittner petitions for certiorari.  In the alternative, the Supreme Court may wait to see whether a consensus emerges among the other Circuits as to how to treat this issue.

In Bittner, the IRS argued that because the reasonable cause exception to the non-willful FBAR penalty references the “balance in the account” language, the reasonable cause exception should be applied on an account by account basis. The Government further maintained in Bittner that the same reasoning should be applied in the assessment of the non-willful penalty.

The Government further argued that, because the penalty for willful violations is assessed with reference to each account, the non-willful penalty should also be assessed with reference to each account. The   District Court rejected both of the Government arguments and held that the $10,000 maximum penalty for a non-willful violation applies on a per form basis rather than on a per account basis.

The Fifth Circuit, relying heavily on the dissent in Boyd, reversed the lower court’s ruling which capped the $10,000 non-willful FBAR penalty on a per form basis. In ruling in favor of the Government, there is now authority for the IRS to assert the non-willful FBAR penalty on a per account basis.

The Bittner decision will certainly bolster the Government’s position that the non-willful FBAR penalty should be applied on a per account basis. Furthermore, the Boyd decision has no binding effect on the Government.  Consequently, taxpayers who have failed to file their FBARS may be subject to significant penalties.

A number of avenues exist where a taxpayer can make an offshore disclosure and either avoid or minimize FBAR penalties.  Depending upon the circumstances, a Taxpayer, who is seeking to make an offshore disclosure, may be eligible for either the foreign or domestic streamlined procedures which would result in significant savings.

In more complex cases where criminal risk is present, it may be necessary for a Taxpayer to make a disclosure using the Voluntary Disclosure Practice Rules announced in November of 2018. The new rules replace the procedures set forth in the Offshore Voluntary Disclosure Program (OVDP) and it prior iterations.

A note of caution. Anyone considering making an offshore disclosure should avoid the temptation of making a “quiet disclosure,” which is frowned upon by the Government and is indicia that the Taxpayer is attempting to prevent the Government from discovering the Taxpayer’s failure to comply with the FBAR statute and related regulations.

The streamlined domestic offshore procedures and the Voluntary Disclosure Practice Rules both provide for a one time miscellaneous offshore penalty, as well as interest. An accuracy related penalty in the case of the Voluntary Disclosure Practice Rules is also assessed on any additional income tax due.

Given the complexities related to FBAR reporting, the penalty regimen, the various avenues available for making a disclosure and the possible application of the FBAR penalty mitigation guidelines, anyone considering making a disclosure should discuss their specific circumstances with an experienced and knowledgeable tax attorney who can assess the Taxpayer’s situation and quantify the potential savings by making an offshore disclosure.







The issue of whether the Government can repatriate a taxpayer’s foreign assets for purposes of satisfying a taxpayer’s outstanding FBAR penalty judgment has not been extensively reported on or discussed. However, the issue was recently addressed by the U.S. District Court for the Southern District of Florida in United States v. Schwarzbaum (S.D. Fla. Dkt # 18-CV-81147-BLOOM/Reinhart).  The decision signals the Biden Administration’s intent to become more aggressive in the collection of outstanding FBAR penalty judgments.

Taxpayers, who have offshore assets, but have yet to report them, should be concerned.  In particular, those who are contemplating expatriation or those who no longer reside in the United States may find themselves subject to FBAR penalties, extradition, criminal prosecution, and the imposition of additional civil fines. Likewise,  U.S. persons against whom FBAR penalties have been assessed, who continue to reside in the United States and who have parked their assets overseas as a means of preventing the Government from collecting need to rethink this strategy.

In Schwarzbaum, the Government commenced an FBAR collection suit against the taxpayer in August of 2018. At the conclusion of a five day bench trial in May of 2021, the Court entered an FBAR penalty judgment in favor of the Government in the amount of $12,555,813. The judgment was based upon Schwarzbaum’s willful failure to file FBARs in compliance with 31 U.S.C. § 5314.

The Government’s post judgment discovery revealed that the taxpayer lacked sufficient assets in the United States from which the outstanding judgment could be satisfied.  However, the discovery did make clear that the taxpayer had sufficient assets located in Switzerland from which the judgment could be satisfied.

Consequently, the Government filed a Motion with the Court for an Order directing Schwarzbaum to repatriate sufficient funds to the United States in order to satisfy the judgment, by depositing such amounts in the form of an appeal bond.

In its Motion, the Government maintained that authority for such an Order exists under, the Fair Debt Collection Procedures Act of 1990 (“FDCPA”), 28 U.S.C. § 3001 et seq.

Judge Bloom referred the Motion to a Magistrate for purposes of issuing a Report and Recommendations (“R&R”).  On June 30, 2021 the Magistrate issued his R&R, recommending that the Government’s Motion be granted. The taxpayer filed Objections to the R&R and the Government filed a Response to the Objections. On October 26, 2021, the Court, adopting the Magistrate’s R&R, entered an Order in favor of the Government.

Prior to the Courts October 26, 2021 Order, the Taxpayer filed an appeal to the U.S. District Court for the Eleventh Circuit.

The Magistrate’s R&R concluded that the Court has authority under the FDCPA by virtue of its express incorporation of the All Writs Act, 28 U.S.C. § 1651 to Order the Taxpayer to repatriate $18,227,465.89 in addition to any additional post judgment interest accrued since May 31, 2021.

The Court rejected the Schwarzbaum’s argument that the All Writs Act does not provide an independent collection remedy and that the FDCPA provides the sole remedy for collections.

The footnotes to the Order provide some context with respect to the taxpayer’s scheme. Specifically, Schwarzbaum took steps to render himself judgment proof in the U.S. including selling his home in Palm Beach County Florida, and moving from Florida to Switzerland, where he maintained three Swiss accounts totaling in excess of $49 million. The footnotes also reveal the taxpayer transferred the bulk of his liquid assets from the United States to Switzerland, prior to the Complaint being filed by the Government.

The Court adopted the R&R and held that the FDCPA incorporates the All Writs Act. Quoting from the language in 28 U.S.C. § 1651, the Court noted that that the “All Writs Act empower federal courts to ‘issue all writs necessary or appropriate in aid of their respective jurisdictions and agreeable to the usage and principles of law.’ “

The Court further noted that the FDCPA provides for issuance of various writs including writs of execution and writs of garnishment. Judge Bloom, citing United States v. Ross, 302 F.2d 831, 834 (2d Cir. 1962) and United States v. McNulty, 446 F. Supp. 90, 90 (N.D. Cal. 1978), pointed out that the cases supporting the Courts interpretation of the interplay between the FDCPA and the All Writs Act rely upon the Court having personal jurisdiction over the defendant to reach assets overseas in cases where the defendant has an outstanding judgment or tax liability to the Government.

The takeaway from this Decision is that an individual who is subject to the assessment of FBAR penalties, and who has not otherwise challenged the assessment, can certainly expect the Government to file a collection action. Any attempt to place assets outside of the reach of the Government, by maintaining or otherwise transferring assets overseas, will be dealt with by the Government in short order. One can reasonably expect that the Government will utilize post judgment Orders of Repatriation to assist in the collection of an outstanding FBAR penalty judgment. The foregoing is true whether a taxpayer expatriates moves overseas or continues to reside in the U.S.

Some may be wondering why Scwarzbaum was not indicted and extradited. Although the U.S. has an extradition treaty with Switzerland, Switzerland does not typically honor such requests. Moreover, such an indictment may have been sealed.

It is noteworthy that the number of extraditions to the U.S. in tax and FBAR related cases is on the rise. Consequently, as the saying goes:  “No matter where you go, there you are.”



Understanding Global Income Tax Systems

Income Tax SystemsUnderstanding how and when the United States imposes federal income tax on its U.S. Tax Residents in cross border transactions has long been a source of confusion to U.S. taxpayers. In fact, in some cases, this issue has resulted in taxpayers paying a disproportionate amount of income tax to more than one tax jurisdiction. Likewise, foreign owned companies and individuals who generate revenue in the United States are uncertain as to their U.S. income tax exposure, and in many cases, improperly structure their cross-border transactions. These problems are due, in large part, to the legal complexities associated with cross border transactions, and to a lesser extent, the failure by some tax advisors to familiarize themselves with the U.S. tax laws and tax treaties.

The following discussion will examine the various types of tax systems, the concept of tax residency, and how inbound and outbound transactions are taxed in the U.S. The discussion will also examine the impact that foreign tax credits, treaty provisions and certain U.S. deferral provisions may have on a taxpayer’s U.S. income tax liability.

Multiple Tax Systems

Many countries impose an income tax using a territorialor quasi territorialsystem. A territorial system is predicated upon where the income (Source of Income) is generated. In this regard, the source country has the primary right to tax the income. A Quasi territorialsystem is a system which taxes its residents on certain types of income earned outside of their jurisdiction of residency.

Other jurisdictions impose an income tax on their tax residents on a worldwide basis, with the taxpayer’s residence being the controlling factor.

The U.S. tax system is considered a hybrid system, depending on whether the taxpayer is an individual or a domestic entity. While individuals are taxed on a worldwide basis, domestic corporations are taxed on a quasi-territorial basis. Individuals are subject to U.S. income tax irrespective of where the income is generated. To illustrate:  A U.S. citizen who resides in Germany and receives interest income from foreign bank accounts maintained in Singapore is subject to U.S. income tax on that foreign interest income.

In general, Domestic Corporations are taxed on income from all source including branches and partnerships. For example, Glendale Educational Services, a domestic corporation, is engaged in providing accounting seminars in Chile through one of its branches. In this regard, the Corporation is subject to U.S. income tax on its branch earnings in Chile, since the branch is treated as part of the domestic corporation.

Finally, there are jurisdictions that do not impose an income tax. These jurisdictions are sometimes referred to as “tax havens.”

Questions to be answered in Understanding U.S. Income Tax System

  • Who is a Resident for U.S. Tax Purposes?

-Generally, U.S. personsare considered tax residents for U.S. income tax purposes and include U.S. citizens and resident aliens as well as domestic partnerships, domestic corporations, domestic estates and certain trusts.

  • Is the Transaction Outbound or Inbound?

In addition to tax residency, jurisdiction to tax may be expanded to include more than one country depending upon whether a transaction is Outboundor Inbound.

Outbound Transactions

Outbound transactions are transactions involving U.S. taxpayers doing business or investing in foreign countries. U.S. citizens and resident aliens are taxed in the U.S. on a worldwide basis irrespective of the source of income. While U.S. individuals are subject to the same subpart F, GILTI, PFIC and investments in U.S. property rules as domestic corporations, they are not eligible for the dividends received deduction that may be claimed by domestic corporations

Domestic Corporations who invest in foreign corporation are subject to U.S. income tax on foreign source income depending upon the type of income and percentage of ownership in a foreign corporation. A Domestic corporation that is considered a U.S. Shareholderin a Foreign Controlled Corporation is subject to U.S. income tax on its share of SubpartF Incomeand may also be subject to tax on its global intangible low taxed income(GILTI). In addition, a domestic corporation may be taxed on income generated from a non-controlling interest in a passive foreign investment company(PFIC).

Inbound Transactions

Inbound transactions involve foreign taxpayers doing business or investing in the United States

Non-U.S. persons, including individuals and entities, with activities in the United States and/or income from the United States are subject to U.S. income tax on the income earned in the United States.

In this regard, products need not be imported into the United States for inbound international taxation to be triggered. Activity in the U.S. may be sufficient to give rise to inbound international tax considerations.

For purposes of taxing inbound transactions, the U.S. distinguishes between U.S. trade or business income and non-business income in determining how the income is taxes and whether the income is subject to U.S. withholding taxes.

  • S. Trade or Business Income:Foreign corporations are generally only subject to U.S. tax on U.S. source net income that is effectively connected(ECI) with a U.S. trade or business. Foreign corporations are also subject to the U.S. Branch tax.
  • Non-Business Income:Unlike U.S. trade or business income, the U.S. imposes a 30% gross tax on U.S. source fixed or determinable, annual or periodical (FDAP) FDAP income includes, but is not limited to, dividends received from domestic corporations, interest received from U.S. tax residents and rents and royalties received for the use or right to use property in the United States.
  • Non-Business Capital Gains:Except for real estate and sales of partnerships with ECI, the U.S. generally does not tax capital gains.

Tax Treaties

A tax treaty is a bilateral (two-party) agreement made by two countries designed to mitigate or eliminate the double taxation of passive and active income. In certain instances, income may be subject to income tax in more than one jurisdiction due to the respective country’s residency and/or source of income rules. Moreover, many countries impose a withholding tax on certain items of income. Tax treaties are designed to lower or eliminate withholding tax on certain categories of income. Tax treaties may also provide for the exemption of foreign source income and/or the availability of a foreign tax credit for taxes paid to the other jurisdiction.

Foreign Tax Credit

A foreign tax credit (FTC) is a tax credit for foreign taxes imposed directly on a U.S. taxpayer. However, certain rules may prevent a taxpayer from claiming the credit. A FTC may only be used to offset the foreign source income portion of a U.S. tax liability.  Thus, if no U.S. income tax is paid in a particular tax year, the FTC cannot be used in that year. Furthermore, the FTC is subject to a limitation.

Example on how to determine FTC limitation: John Jones U.S. income tax on his worldwide income before application of the FTC is $20,000. John’s foreign source taxable income is $30,000 and his world wide taxable income is $100,000. John pays $8,000 in foreign income tax to the UK.

FTC Limitation = Foreign source taxable income/ Worldwide taxable income X U.S. tax on worldwide taxable income

$30,000/$100,000 x $20,000 = $6,000

In this example John’s FTC is limited to $6,000. The remaining $2,000 may be carried back one year or carried forward to 10 years.

In addition, in order to qualify for the foreign tax credit, the foreign tax must be a tax on income, war profits, excess profits or a tax “in lieu of” income tax. Foreign sales, VAT, excise or capital tax, are not eligible although they may be deductible as an expense. Likewise, fines, interest, penalties and custom duties are not considered income tax.

Globalization has created tax compliance and planning challenges for U.S taxpayers engaged in cross border transactions as well as foreign businesses that conduct business within the United States. Multi-jurisdictional tax rules are complex, often times overlooked by tax practitioners and can result in the serious consequences to the taxpayer. U.S. and foreign taxpayers should consult with an experienced and knowledgeable tax attorney prior to entering into cross border transactions. Proper planning and business structure can result in substantial tax savings.



Effectively Connected Income and it’s Tax Consequences

Taxing Foreign CorporationsForeign entities that deliver digital goods and services using the internet as a point of distribution may be subject to U.S. income tax. The nature and character of the goods and services will dictate how the income is taxed. In the interest of clarity, the following discussion is limited to effectively connected income.

The explosion of foreign companies using the internet to deliver digital products and services has afforded foreign businesses the opportunity to compete in global markets without the necessity of a traditional bricks and mortar operation. In this regard, the critical question is always this: Does the United States have a right to impose an income tax? It is important to note that jurisdiction to tax a foreign entity requires determining whether a sufficient connection or nexus with the United States exists to justify imposing an income tax. Foreign corporations are subject to U.S. income tax on income that is considered effectively connected income (“ECI”) and associated with conducting a trade or business within the United States 26 U.S.C. § 864(b), 26 U.S.C. § 871(b) and26 U.S.C. § 882(a).

Business Presence in United States Tax Consideration

ECI is based upon the permanent establishment of a presence in the United States. In some cases, the question of permanent establishment is easy. For instance, a foreign company that leases office space and employs its administrative staff in Phoenix will be deemed to have permanently established a U.S. presence. Other cases are less clear, for example, a case where goods and services are digitally delivered to consumers in the United States, while the company’s operation, employees, website and servers are located in one or more countries. Generally, the existence of a website alone is insufficient to establish a permanent establishment within the United States due to the absence of any tangible physical component. In contrast, the location of the server, where the website is hosted is a piece of equipment with a physical location. Thus, the presence of a server in the United States may be sufficient for purposes of permanently establishing a U.S. presence. This is particularly true where a foreign company owns and operates its servers or has physical access to them. For U.S. tax purposes, the delivery of goods and services through a server that is located in the United States but neither owned, leased nor at the disposal of a nonresident does not currently create a permanent establishment in the United States.

Foreign companies will often deliver their products and services via the Cloud using the Software as a Service(“SaaS”) model or by using a CD, portable USB device or by the customer downloading a copy of the software from the company’s website. The SaaS model involves using a third party to host a foreign company’s website and software and to store and process its hardware infrastructure. These solutions are generally delivered to consumers over the internet for a fee. The manner in which these products and services are delivered will affect how the income is characterized for U.S. tax purposes.

Character of Income in US Business Tax Consideration

The amount of a foreign company’s ECI depends, in part, on the source and character of the income.The starting point for evaluating these inbound transactions can be found in the Treasury Software Regulations(the “Regs.”). Under the Regs, the character of payments received in transactions involving computer programs is based on the nature of the rights conveyed. The determination is made without regard to the transaction form adopted by the parties or the terms they apply (26 C.F.R. § 1.861-18(g) (1)). Moreover, the means of the transaction (that is, whether by purchase of physical disc or electronic download) is irrelevant (26 C.F.R. § 1.861-18(g) (2)).

Under the Regs, computer software transactions are classified into four categories:

  • The sale of a copyright right: the right to make copies of the property, the right to prepare derivative property, the right to make public performances, or the right to publicly display the property (26 C.F.R. 1.861-18(c) (1) (i) and 26 C.F.R. § 1.861-18(c) (2) (i)-(iv)).
  • The license of a copyright right: considered a sale or exchange for income tax purposes if under the facts and circumstances, the transferee receives substantially all of the right to the underlying copyright. Where less than substantially all of the rights to the underlying copyright are transferred, the transfer will be treated as a license (26 C.F.R. §1.861-18(f) (1)).
  • The sale of a copyrighted article: transferee receives a copy of a software program but acquires no rights (or a deminimis grant of rights) that accompany a copyright right (26 C.F.R. § 1.861-18(c) (1) (ii)). To qualify for sale treatment, the transferee of the copyrighted article must receive all the “benefits and burdens” of ownership
  • The lease of a copyrighted article: Where all of the benefits and burdens of ownership have not been transferred, the transaction will be treated as a lease generating rental income (26 C.F.R. § 1.861-18(f) (2)).

The Regs, however, do not applyto transactions involving digitized content or services that do not involve the transfer of a computer program. Transactions involving hosted software, such as SaaS, do not include a transfer of a computer program, and, as such, are not subject to the Regs (26 C.F.R. §1.861-18(b) (1)). The question then is: whether hosted software transaction is a property or services transaction? That distinction can be found in 26 U.S.C. §7701(e),which provides that a contract that “purports to be a service contract” can be recast as a lease based upon the existence of the following factors:

  • The customer is not in physical possession of the software.
  • The customer does not control the software application.
  • The customer does not have a significant economic or possessory interest in the software.
  • The provider uses the software to provide services to multiple third parties.

The Section 7701 (e) factors should be carefully examined when considering SaaS services or similar digital transactions. Payments made in exchange for SaaS services are generally characterized as service income because such transactions do not satisfy a number of the Section 7701(e)factors.

In Tidewater Inc. v. U.S.,(565 F.3d 299 (5th Cir. 2009), the U.S. Court of Appeals for the 5th Circuit applied the 26 U.S.C. § 7701(e) factors in holding that income earned by a time charter that supplied a vessel complete with a crew to its customers constituted leasing income.In Xerox Corp. v. U.S., (656 F.2d 659 (Ct. Cl. 1981), the U.S. Court of Claims applying a set of factors predating Section 7701(e) determined that a supply of copying machines was treated as a service.

Source of income in US Business Tax Determination

In addition to the “character” of the income”, the “source” of the income will also drive certain U.S. federal income tax consequences (e.g., application of withholding tax to foreign persons, application of the foreign tax credit limitation formula).

Income earned from the performance of “services” is sourced according to the place of performance. If the services are performed in the United States, the income is U.S. sourced income, and subject to U.S. federal income tax; if the services are performed outside the United States, the income is considered foreign-sourced income and exempt from U.S. tax.

Determining where a digital service is performed, and, thus, the source of the income derived in connection with such service, can be difficult in certain cases. For instance, in Piedras Negras Broad Co. v. Comm’r,the United States Board of Tax Appeals held that the source of a Mexican broadcaster’s income was Mexico since the broadcast originated in Mexico and the facilities and personnel were located in Mexico, not the United States, where its customers were located ((43 BTA 297 (1941) (nonacq. 1941-1 CB 18), aff’d, 127 F.2d 260 (5th Cir. 1942)). Similarly, in  Korfund v. Comm’r,(1 T.C. 1180 (1943), the Tax Court interpretingPiedras Negrasheld that the source of such income was not within the United States, by holding that the source of income is the situs of the income-producing service and that the source of the income was the act of transmission.

In conclusion, tax jurisdiction as well as the character and source of incomeplay a critical role in determining the U.S. federal income tax consequences as well as how the income will be taxed. Accordingly, foreign companies planning to do business within the U.S. would be well advised to consult with an experienced and knowledgeable tax attorney prior to conducting business.



Relief Procedures for former U.S. Citizens

Tax relief for renouncing citizenship 1The new procedures attempt to address problems faced by some U.S. citizens, whose only connection with the United States is that they were born in America. Many of these individuals have been living overseas since an early age, and in some cases, are also citizens of the foreign country in which they reside.

The new procedures are aimed at providing relief to these former citizens who have had to deal with the problems associated with FATCA and other U.S. tax and reporting obligations. In case of FATCA, many foreign financial institutions have elected to close the accounts of U.S. expats rather than deal with the onerous compliance requirements and the 30% withholding obligations.

Consequently, expats have found banking overseas difficult if not impossible. In response to the problem, some have decided to renounce their U.S. Citizenship after determining that the benefits of U.S. Citizenship were outweighed by the problems FATCA and other U.S. tax and financial reporting requirements have created. Prior to the announcement, however, these expats were still expected to pay income tax on money they previously earned. The new Procedures address this concern.

Eligibility criteria and requirements under the Relief Procedures

Under the new procedures, eligible Individuals include those who relinquished their U.S. citizenship any time after March 18, 2010, the year FATCA was enacted and who also meet the following criteria:

  1. The Taxpayer has failed to file U.S. tax returns;
  2. The Taxpayer owes a limited amount of back taxes to the U.S. government ($25,000 in the past six years);
  3. The Taxpayer has net assets of less than $2 million; and
  4. Any prior U.S. compliance failure with the IRS was not due to willful conduct.

It is important to note that the procedures are only available to individuals. This means that estates, trusts, corporations, partnerships and other entities can’t use the procedures.

Those who are eligible are required to file outstanding U.S. tax returns, including all required schedules and information returns for the five years preceding and their year of expatriation. If the total tax for the six years period is less than $25,000, the taxpayer is relieved from paying U.S. taxes. Individuals who qualify for the procedures won’t be assessed penalties and interest.

Despite the relief the new procedures provide for U.S. citizens, the IRS cautions citizens regarding the permanent nature and consequences associated with relinquishing U.S. citizenship:

 “Relinquishing U.S. citizenship and the tax consequences that follow are serious matters that involve irrevocable decisions,” said the IRS. “Taxpayers who relinquish citizenship without complying with their U.S. tax obligations are subject to the significant tax consequences of the U.S. expatriation tax regime. Taxpayers interested in these procedures should read all the materials carefully, including the FAQs, and consider consulting legal counsel before making any decisions.”

The decision to relinquish one’s U.S. citizenship requires a careful evaluation of both quantitative and qualitative factors including income tax consequences, quality of life and mobility. In addition, any such decision needs to be evaluated in the context of political risk. Therefore, it is advisable that those who are contemplating renouncing their U.S. citizenship should consult with an experienced tax attorney who is familiar with the process, as well as the risks.




 Tax billCitizen Based Taxation

The origins of citizen based taxation can be traced back to the Civil War and the government’s struggle to raise revenue for the war effort. The predicate for imposing such a system was based upon the notion that Americans living outside of the United States were shirking their duties to America during a crisis. As a consequence, in 1861 the Government imposed an income tax on expats. This tax that was higher than the rate charged to the Americans who resided in the United States.

The law was subsequently reformed and beginning in 1864, nonresident citizens paid the same rate as citizens residing in the United States. In exchange for equalizing the tax rates, nonresident citizens were now required to pay income tax on their worldwide income.

The rationale for imposing citizen based taxation was predicated upon a sense of duty and community membership, sentiments that carried over from the Civil War. In 1924 the Supreme Court decided that citizen based taxation was constitutional (Cook v. Tait, 265 U.S. 47 (1924).  However, instead of relying on sense of duty and community membership, the Court appeared to rely upon the inherent benefits associated with becoming a U.S. citizen, but failed to detail the benefits. Presumably, these benefits include: the right to return to the United States, the ability to participate in the American economic and social community, and the right to access U.S. Courts for redress and the right to vote.

Over the years, efforts to mitigate the impact of citizen based taxation on non-resident citizens have included the implementation of the foreign tax credit in 1918 and the foreign earned income exclusion in 1926.

Tax Fairness for Americans Abroad

U.S. expats have been lobbying for years seeking to change the current U.S. citizen based taxation system to a residency based system. In December of 2018, Republican Congressman Holding introduced a bill entitled: “Tax Fairness for Americans Abroad Act” (H.R. 7358). This bill proposes a transition from citizen based taxation system to a system that is based upon residency. The bill would amend I.R.C. Section 911 by adding a Section 911A designated as “ALTERNATIVE FOR NON-RESIDENT CITIZENS OF THE UNITED STATES LIVING ABROAD” (Id. at Pg. 2).

With the introduction of this legislation in Congress, many expats, practitioners and other observers are overjoyed at the prospect of ending the citizen based taxation, which taxes U.S. Citizens and its legal residents on their worldwide income. However, I do not believe the change will occur, at least, for the foreseeable future.

Reasons that will hinder the change in the current IRS Tax based system

The proposed amendment provides qualified non-resident citizens of the United States, who elect to be taxed as nonresident citizens, with exclusion for foreign earned income as well as foreign unearned income for U.S. tax purposes. Alternatively, an Individual can elect to continue to be taxed based upon the current citizen based system.

In addition, qualified non-resident citizens would be allowed to exclude unearned income (Gains) associated with the “sale of personal property to the extent such income is attributable to periods during which the individual was a qualified nonresident citizen. Id. at Pg. 3. Similarly, HR 7358 would amend I.R.C. Section 7701(b) by adding a new definition for the term “Nonresident Citizen.” To be considered a non-resident citizen in a given tax year an individual must: (i) be a citizen of the United States; (ii) have a tax home in a foreign country; and (iii) must otherwise be in compliance with the U.S. tax laws for the previous 3 years.

Similarly, the individual must establish that he or she has been a bona fide resident of a foreign country or countries for an uninterrupted period of one year or alternatively meet the physical presence test which requires that an individual be present in one or more foreign countries for a minimum of 330 days during the tax year. The amendment excludes Federal Employees from the definition of nonresident citizen.

It is also important to note that the prospects for passing such legislation are slim based upon the history of citizen based taxation, the Government’s investment in financial reporting, FATCA, Bank Secrecy Act, concurrent FBAR filing requirements and the political climate in DC.

One could also argue that, the proposed bill undermines the integrity of FATCA and other IRS global tax enforcement initiatives designed to ferret out overseas tax cheats.

Perhaps the most significant reason HR 7358 will fail is the upcoming presidential election in 2020. It is highly unlikely that bipartisan support for HR 7358 could be achieved in the foreseeable future, given the current legislative climate in DC. The logic is clear.  The passage of any bill introduced by a Republican would be considered a victory for the President Trump. Consequently, democrats will never get on board.

Furthermore, there are no signs that the congressional stalemate will subside following the presidential election. Quite the contrary. Political commentators predict more of the same, irrespective of who is in the White house and whether the Republicans regain control of the House of Representatives. If Trump is reelected, more investigations will certainly follow. Even if the Republicans somehow are able to regain the majority in the House, there is no certainty that anything will be accomplished. Remember! “Repeal and Replace Obamacare.”

While politicians and expats alike may consider HR 7348 promising, I am reluctant to pop the cork just yet. We will just have to wait and see. Expats who meet the filing threshold will still be required to file FinCEN Form 114 (FBAR) with respect their Foreign Financial Accounts.