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The Most Costly Mistakes of CFC Shareholders that Catch the Attention of the IRS. Part Seven- Making a 962 Election and Failing to File Forms 1116 and 1118

The Most Costly Mistakes of CFC Shareholders that Catch the Attention of the IRS. Part Seven- Making a 962 Election and Failing to File Forms 1116 and 1118

Tax Law
By Anthony Diosdi Introduction For those who are or will be involved in international business and investment transactions, it is important to have some basic understanding of the relevant tax laws. These series of articles are intended to warn individual shareholders of controlled foreign corporations (“CFCs”) (whether individual or corporate) of mistakes that will likely catch the attention of the Internal Revenue Service (“IRS”) and trigger a potential costly audit. This is the seven of a series of articles designed to educate CFC shareholders of mistakes that can catch the attention of the IRS. Individual shareholders of CFCs that recognize a GILTI inclusion may be taxed at federal rates up to 37 percent, plus another 3.8 percent Medicare Tax. Absent planning, no direct foreign tax credit is available to offset…
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The IRS Makes Significant Changes to Schedule H of Form 5471

The IRS Makes Significant Changes to Schedule H of Form 5471

Tax Law
By Anthony Diosdi Recently, the Internal Revenue Service (“IRS”) issued a draft of a new Schedule H for Form 5471. Schedule H is used to report a controlled foreign corporation’s (“CFCs”) current earnings and profits (“E&P”). Category 4 and Category 5 filers are required to attach a Schedule H to their Form 5471. A Category 4 filer is a U.S. person who had “control” of a CFC for an uninterrupted period of at least 30 days during the foreign corporation’s annual accounting period. Control for purposes of Category 4 is defined as more than 50 percent of voting power or value utilizing the attribution rules of Section 958. A Category 5 filer is a U.S. person who is a ten percent or greater shareholder in a corporation that was a…
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How is the GILTI High-Tax Exemption Treated for Purposes of Section 959?

How is the GILTI High-Tax Exemption Treated for Purposes of Section 959?

Tax Law
By Anthony Diosdi Recently, the Internal Revenue Service (“IRS”) and the Department of Treasury finalized regulations which allows certain shareholders to make a high tax exception to GILTI inclusions. This exception applies to the extent that the net tested income of a controlled foreign corporation (“CFC”) exceeds 90 percent of the U.S. federal corporate income tax rate. Thus, if the effective foreign tax rate exceeds 18.9 percent, a CFC shareholder can elect to make a high tax exemption. This option allows CFC shareholders to defer the recognition of undistributed GILTI income (and subpart F income) as earnings and profits (“E&P”). The high tax exception can be a very effective tax planning tool. Claiming a high tax exception can also pose a significant compliance challenge. Where the E&P of a CFC…
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The Most Costly Mistakes of CFC Shareholders that Catch the Attention of the IRS. Part Six- Failing to Disclose GILTI Income on Schedule H of Form 5471

The Most Costly Mistakes of CFC Shareholders that Catch the Attention of the IRS. Part Six- Failing to Disclose GILTI Income on Schedule H of Form 5471

Tax Law
By Anthony Diosdi Introduction For those who are or will be involved in international business and investment transactions, it is important to have some basic understanding of the relevant tax laws. These series of articles are intended to warn individual shareholders of controlled foreign corporations (“CFCs”) (whether individual or corporate) of mistakes that will likely catch the attention of the Internal Revenue Service (“IRS”) and trigger a potential costly audit. This is the six of a series of articles designed to educate CFC shareholders of mistakes that can catch the attention of the IRS. Category 4 and Category 5 filers must attach a Schedule H of a Form 5471. Schedule H is used to report a foreign corporation’s current earnings and profits (“E&P”) for U.S. tax purposes. The instructions promulgated…
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Income Tax Consideration of Property Inherited from a Foreign Individual

Income Tax Consideration of Property Inherited from a Foreign Individual

Tax Law
By Anthony Diosdi Many U.S. income tax questions arise in connection with the receipt of inherited property. These questions generally include whether the recipient must include the value of such property in gross income for U.S. tax purposes and what will be the U.S. income tax consequences of the recipient’s subsequent disposition of the inherited property. This article will briefly summarize the more relevant U.S. income tax consequences in connection with inherited property with emphasis on property inherited from a foreign individual. Although the U.S. has a transfer tax regime that could impose an estate tax upon the transfer of the property of a decedent, the estate tax is generally imposed on the estate of a decedent and not on the recipient. However, the estate tax generally reduces the value…
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The Most Costly Mistakes of CFC Shareholders that Catch the Attention of the IRS. Part Five- Failure to Charge Arm’s-Length Rate of Interest on Intercompany Loans or Advances

The Most Costly Mistakes of CFC Shareholders that Catch the Attention of the IRS. Part Five- Failure to Charge Arm’s-Length Rate of Interest on Intercompany Loans or Advances

Tax Law
By Anthony Diosdi Introduction For those who are or will be involved in international business and investment transactions, it is important to have some basic understanding of the relevant tax laws. These series of articles are intended to warn individual shareholders of controlled foreign corporations (“CFCs”) (whether individual or corporate) of mistakes that will likely catch the attention of the Internal Revenue Service (“IRS”) and trigger a potential costly audit. This is the first of a series of articles designed to educate CFC shareholders of mistakes that can catch the attention of the IRS. We will begin this series with the rules governing intercompany loans and advances.As a result of the pandemic, IRS examinations of tax returns have significantly declined. With that said, even before the pandemic, the number of…
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The IRS Clarifies the Regulations for the High-Tax Exception to GILTI

The IRS Clarifies the Regulations for the High-Tax Exception to GILTI

Tax Law
By Anthony Diosdi Global intangible low-taxed income (“GILTI”) is the excess of a U.S. shareholder’s net controlled foreign corporation (“CFC”) tested income for such taxable year over its net deemed tangible income return. Net CFC tested income is any excess of the U.S. shareholder’s pro rata share of the tested income of each CFC for which it is a U.S. shareholder over its pro rata share of each CFC’s tested loss. A U.S. shareholder’s net deemed tangible income return is 10 percent of the shareholder’s pro rata share of the CFC’s tax basis in tangible personal property used by its CFCs in the production of tested income (reduced by certain interest expense). Congress presumably intended that GILTI apply only to income that is subject to a low tax rate of…
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Demystifying IRS Form 5472

Demystifying IRS Form 5472

Tax Law
By Anthony Diosdi In order to effectively audit the transfer prices used by a U.S. subsidiary of a foreign corporation, the Internal Revenue Service (“IRS”) often must examine the books and records of the foreign parent corporation. Historically, foreign parties have resisted making their records available to the IRS, or have not maintained records sufficient to determine arm’s length transfer prices. In response, Congress enacted the requirement that each year certain reporting corporations must file Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business, and maintain certain records. See IRC Sections 6038A and 6038C. A domestic corporation is a reporting corporation if, at any time during the taxable year, 25 percent or more of its stock, by vote…
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How IRS Criminal Investigations Work

How IRS Criminal Investigations Work

Tax Law
Many people who have unpaid taxes worry about how much they will owe the IRS, though they do not consider that the agency might launch a criminal investigation into possible tax evasion or tax fraud. If you believe that you might be under investigation by the IRS, it is essential that you contact a tax lawyer in San Francisco as soon as possible to protect your rights and your future. The IRS investigates many issues, including: Fraud of tax return preparersAbusive tax schemesCorporate tax fraudFinancial institution fraudIllegal gaming operationsIdentity theftFraudulent returns or refundsEvasion of tax liability The process begins when a tax auditor refers a case to the IRS Criminal Investigations unit due to suspicions of criminal conduct. Special IRS investigators then conduct a preliminary analysis to determine whether to…
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A Walk-Through Form 8992-U.S. Shareholder Calculation of Global Intangible Low-Taxed Income (“GILTI”)

A Walk-Through Form 8992-U.S. Shareholder Calculation of Global Intangible Low-Taxed Income (“GILTI”)

Tax Law
By Anthony Diosdi IntroductionUnder the 2017 Tax Cuts and Jobs Act, new rules were enacted which required the inclusion of global intangible low-taxed income (“GILTI”) generated by a controlled foreign corporation (“CFC”). Internal Revenue Code Section 951A governs GILTI. The purpose of GILTI is to tax U.S. shareholders on their allocable share of earnings from a CFC to the extent that the earnings exceed a ten percent return on tangible assets allocable to a CFC shareholder. GILTI is determined by subtracting net deemed tangible income return from net CFC tested income. A CFC shareholder must calculate its GILTI inclusion on Internal Revenue Service (“IRS”) Form 8992. This article will go line by line through the Form 8992 to determine how a GILTI inclusion is determined. This article is based on…
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