San Francisco Tax Blogs | Diosdi, Ching, & Liu, LLP

06May 2022 by Anthony Diosdi

How to Utilize Section 6751 to Successfully Challenge IRS 5472 Penalties

Tax Law

By Anthony Diosdi Under Internal Revenue Code 6038A requires any domestic corporation (including single member LLCs treated as disregarded entities) that is 25 percent foreign-owned to annually file a Form 5472 and a Form 1120 with the Internal Revenue Service (“IRS”). The penalty for failure to file Form 5472 is $25,000. If such failure continues for more than 90 days after notification by the Internal Revenue Service (“IRS”), there is an additional penalty of $25,000 for each 30-day period or fraction. The problem is a significant number of individuals that operate U.S. companies which are 25-percent owned do not know they have a Form 5472 of the reporting obligation. Many of these same individuals believed they could correct the noncompliance by late filing a Form 5472 and Form 1120 with…

05May 2022 by Anthony Diosdi

How to Utilize Section 6751 to Successfully Challenge IRS 3520 Penalties

Tax Law

By Anthony Diosdi Under Internal Revenue Code Section 6677(a), if any United States Person beneficiary receives (directly or indirectly) a distribution from a foreign trust, that person is required to disclose the aggregate distribution received on an Internal Revenue Service (“IRS”) Form 3520. A foreign gift, bequest, or inheritance that exceeds $100,000 must also be disclosed on a Form 3520. The IRS may assess an annual penalty equal to 35 percent of the gross value of the foreign trust not disclosed. In the cases where foreign gifts are not timely disclosed on a Form 3520, the IRS may assess a penalty under Internal Revenue Code Section 6039F equal to 25 percent of the value of a foreign gift. The problem is a significant number of individuals who had a 3520…

05May 2022 by Anthony Diosdi

Be Careful with Loans to Controlled Foreign Corporations – a Loan to a Foreign Corporation Can Trigger a Form 5471 Filing Requirement

Tax Law

By Anthony Diosdi Once a foreign corporation is established, it must decide how to raise funds. Like domestic corporations, foreign corporations often raise capital through issuing stocks or through borrowing. The investor who acquires stock holds an equity interest in the corporation while the lender holds a debt or creditor interest in the foreign corporation. In either case, the investor or lender expects a return on the investment. Shareholders may receive that return from dividends paid on stock and from profit upon later sale of the share. On the other hand, lenders receive their return on their investment in the form of interest payments. Many U.S. investors do not wish to hold an equity investment in a foreign corporation because of the harsh GILTI or subpart F income tax consequences…

03May 2022 by Anthony Diosdi

Potential IRS Penalties for Tax Non-Payment

Tax Law

Federal law and IRS regulations state that if you don’t file your tax returns or pay your taxes in a timely fashion, the IRS will charge you pretty significant penalties. A penalty will apply for each month of 0.5 percent for the first month and each additional month or partial month that the tax remains owing, subject to an aggregate maximum of 25 percent of the taxes owing. The IRS applies the penalty to the net amount due, so any amount paid will reduce the overall debt. If you miss certain deadlines in making your payments, the IRS can increase the monthly penalty to 1 percent of the total owing. The penalties in the case of a fraudulent failure to file triple the penalty payments and aggregate maximum. You can…

03May 2022 by Anthony Diosdi

The IRS Multinational Audit: How Multinational Corporations Can Survive Five Common Targets of an IRS International Tax Audit

Tax Law

By Anthony Diosdi An exam of a multinational’s tax return(s) will begin much the same manner as any other audit in that the corporation will receive a letter from the Internal Revenue Service (“IRS”) notifying it of the audit. However, unlike a typical garden variety audit which tends to focus on substantiating expenses claimed on a tax return or a probe of the income, an international audit will likely focus on cross–border transfers and reorganizations, transfer pricing, foreign tax credits, bilateral tax treaties, and international information returns. These matters tend to be extraordinarily complex. Furthermore, special procedural issues may arise in international audits that do not typically arise in more traditional audits. This article explores five areas that in our experience tend to come up in international tax audits of…

26Apr 2022 by Anthony Diosdi

The U.S. and Canadian Tax Consequences of a Canadian Investor’s Acquisition of U.S. Real Estate

Tax Law

Canadian investors generally have the same goals of minimizing their tax liabilities from their U.S. real estate and business investments, as do their U.S. counterparts, although their objective is complicated by the very fact that they are not U.S. persons. That is, Canadian investors must be concerned not only with income taxes in the United States, but also income taxes in Canada. Further, the United States has a special tax regime that is applicable to foreign persons. Specifically, if the non-U.S. person derives certain types of passive income, it is typically taxed at a flat 30 percent rate (without allowance for deductions), unless an applicable tax treaty reduces this statutory rate. In contrast, if the U.S. activities of the foreign person rise to the level of constituting a “U.S. trade…

26Apr 2022 by Anthony Diosdi

The United States-Canada Income Tax and Estate Tax Treaty Revisited

Tax Law

By Anthony Diosdi The major purpose of an income tax treaty is to mitigate international double taxation through tax reduction or exemptions on certain types of income derived by residents of one treaty country from sources within the other treaty country. Because tax treaties often substantially modify U.S. and foreign tax consequences, the relevant treaty must be considered in order to fully analyze the income tax consequences of any outbound or inbound transaction. The U.S. currently has income tax treaties with approximately 58 countries. This article discusses the implications of the United States.-Canada Income Tax Treaty. There are several basic treaty provisions, such as permanent establishment provisions and reduced withholding tax rates, that are common to most of the income tax treaties to which the U.S. is a party. In…

13Apr 2022 by Anthony Diosdi

The IRS Form 5472 Reporting Requirements for Foreign Owners of a U.S. Disregarded Entity

Tax Law

By Anthony Diosdi Recently, the Internal Revenue Service (“IRS”) and the Treasury Department issued final regulations regarding the reporting requirements for domestic disregarded entities held by a nonresident. According to the regulations under Internal Revenue Code Section 6038A, a disregarded entity will be treated as a U.S. corporation. Historically, a foreign-owned disregarded entity was just that- disregarded. As a result, nonresidents were not required to disclose disregarded entities to the IRS on a tax return or informational return. Under the new rules, this is no longer the case. Under the new regulations, a disregarded entity held by a nonresident individual or foreign entity is required to obtain a Employer Identification Number (“EIN”), prepare a pro-forma Form 1120, and file a Form 5472, Information Return of a 25% Foreign Owned US…

13Apr 2022 by Anthony Diosdi

A Closer Look as to How Nonresidents Can Utilize the U.S.- Korean Income Tax Treaty to Avoid U.S. Taxation Associated With a Domestic Retirement Plan Distributions

Tax Law

By Anthony Diosdi In an increasingly global economy, workers are experiencing unprecedented mobility. As such, foreigners living in America, even for a limited time, often participate in a pension or retirement plan in the United States; participation might even be mandatory. In most cases, pretax money is contributed into retirement accounts where it accumulates tax-free until retirement. U.S. retirement such as 403(b) plans, 401(k) plans, and Individual Retirement Accounts (“IRAs”) are commonly encountered by foreigners who are employed in the United States. In the alternative, Americans who are employed abroad often contribute to foreign retirement plans. Whether contributions, earnings, and distributions are includible in a foreign worker’s U.S. taxable income depends on how the worker is classified for U.S. tax purposes and whether a tax treaty exempts an event that…

12Apr 2022 by Anthony Diosdi

Utilizing the U.S.- China Tax Treaty to Avoid U.S. Withholding Tax and Early Withdrawal Penalties From a 403(b) Plan

Tax Law

By Anthony Diosdi In an increasingly global economy, workers are experiencing unprecedented mobility. As such, foreigners living in America, even for a limited time, often participate in a pension or retirement plan in the United States; participation might even be mandatory. In most cases, pretax money is contributed into retirement accounts where it accumulates tax-free until retirement. U.S. retirement such as 403(b) plans, 401(k) plans, and Individual Retirement Accounts (“IRAs”) are commonly encountered by foreigners who are employed in the United States. In the alternative, Americans who are employed abroad often contribute to foreign retirement plans. Whether contributions, earnings, and distributions are includible in a foreign worker’s U.S. taxable income depends on how the worker is classified for U.S. tax purposes and whether a tax treaty exempts an event that…