GILTI Tax & 2018 Taxes - New Summary Tax Guide for Foreign Income - Golding & Golding

GILTI Tax & 2018 Taxes – New Summary Tax Guide for Foreign Income – Golding & Golding

GILTI Tax & 2018 Taxes – New Summary Tax Guide for Foreign Income

The tax liability spectrum for GILTI varies greatly.

GILTI Tax: While some U.S. shareholders may get stuck with a significant tax bill on their foreign income as a direct consequence of GILTI — others may avoid such negative tax results.

In order to try to bring some clarity to GILTI Tax. We will explain the basics of Global Low-Taxed Intangible Income, if it may impact you, and what you may be able to do to minimize the impact.

Common questions about GILTI Tax:

  • What is GILTI Tax?
  • What does GILTI mean?
  • What if I live overseas?
  • What if I am a corporate shareholder?
  • What if I am an individual shareholder?
  • How to avoid GILTI Tax?
  • Can I make any elections to reduce or avoid GILTI Tax?

GILTI Tax

GILTI is Global Intangible Low-Taxed Income – but it applies to more types of income than just the name would presume. Unless the foreign income is specifically excluded from GILTI – it is GILTI.

For Corporate Shareholders, it may not be so bad. For Non-Corporate Shareholders with an aggregate CFC tested net income loss, it is may also largely be a non-issue.

But for a single member U.S. Shareholder of a CFC (or a single member with a large ownership stake) who earns significant income, with relatively low value CFC assets…such as U.S. Person Doctors and Lawyers operating foreign professional corporations with significant deferred compensation – it can be a serious problem.

This summary will focus on non-corporate U.S. Shareholders.

How do I Report GILTI?

GILTI is reported on Form 8993 (Here is a link to the Draft)

Corporate Shareholders

If you are a U.S. Corporate Shareholder owner of a CFC, you may able to receive significant reductions in GILTI. This summary will not focus on Corporate Shareholders, other than to say that with deductions and credits, you may be able to significantly reduce any GILTI taxes due.

U.S. Shareholder – Net Zero Multiple Companies

GILTI is based on the net value of all CFC related income. At a most basic level (exceptions, exclusions and limitations apply), if you own (5) companies and (4) of them each generate a profit, but the fifth company generates a loss equal to, or greater than the total income of the other companies  – your net GILTI would be zero.

In other words, it is an aggregate of all CFCs, not per company. 

U.S. Shareholder – One Company (High Assets)

The basic formula for GILTI Net CFC Tested Income reduced by net Deemed Tangible Income Return (DTIR).

On the net CFC tested income is determined, the net CFC tested income is reduced by the shareholder’s “net deemed tangible income return” to arrive at the shareholder’s GILTI.

For example, David has a single CFC overseas that generated net income of $300,000 that may be subject to GILTI. But, David’s business has high assets, to the tune of $5M.

10% of the assets value is $500,000. Since $500,000 is less than $300,000, the total GILTI income would be zero, since when you subtract.

It appears the loss is not carried forward to offset future years GILTI.

Do You Have a High-Profit, Low Asset CFC?

Using the example above, let’s say the CFC is a single member Professional Corporation (PC) which is not eligible to be disregarded under U.S. Tax Law (26 CFR 301.7701-2). The PC is a law firm, in which the member earns $600,000.

The expenses are small and the owner only takes a small amount of income, and defers the rest into government approved investments (similar to a 401K) to receive tax deferred status. This deferred income will not be taxed until it is distributed.

Problem: The total net income after deductions, is still substantial, and may result in a significant tax liability (due to the mismatch in tax payment due in the U.S. vs. abroad).

How can a Person Avoid GILTI Income?

If possible, the best option is to try to find an exclusion to GILTI.

Generally, the following types of income are excluded from GILTI:

– Section 952 Effectively connected income (ECI)

– Gross income of the CFC excluded from foreign base company income (determined under §954) and insurance income (determined under §953) by reason of the high tax exception under §954(b)(4)

– Subpart F income of the CFC

– Related Person Dividends (as defined in §954(d)(3)), and

– Foreign oil and gas extraction income (determined under §907(c)(1)), over

Should You Make a 926 Election?

Section 926: 

With Form 926, you can elect to be taxed a corporation. With the new reduced corporate tax rate, it may be a benefit for some individual shareholders.

As to the 50% corporate deduction, the general consensus amongst practitioners is that it does not apply, even if a person makes an election to be taxed as a corporation.

*You must consider both short and long-term strategies before making such an election.

Should You Disregard the Entity?

One strategy may be to change the foreign structure of the business to avoid CFC status. A CFC is a legal term, and technically under CFC rules, if the corporation is not considered a corporation/CFC – it may avoid any GILTI issue (but it may have other unintended tax consequences).

Should You Shift Profits?

Depending on the type of CFC you have, you may consider shifting the income/ownership percentage of the CFC to avoid CFC status – but you have to be cognizant of Attribution.

For example, if you shift ownership to your spouse, his or her ownership may be attributed to your ownership percentage ownership.

Invest in a losing CFC company?

If you have a hunkering for purchasing a company that is generating losses, you may be able to plan the purchase of a losing corporation to offset GILTI.

But, there are already regulations to deter this type of behavior, and if assets are purchased solely for trying to reduce GILTI, the IRS can disregard those assets in determining GILTI.

Are You Out of Compliance for CFC & Other Reporting?

If you are out of compliance for failing to properly report your foreign/offshore accounts, you may consider entering one of the approved IRS offshore voluntary disclosure programs/tax amnesty program to safely get yourself into compliance before it is too late.

What Type of Attorney Should I Hire?

IRS Voluntary Disclosure is a specialized area of law. An IRS Voluntary Disclosure is a complex undertaking. It requires the coordination of several moving parts, including strategy development, Tax Preparation, Legal Analysis, Negotiation and more.

You should hire a Tax Attorney who has the following credentials:

  • ~20 Years of Private Practice experience representing his/her own clients
  • Experienced in Criminal and Civil Tax Litigation
  • Experienced representing clients in Eggshell and Reverse Eggshell Audits.
  • Advanced Tax Degree (LL.M.)
  • EA (Enrolled Agent) or CPA (Certified Public Accountant)
  • Preferably a Board Certified Tax Law Specialist

We Specialize in Safely Disclosing Foreign Money

We have successfully handled a diverse range of IRS Voluntary Disclosure and International Tax Investigation/Examination cases involving FBAR, FATCA, and high-stakes matters for clients around the globe (In over 65 countries!)

Whether it is a simple or complex case, safely getting clients into compliance is our passion, and we take it very seriously.

Examples of areas of tax we handle

Who Decides to Disclose Unreported Money?

What Types of Clients Do we Represent?

We represent Attorneys, CPAs, Doctors, Investors, Engineers, Business Owners, Entrepreneurs, Professors, Athletes, Actors, Entry-Level staff, Students, Former/Current IRS Agents and more.

You are not alone, and you are not the only one to find himself or herself in this situation.

Sean M. Golding, JD, LL.M., EA (Board Certified Tax Law Specialist)

Our Managing Partner, Sean M. Golding, JD, LLM, EA  earned an LL.M. (Master’s in Tax Law) from the University of Denver and is also an Enrolled Agent (the highest credential awarded by the IRS, and authorizes him to represent clients nationwide.)

Mr. Golding and his team have successfully handled several hundred IRS Offshore/Voluntary Disclosure Procedure cases. Whether it is a simple or complex case, safely getting clients into compliance is our passion, and we take it very seriously.

He is frequently called upon to lecture and write on issues involving IRS Voluntary Disclosure.

Less than 1% of Tax Attorneys Nationwide are Board Certified Tax Law Specialists 

The Board Certified Tax Law Specialist exam is offered in many states, and is widely regarded as one of (if not) the hardest tax exam given in the United States for practicing Attorneys. Certification also requires the completion of significant ethics and experience requirements.

In California alone, out of more than 200,000 practicing attorneys (with thousands of attorneys practicing in some area of tax law), less than 350 attorneys are Board Certified Tax Law Specialists.

Beware of Copycat Law Firms

Unlike other attorneys who call themselves specialists or experts in Voluntary Disclosure but are not “Board Certified,” handle 5-10 different areas of tax law, purchase multiple keyword specific domain names, and even practice outside of tax, we are absolutely dedicated to Offshore Voluntary Disclosure.

*Click here to learn the benefits of retaining a Board Certified Tax Law Specialist with advanced tax credentials.

IRS Penalty List

The following is a list of potential IRS penalties for unreported and undisclosed foreign accounts and assets:

Failure to File

If you do not file by the deadline, you might face a failure-to-file penalty. If you do not pay by the due date, you could face a failure-to-pay penalty. The failure-to-file penalty is generally more than the failure-to-pay penalty.

The penalty for filing late is usually 5 percent of the unpaid taxes for each month or part of a month that a return is late. This penalty will not exceed 25 percent of your unpaid taxes. If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.

Failure to Pay

f you do not pay your taxes by the due date, you will generally have to pay a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty can be as much as 25 percent of your unpaid taxes. If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5 percent failure-to-file penalty is reduced by the failure-to-pay penalty.

However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax. You will not have to pay a failure-to-file or failure-to-pay penalty if you can show that you failed to file or pay on time because of reasonable cause and not because of willful neglect.

Civil Tax Fraud

If any part of any underpayment of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 75 percent of the portion of the underpayment which is attributable to fraud.

A Penalty for failing to file FBARs

The civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign financial account per violation. See 31 U.S.C. § 5321(a)(5). Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation.

A Penalty for failing to file Form 8938

The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.

A Penalty for failing to file Form 3520

The penalty for failing to file each one of these information returns, or for filing an incomplete return, is the greater of $10,000 or 35 percent of the gross reportable amount, except for returns reporting gifts, where the penalty is five percent of the gift per month, up to a maximum penalty of 25 percent of the gift.

A Penalty for failing to file Form 3520-A

The penalty for failing to file each one of these information returns or for filing an incomplete return, is the greater of $10,000 or 5 percent of the gross value of trust assets determined to be owned by the United States person.

A Penalty for failing to file Form 5471

The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.

A Penalty for failing to file Form 5472

The penalty for failing to file each one of these information returns, or to keep certain records regarding reportable transactions, is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency.

A Penalty for failing to file Form 926

The penalty for failing to file each one of these information returns is ten percent of the value of the property transferred, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was intentional.

A Penalty for failing to file Form 8865

Penalties include $10,000 for failure to file each return, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return, and ten percent of the value of any transferred property that is not reported, subject to a $100,000 limit.

Fraud penalties imposed under IRC §§ 6651(f) or 6663

Where an underpayment of tax, or a failure to file a tax return, is due to fraud, the taxpayer is liable for penalties that, although calculated differently, essentially amount to 75 percent of the unpaid tax.

A Penalty for failing to file a tax return imposed under IRC § 6651(a)(1)

Generally, taxpayers are required to file income tax returns. If a taxpayer fails to do so, a penalty of 5 percent of the balance due, plus an additional 5 percent for each month or fraction thereof during which the failure continues may be imposed. The penalty shall not exceed 25 percent.

A Penalty for failing to pay the amount of tax shown on the return under IRC § 6651(a)(2)

If a taxpayer fails to pay the amount of tax shown on the return, he or she may be liable for a penalty of .5 percent of the amount of tax shown on the return, plus an additional .5 percent for each additional month or fraction thereof that the amount remains unpaid, not exceeding 25 percent.

An Accuracy-Related Penalty on underpayments imposed under IRC § 6662

Depending upon which component of the accuracy-related penalty is applicable, a taxpayer may be liable for a 20 percent or 40 percent penalty

Possible Criminal Charges related to tax matters include tax evasion (IRC § 7201)

Filing a false return (IRC § 7206(1)) and failure to file an income tax return (IRC § 7203). Willfully failing to file an FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C. § 5322.  Additional possible criminal charges include conspiracy to defraud the government with respect to claims (18 U.S.C. § 286) and conspiracy to commit offense or to defraud the United States (18 U.S.C. § 371).

A person convicted of tax evasion

Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000. A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000.  A person convicted of conspiracy to defraud the government with respect to claims is subject to a prison term of up to not more than 10 years or a fine of up to $250,000.  A person convicted of conspiracy to commit offense or to defraud the United States is subject to a prison term of not more than five years and a fine of up to $250,000.

What Should You Do?

Everyone makes mistakes. If at some point that you should have been reporting your foreign income, accounts, assets or investments the prudent and least costly (but most effective) method for getting compliance is through one of the approved IRS offshore voluntary disclosure program.

Be Careful of the IRS

With the introduction and enforcement of FATCA for both Civil and Criminal Penalties, renewed interest in the IRS issuing FBAR Penalties, crackdown on Cryptocurrency (and IRS joining J5), the termination of OVDP, and recent foreign bank settlements with the IRS…there are not many places left to hide.

4 Types of IRS Voluntary Disclosure Programs

There are typically four types of IRS Voluntary Disclosure programs, and they include:

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