U.S. continues to go after foreign tax evasion with new regulation

Gifts and inheritances from "covered" expatriates are subject to the 40 percent estate tax.

Expatriates who gift or bequeath wealth to U.S. taxpayers are also gifting a tax obligation, which the IRS clarified under new proposed regulations issued in September, 2015.

In recent years, Congress and the IRS have spent a significant amount of effort and resources tracking down foreign income - and going after those who are found to have intentionally or unintentionally avoided paying taxes by leaving the U.S. or keeping assets abroad.

In September, 2015, the IRS continued its dogged pursuit of foreign dollars by issuing a new proposed regulation governing the taxation of expatriates who gift or bequeath assets to loved ones still in the U.S.

Under Section 2801 of the Internal Revenue Code, added in 2008, gifts from "covered" expatriates were to be taxed at the highest gift or estate tax rate, regardless of whether the gift or assets were acquired before or after the expatriate began living abroad. The annual gift tax exclusion does still apply, however.

For expatriates who still have family and loved ones in the U.S., a gift or inheritance may therefore be subject to a 40 percent tax rate, payable by the individual receiving the gift.

Details of the proposed regulations

Under the proposed regulations, covered expatriates for the purposes of Section 2801 are people who have an average annual net income tax liability greater than $160,000 for the previous five years, which is adjusted annually for inflation, or have a net worth of $2 million or more.

The regulations are not yet final and are open for public comment. Once finalized, the IRS will issue Form 708, which will give the due date and other rules for assessing tax liability under Section 2801.

Has the IRS began collection efforts against you?

It has been difficult for many U.S. taxpayers to know when they are subject to paying the 40 percent estate tax on inheritances from relatives living abroad. This is just one example among many of the U.S. government and IRS pursuing taxes on current or former U.S. citizens living abroad.

If you are under investigation by the IRS, or have a past due tax liability on which the IRS is attempting to collect, delay can be costly. Penalties and interest can mount quickly, even if your tax omission was an honest mistake.

At Robert J. Fedor, Esq., LLC, our team understands what a dispute or investigation with the IRS entails. The IRS is too powerful to negotiate with alone. Contact our office to discuss your situation and receive experienced counsel on your legal options and next steps.