California Wealth Tax, a Dangerous Initiative

As the Pandemic dried state treasuries, they desperately seek new ways to get more revenue.  Like addicts without a fix, some have resorted to extreme measures. I watch these with trepidation because the emergency makes them justifiable to legislatures. But once adopted, they tend to grow roots and become permanent, making them doubly dangerous. New York just enacted its own way of getting the “stuff”. Others will likely follow.

California’s Wealth Tax initiative -AB2088- is textbook “California”: innovative, greedy and innocuous looking from popular perspective. After all, it only applies if your net worth is over 30 million (15 if married filing separately). Read even if it still does not yet apply.

This is a “net worth” tax. Unlike an income tax, this requires you to compute your worldwide net worth to figure if the tax applies. A long list of assets are included in the mix, even if they are difficult to value family businesses, startups, farms, or others. Since cash counts, you would have to disclose its existence to California, no matter where located, even if it’s under your mattress.

If you barely met the threshold, $120,000 would be added to your annual tax bill.

In a pernicious twist, if you decide to become a nonresident, leaving that nonsense behind, you would remain subject during the next ten years, albeit at “generous” declining tax rates. Worse, it invents a new “temporary resident” category, aimed at those spending over 60 days in the state over the year. Those would prorate the tax based on time spent in California. Aimed at snowbirds, those should be very leery of these provisions. They could find themselves stuck with a California reporting obligation and tax even if they have no corresponding federal one. No tax treaty would be of help against California.

Dangerous? Well, it’s populist. It sounds good to tax the wealthy. I would generally agree, except there’s no guarantee that once enacted, that $30M “floor” won’t somehow move down to include more and more taxpayers. The compliance costs, even figuring out if you are subject, can be staggering and can exceed the tax itself. You have foreign businesses or investments or retirement funds anywhere? They go in. It can quickly get quite complex.

In my almost 25 years as a licensed attorney, I have never seen such a worrying proposal from California, the state that even figured how to tax satellites that fly far above the state.

Orlando Gotay is a California licensed tax attorney (Master of Laws in Taxation) admitted to practice before the IRS, the U.S. Tax Court and other taxing agencies.  His love of things Mexican has led him to devote part of his practice to federal and state tax matters of U.S. expats in Mexico.  He can be reached at tax@orlandogotay.com Facebook: GotayTaxLawyer or WhatsApp at +17604491668. This is just a most general outline. It is informational only and not meant as legal advice.

Foreign Asset Control and You

BY ORLANDO GOTAY / TAX ATTORNEY

If you are a US person who runs a business in Mexico and have not heard about OFAC, perhaps you should. OFAC (Office of Foreign Asset Control), is part of the US Treasury. It administers dozens of programs related to trade and economic sanctions to further US national security interests.

OFAC foreign asset control programs designate both foreign individuals and entities for economic sanctions. Some of these are country focused, such as Cuba, Iran, Venezuela and North Korea. Others are broader, making designations under Global Terrorism, Narcotics Trafficking and “Kingpin” lists, among others. Because these are economic sanctions, the lists include entities in which target persons have a majority ownership too, even if the named entities themselves have no actual relation to what got the “owners” on the list. This is the so-called “Specially Designated Nationals (SDN) and Blocked Persons” list.

Sanctions are a bad thing. One does not want to be on these lists. Why is this relevant to you? Great question!

If you are a US person, you are not allowed- in fact, you are prohibited by federal law- from doing business, receiving or giving property to anyone on these lists. OFAC has a comprehensive database of listed persons and entities that change constantly. I just searched it to figure out how many entries it had for Mexico; it returned over seven hundred names. On the basis of a name alone, some businesses would hardly be noticed. There is a childcare center, hotels, even an air taxi service. But the rule is there and it’s on you to not do any business with listed persons.

Why? Because, you can be fined for a violation of OFAC sanctions if you have prohibited transactions with sanctioned persons. More serious cases could warrant more comprehensive actions, ranging all the way to criminal prosecution.

Compliance with these rules can be burdensome. There are screening services that will clear names for you. If you are operating a souvenir shop somewhere, you may not need to do much screening. If you are a real estate developer, the scope of your activities could be such where it may be worth the while, maybe even critical, to screen against the OFAC list.

Of course, the screening universe includes not only clients, but even partners and service providers.  Remember, it’s on you not to do business with them!  You were told.

Orlando Gotay is a California licensed tax attorney (Master of Laws in Taxation) admitted to practice before the IRS, the U.S. Tax Court and other taxing agencies.  His love of things Mexican has led him to devote part of his practice to federal and state tax matters of U.S. expats in Mexico.  He can be reached at tax@orlandogotay.com Facebook: GotayTaxLawyer or WhatsApp at +17604491668. This is just a most general outline. It is informational only and not meant as legal advice.

Tax in a World of Pandemic

BY ORLANDO GOTAY

A name that did not even exist at the beginning of the year, COVID-19, has turned all of our lives literally upside down, in a matter of weeks. Folks, we are living in amazing times.

COVID-19 has a way to affect literally everything we do, or plan to do (I am asking South Dakota to waive a one-day “visit overnight” requirement for my driver’s license renewal, due soon). Employment, travel, supply chains –literally everything– is being affected by COVID-19.  And of course, this comes in the middle of tax season. People are losing jobs and facing incredible hardships –all have a very meaningful impact, come tax time.

As I write this, Congress is fashioning some emergency economic relief for Americans; details are unclear but suffice it to say this is a truly major calamity that requires unprecedented actions, the world over.

The IRS has moved a little (and by this, I mean not nearly enough) to cushion the blow for now. It announced a 90-day postponement of the due date for 2019 tax returns, July 15. This includes payments too. There are additional extensions available. Some extensions (if you reside abroad) are automatic (no extension request needed filing, your later returns simply noted as such). For regular stateside residents, an extension needs to be affirmatively filed on time.

States are tricky because sometimes they follow the federal rule and sometimes they don’t. For instance, some allow an automatic extension if you filed a federal one, some will require their own extension filed irrespective of federal extensions. COVID-19 throws an additional wrench. For example, California’s COVID-19 relief provides an automatic extension of time to file and pay tax until June 30. If you need to file a state tax return, make sure you note with precision the exact requirements if you are not able to file (or pay tax) by their regular due dates.=
Tax administrators are just beginning to wrap their arms about the entire set of consequences COVID-19 has on ordinary Americans, not just on patients and their loved ones. If you come up with a tax situation affected by COVID-19, I urge you to write the appropriate tax officials. They need to hear from you. I hope you will continue to be safe wherever you happen to be.

Orlando Gotay is a California licensed tax attorney (Master of Laws in Taxation) admitted to practice before the IRS, the U.S. Tax Court and other taxing agencies.  His love of things Mexican has led him to devote part of his practice to federal and state tax matters of U.S. expats in Mexico.  He can be reached at tax@orlandogotay.com Facebook: GotayTaxLawyer or WhatsApp at +17604491668. This is just a most general outline. It is informational only and not meant as legal advice.

It’s All in the Cards

BY ORLANDO GOTAY

Earthquakes can be catastrophic events due to massive forces and unpredictability. Science always looks for clues to figure out when the next “big one” will arrive.  In the tax arena, I can’t predict, but there’s an earthquake looming– aimed at persons who own, trade or use virtual currencies (“crypto”).

The IRS responds slowly to technology. Early 2014 guidance simply said crypto was “property” and that crypto income or gain just had to be reported like any other property.

In November 2016, the IRS went after Coinbase, a large San Francisco based crypto exchange, seeking trader information. In 2017 the IRS won– a list of persons with at least one transaction of $20,000 or more between 2013 and 2015.

In June 2019, the IRS sent letters to 10,000 persons urging “review” of tax reporting on account of crypto transactions. Two additional versions of the letter exist, in which the IRS states “potential misreporting” of transactions, or even requesting specific taxpayer responses.

This month, H.M. Revenue and Customs (the British IRS) requested user names and transaction data from UK-based exchanges. The tectonic plates are beginning to shift all over. Tax administrators have seen not just massive money floating around, but unreported and untaxed money.

From IRS court filings: “There has been an explosion of billions of dollars of wealth in just a few years from bitcoin, a significant amount of which has no doubt accrued to United States taxpayers, with virtually no third-party reporting to the IRS of that increase in income.”

And that takes me to the next point, the likely earthquake.

So far, “foreign” crypto is not reportable under Foreign Bank Account Report (FBAR) or Form 8938, Report of Specified Foreign Financial Assets. But all those IRS letters can’t be seen in isolation; they must be part of a broader effort. That could be updated guidance, including new reporting requirements for “foreign” crypto.  And if this concerns you, you should follow this closely.

If “foreign” crypto holdings are reportable, I would expect some type of shoehorning into existing FBAR/8938 reporting schemes…akin to a square peg in a round hole. This would likely require potentially massive information gathering from its owners, just to be able to comply. I would urge crypto holders to look immediately at their holdings, and to begin getting a grasp of the magnitude of data that could be needed: exchanges, transactions, digital wallets, valuation of e-coin, and more.  Forewarned is forearmed!

 

Orlando Gotay is a California licensed tax attorney (with a Master of Laws in Taxation) admitted to practice before the IRS, the U.S. Tax Court and other taxing agencies.  His love of things Mexican has led him to devote part of his practice to federal and state tax matters of U.S. expats in Mexico.  He can be reached at tax@orlandogotay.com or Facebook: GotayTaxLawyer.  This is just a most general outline. It is informational only and not meant as legal advice.

U.S. Tax Clock Stops While In Mexico

The IRS is going through tough times. In recent years, Congress “punished” the agency by providing it a super lean budget. The shutdown also left it with millions of unopened letters and mail. The IRS Ombudsman estimates it will take a year to get back to normal.

One of the things Congress did to the IRS was to require that inactive collection accounts be turned over to Private Collection Agencies. Those were old accounts the IRS felt had little collection potential. Off to work PCAs went, and we have some results. They are not very good at collecting. And when they were able to reach the taxpayer and the taxpayer wanted to set up a payment plan, somehow it fell through. I’ll add that it was tried before, and this time around it seems like yet another fiasco.

Why, you would say, do I take time to write about this? Well, for any of my readers that may have outstanding IRS debt, it is always important to know a few things. Generally, once the tax liability is assessed (imagine the entry in the government’s ledger “Joe owes us X dollars”), the government has ten years from that date to collect. So, it’s easy to say, “Why can’t I just wait this out if the debt is old?”

You should know the 10-year collections clock comes with that “exceptions apply” language we often see in ads. One you should know about: If a taxpayer is outside the U.S., the collection clock stops until the taxpayer returns to the U.S., then it restarts six months thereafter. Otherwise, it stops forever.  If, in the course of your conversation with one of these folks, they learn that you like real margaritas and tacos, instead of their north-of-the-border facsimiles, your collection file will be coded such that the debt will not expire.

The other consequence is that those debts continue accumulating penalties and interest. It’s not difficult to see how old tax debt can balloon up to the magic debt level that would make you eligible for passport non-renewal or cancellation.  You see, they have all kinds of persuasive methods.

Another way in which this can be addressed is through a payment plan that takes into account your living expenses versus your income, or through an offer in compromise where a sum is offered in exchange for release of all liabilities. Whether one or the other is convenient depends on one’s individual circumstances.

Orlando Gotay is a California licensed tax attorney (with a Master of Laws in Taxation) admitted to practice before the IRS, the U.S. Tax Court and other taxing agencies.  His love of things Mexican has led him to devote part of his practice to federal and state tax matters of U.S. expats in Mexico.  He can be reached at tax@orlandogotay.com or Facebook: GotayTaxLawyer.  This is just a most general outline. It is informational only and not meant as legal advice.

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