U.S. tax reporting for U.S. persons with businesses or assets outside the U.S. is complex, legal intensive, and there are many traps for the unwary that can carry serious penalties. The tax preparer must understand the forms to prepare, understand the rules as the tax preparation software has not caught up to the complexity of the reporting, and be prepared to take legal positions to obtain the best result for the client. Too often, tax preparers do not have the necessary background to handle the tax reporting for international clients.
Our approach is to have advisors with legal and accounting backgrounds to efficiently handle the tax preparation for these international clients. For instance, a controlled foreign corporation (CFC) has three general tax accounting regimes:
(1) Subpart F income,
(2) Global Intangible Low Tax Income (GILTI), and
(3) exempt income.
The tax preparer must understand how income and expenses flow through each category in order to properly report the income. In addition to the three categories of income, there are four baskets for the foreign tax credit to account for with complicated allocation rules. It is incumbent on the tax preparer to know the rules for the income of a controlled foreign corporation to be properly reported and not rely on tax software that cannot sort this out for the tax preparer.
For example, we reviewed a tax return of a client who had their tax return prepared by one of the top ten accounting firms in the world. The tax preparer was one of their experts for U.S. international tax preparation. For tax year 2017, there was a deemed repatriation transition tax (DRTT) that was applicable to CFCs. The tax preparer at this accounting firm reported the DRTT resulting in a tax of close to $60,000.
We reviewed the tax return and noticed that the CFC paid more tax in the country where the CFC was located and if proper elections were made, the foreign tax credits would reduce the DRTT to $0. We amended the necessary tax returns for the client resulting in a full refund of the $60,000 of tax previously paid. Not having accounting and legal advisors at the table almost cost this client $60,000.
Handling tax preparation for clients with international assets and businesses requires more than blindly plugging in numbers into tax software. It requires strong legal knowledge of the rules, how to comply with variations in tax accounting, and how the tax information should flow through the international tax forms. Thoughtful review reduces errors, minimizes taxes, and leads to tax planning strategies. At Praestans, we have tax, legal, and accounting professionals at the table to be attentive to client matters and provide the best outcomes.
Praestans Global Advisors is neither a law firm nor a CPA firm.