Tax Notes Blog

US Character and Sourcing of Software Sales

Written by Gregory Fallon, EA, MST on Thursday, 15 August 2013.

US Character and Sourcing of Software Sales

When U.S. companies are involved in international transactions they need to understand where their income will be sourced and how it will be characterized before they can develop effective tax strategies. These two factors will also be important when taxpayers take advantage of the Foreign Tax Credit. This article will be focusing on sourcing and character of international and US software sales for “shrink wrap” software. When classifying software transactions it is important to first determine what rights have been transferred. The character of software sales is not based on the form adopted by the sellers and buyers or controlled by copyright law it is determined by IRS regulations. Treas. Reg. 1.861-18(g) focuses on the rights that are acquired by the buyer in determining the type of income.

FBAR Penalties

Written by Gregory Fallon, EA, MST on Thursday, 15 August 2013.

FBAR Penalties

On 7/25/2012 a 64 year old man named Luis Quintero of Miami Beach recieved 4 months in prison, 250 hours of community service, a criminal fine of $20,000, and a civil penalty of $2 million. Mr. Quintero failed to report his Swiss UBS accounts, valued at $4 million, from 2005-2007.  Any US persons with a financial interests or signing authority over bank accounts, brokerage accounts, or other financial accounts valued at $10,000 during a calendar year is required to file an FBAR by June 30th of the following year. Taxpayers that do not file their FBAR when required will be subject to severe penalties and even jail time. Taxpayers Non-willful FBAR violation (filing errors or mistakes) can result in a civil penalty of up to $10,000 for each violation (per account). However, if the Taxpayer willfully violates FBAR they will be subject to civil penalties that are the GREATER of $100,000 or 50% of the account balance at the time of violation. Therefore, a Taxpayer that willfully violates FBAR by not reporting a $20,000 account could be assessed a $100,000 civil penalty. The statue for assessing this penalty is 6 years. The IRS is also allowed to apply both criminal and civil penalties. The criminal penalties for willfully violating FBAR can lead to a fine of up to $250,000 or imprisonment for not more than 5 years.

In 2009 the IRS obtained a list of over 4,450 accounts held by US taxpayers from UBS so we should continue to see more FBAR cases in the future.

Limitation on Itemized Deduction for High-Income Taxpayers

Written by Gregory Fallon, EA, MST on Thursday, 15 August 2013.

Limitation on Itemized Deduction for High-Income Taxpayers

For tax years beginning after 2012, the 2012 Taxpayer Relief Act provides that the “Pease“ limitation on itemized deductions, which had previously been suspended, is reinstated with a starting threshold of $300,000 for joint filers and a surviving spouse, $275,000 for heads of household, $250,000 for single filers, and $150,000 (one-half of the otherwise applicable amount for joint filers) for married taxpayers filing separately. Thus, for taxpayers subject to the “Pease” limitation, the total amount of their itemized deductions is reduced by 3% of the amount by which the taxpayer's adjusted gross income (AGI) exceeds the threshold amount, with the reduction not to exceed 80% of the otherwise allowable itemized deductions. These dollar amounts are inflation-adjusted for tax years after 2013.

If you expect your adjusted gross income to exceed the threshold for 2013 click on the "Pease" Calculator link.here

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