What Does a Tax Attorney Do?
What does a tax attorney do and why is it important to work with one?
Many people think they do not need a tax attorney or can solve their issues with a CPA. For clients with international interests and high net worth, preserving wealth often requires the support of a tax attorney.
The ever-changing regulatory landscape
The laws are constantly changing and taxpayers need to adapt to the latest rules.
In the United States, tax laws and regulations tend to change every time there’s a switch in which political party is in power. In the Trump era, substantial changes were made as part of the Tax Cuts and Jobs Act (TCJA) in 2017. In the subsequent Biden administration, there was serious consideration of new taxes for the wealthy.
The changes aren’t limited to the U.S. Similar changes occur in other countries worldwide.
Taiwan has shifted from a flat rate system to a progressive rate system on taxable gifts and estates.
Hong Kong has substantially increased the stamp duty on certain real estate acquisitions and dispositions.
South Korea has strengthened tax enforcement achieving 83% increase in collected wealth transfer taxes over the last four years.
What does a tax attorney do?
In a period of uncertainty where taxpayers are facing a long list of tax changes almost every year domestically and internationally, or where in certain areas the laws are behind our time, and there is no clear guidance from the tax authority, tax attorneys are better equipped to advise taxpayers with practical solutions that can stand up to potential challenges.
The U.S. has a self-reporting system where each taxpayer calculates and reports taxes on their own. The Constitution of the United States grants U.S. taxpayers tremendous freedom and power over the amount, timing, and method of paying taxes, allowing them to plan and/or adjust their tax liability with the help of their tax attorneys.
In Gregory v. Helvering, 293 U.S. 465, 469 (1935), the Supreme Court of the United States stated that “legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits, cannot be doubted.”
The self-reporting nature of the US tax system combined with the U.S. worldwide taxation makes tax planning crucial to taxpayers with U.S. connections.
As the Supreme Court stated, a taxpayer has an absolute right to pay the minimum amount of tax.
What do tax attorneys do at CaoLaw?
We provide international tax planning to minimize taxpayers’ income tax globally.
We help our clients preserve their wealth through estate planning to minimize estate tax globally.
We represent clients with foreign bank accounts and foreign business interests.
We ensure our clients are compliant with taxes internationally.
We help clients mitigate any potential international penalties.
For clients considering physically relocating to another country, investing in a foreign country, or transferring assets between countries, what choices they make at the beginning and along the way can greatly impact the tax liability, both short-term and long-term.
The complexities of tax issues
In this next part, we’ll briefly look at several examples of issues that taxpayers may face that are difficult to navigate without the advice of a tax attorney.
Tax residency
The country that a taxpayer is considered a resident in has a large impact on the tax assessed. This concept of “tax residency” is an amorphous concept developed over the years by both the IRS and the Courts, making it very difficult for taxpayers to understand and plan ahead without the advice of a tax attorney.
The legal codes and regulatory guidance also vary significantly by country. Even within the same country, tax residency is determined differently for different tax purposes. When potential tax residency of multiple countries is involved, we strongly advise the taxpayer to consult a tax attorney.
Residency and income source
A resident alien is subject to federal income tax on worldwide income, regardless of source, whereas a nonresident alien is subject to federal income tax only on income that is from sources within the United States.
The tax treaty exception and the foreign tax home/closer connection exception may classify a taxpayer as a nonresident alien.
In addition, certain rules of a bona fide resident of US possessions (e.g., Puerto Rico) may provide tax opportunities and beneficial tax treatments on certain capital gains, such as stocks, bonds, and cryptocurrency.
However, taxpayers must be mindful of exceptions or other applicable Code sections and their accompanying regulations.
Residency and real estate
In general, a nonresident alien is subject to U.S. tax only on income that has a sufficient nexus with the United States.
However, under Foreign Investment in Real Property Tax Act (“FIRPTA”), any foreign person that disposes of United States real property interest (“USRPI”) is deemed to conduct a U.S. trade or business.
Thus, for foreigners, there is a real estate withholding tax of 15% of the selling price that the buyer of your U.S. real estate is required to withhold through an escrow company, which facilitates the transaction. However, taxpayers may pay the withholding tax currently and either wait for a refund or proactively apply for a real estate withholding certificate to avoid the 15% withholding tax.
This latter approach provides the taxpayer with immediate cash flow and the taxpayer does not wait for the federal government’s refund, whereas the taxpayer who withheld 15% tax more than likely has paid more than their share of tax. To get a refund, the taxpayer then has to file a US tax return in the following year and then wait at least 6 months for the government to process the refund.
Foreign income and offshore accounts
Once a taxpayer becomes a U.S. tax resident, there are several reporting obligations that the taxpayer must take into consideration regardless of whether the taxpayer is residing within the U.S. or not.
If a U.S. tax resident fails to abide by any applicable reporting obligations, the IRS may impose accuracy-related penalties, information return penalties, and/or FBAR penalties. Generally, there is no statute of limitation on noncompliance issues resulting from failure to file foreign income or foreign accounts.
We will properly assess the taxpayer’s noncompliance issue and determine the best course of action to restore the taxpayer’s compliance record and preventatively avoid a significant penalty risk.
Gift & estate tax issues
Setting up proper trust structures based on the taxpayer’s goal may provide the solutions to the hefty inheritance and gift taxation.
Different jurisdictions also have different estate tax rules.
The U.S. provides $12,060,000 estate and gift tax exemptions for resident aliens (2022), which may sunset after 2025. Coordinating the gift and estate tax rules of different jurisdictions and structuring a trust that effectively approaches issues of both or multiple jurisdictions is crucial.
Conclusion
Understanding the tax system of the United States is very difficult. For people with international assets, the complexity increases significantly and an understanding of all countries' legal codes is required to preserve wealth.
Compared to many countries where taxpayers do not report their own taxes, in the U.S., understanding the tax reporting requirements is a taxpayer’s obligation and learning tax planning strategies is essential to growing a business and preserving family wealth.
The taxpayer will also be held liable in the U.S. for mistakes on their taxes, even if they result from a lack of understanding of the reporting requirements.
The tax laws in all countries are subject to change that is often tied to administration changes and policy objectives. Preparing for upcoming changes and uncertainty in law and policies is crucial for growing and preserving wealth in this complex landscape.
CaoLaw attorneys are experts on international tax, estate planning, and wealth preservation.
