The year began with the passage of the American Taxpayer Relief Act of 2012 (ATRA).

Top Tax-Bracket Increases
The most important result of this act was the tax increase from 35% to 39.6% for those with income over $400,000 if single and $450,000 for married taxpayers filing jointly.

Alternative Minimum Tax (AMT)
ATRA also increased the alternative minimum tax exemption amounts and, for the first time, indexed the exemption and phaseout amounts, with the result that taxpayers can avoid the annual uncertainty regarding the exemption.

Increased Capital Gains and Qualified Dividends Tax Rates
ATRA extended the favorable capital gains and dividends rates on income at or below $400,000 (individual filers), $425,000 (heads of households), and $450,000 (married filing jointly) for tax years beginning after December 31, 2012. However, for taxpayers with incomes above those thresholds, the rate for both capital gains and dividends increased to 20 percent.

New 3.8% Medicare Tax on Net Investment Income
Starting with the year 2013, individuals may be subject to the Unearned Income Medicare Contribution surtax of 3.8% on their net investment income. This surtax is also called the Net Investment Income Tax (NIIT). The tax is 3.8 percent of the lesser of two amounts:

• Net investment income, or
• the excess of the taxpayer’s modified adjusted gross income (MAGI) above $200,000 (single filer) or $250,000 (joint filer).

Same-Sex Marriage
As a result of the Supreme Court decision in U.S. v. Windsor and a related IRS Revenue Ruling issued shortly thereafter, same-sex married couples may now file joint federal income-tax returns. The state where a couple was married rather than the state where a couple resides determines a same-sex couple’s marital status for federal tax purposes. Civil unions and registered domestic partnerships recognized under state law do not qualify

Itemized Deduction and Personal Exemption Phase-Outs
The phase-out of itemized deductions (often called the “Pease” Limitation) has returned for 2013. The Pease Limitation was temporarily suspended from 2010 to 2012 and allowed taxpayers to enjoy the full benefit of their itemized deductions, regardless of their adjusted gross income. For 2013, if taxpayers filing as married filing jointly have adjusted gross income of $300,000 or higher ($250,000 for single, $150,000 for married filing separately and $275,000 for head of household), itemized deductions will be reduced by 3% of the amount by which their adjusted gross income exceeds the thresholds. This reduction is capped at 80% of itemized deductions.

Introduction of a new tax bracket at 45% for personal income tax

The personal income tax progressive scale includes a new tax bracket at 45% for income above a threshold of 150,000 Euros per share of the family quotient. The new tax bracket is applicable before the cap of the family quotient.

End of flat tax rates for dividends and interest

Dividends and interest are taxed under the progressive scale (plus social contributions amounting to 15.5%). The tax allowance on dividends amounting to 40% is still maintained. However, the current additional tax allowance for dividends of 1,525 Euros or 3,050 Euros, depending on the personal situation of the recipient, is abolished. Finally, the deductible portion of the general social contribution is lowered to 5.1% (instead of 5.8%). An advance payment obligation is applicable (21% for dividends and 24% for interest), withheld at source, and implemented in 2013.

End of flat tax rates for capital gains on share disposals

The flat tax rate for personal income tax amounting 19% (plus social contributions amounting to 15.5%, making an overall tax rate of 34.5%) is increased for capital gains on share disposals carried out in 2012. The latter are taxed at a global tax rate of 39.5%.

As from 1 January 2013, capital gains are subject to personal income tax progressive scale; leading to a maximum tax burden of up to 60.5% (social contributions remaining applicable). However, the net capital gain is reduced by a tax allowance for the holding period (20% between two and four years, 30% between four and six years, 40% after six years). 

Favourable regime for entrepreneurs (flat tax rate of 19%)

Capital gains on share disposals benefit, under option, from a flat tax rate for personal income tax amounting to 19% without the tax allowance (plus social contributions amounting to 15.5%, i.e. an overall tax rate of 34.5%). Various conditions need to be met.

The company must operate an economic activity. This condition must be met on a continuing basis for at least ten years before the sale. In addition, shares must be held on a continuous basis, directly or indirectly, over five years before the sale. Shares sold must represent 10% of voting and financial rights during at least two years within the ten years before the sale. On the day of the sale, the shares sold need to represent at least 2% of voting and financial rights. Finally, the seller must be a manager or employed continuously over the five years before the sale.

Amendment to the mechanism of deferral taxation applicable to capital gains on share disposals

The deferral taxation treatment granted upon reinvestment of the proceeds remains applicable but is slightly amended. The seller must now reinvest at least an amount corresponding to 50% of the capital gain (net of social contributions) within a 24-month period. However, any portion of the capital gain not reinvested is taxed.

End of flat tax rates for acquisitions gains on stock-options and free shares

The flat tax rates for personal income tax amounting to 18% to 41% are abolished for acquisitions gains on stock-options and on free shares (plus social contributions amounting to 15.5%). 

Acquisition gains on stock-options and on free shares are taxed under the progressive scale amounting up to 45% plus a total of 18% in social charges on employment income. This measure is applicable to stock-options and free shares granted as from 28 September 2012.

Return to a progressive scale for wealth tax

The progressive scale is restored for taxpayers whose taxable net assets exceed a threshold of 1,300,000 Euros. The tax rates range from 0.5 % (for taxable net assets between 800,000 Euros and 1,300,000 Euros) to 1.5% (for taxable net assets exceeding a threshold of 10,000,000 Euros). A mechanism capping the amount of tax to 75% of the income is applicable (the amount of tax including, notably, wealth tax, personal income tax and social contributions). This measure is applicable as from 1 January 2013.

• Taxpayers will continue to be subject to the current 10/15/25/28/33/ and 35% tax rates on all income up to $450,000 (for MFJ, $400,000 for single). Those with taxable income in excess of these thresholds will pay tax on the excess – and only the excess — at 39.6%

• The tax-rate on long-term capital gains and qualified dividends will increase from 15% to 20% for only those taxpayers with taxable income in excess of the aforementioned thresholds. The rates will remain 15% for everyone else. However, you need to tack on the 3.8% Obamacare tax on net investment income on the lesser of 1) A taxpayer’s net investment income (generally interest, dividends, royalties, annuities, rents and capital gains), or 2) Modified adjusted gross income in excess of the applicable threshold: $250,000 for MFJ, $200,000 for single.

• The estate tax exemption will remain at $5,000,000 (adjusted for inflation, so approximately $5,120,000 in 2013) but the rate will increase from 35% to 40%.

• The phase-out of a taxpayer’s itemized deductions and personal exemptions return, but only at increased levels of income. The new threshold kicks in at $300,000 of AGI for married taxpayers and $250,000 for single taxpayers.

• The increased child tax and earned income credits and the expanded education credits have been extended for five years.

• The R&D credit has been retroactively reinstated and prospectively extended, and 50% bonus depreciation is back for 2013.

Exceptional surtax on “high income” – Article 2, Finance Act 2012

This tax is at 3% for single taxpayers with income (revenu fiscal de reference) in excess of 250K euros but less than 500k euros. The tax is increased to 4% when the income is beyond 500K euros. For joint filers the 3% tax applies when income is between 500K – 1 million euros. Any excess over 1 million euros will be subject to a 4% tax. 

While presented as a temporary measure, this surtax is scheduled to apply until the tax year during which the public deficit disappears.

Income tax brackets to remain at the current level for 2011 income and future years – Article 16 , 4th Amended Finance Act 2011

The 2010 income tax brackets will be applicable to 2011 income. They are also maintained for subsequent fiscal years until the public deficit falls below 3% of GDP.

The indexing adjustments applied to wealth tax and estate and gift tax brackets are also frozen.

Ceiling on the use of tax credit items – Article 84, Finance Act 2012

The cap on the use of designated tax credit items is now the lower of €18,000 (unchanged) or 4% (previously 6%) of the total income used to calculate the income tax.

Certain tax credits are not subject to the ceiling including certain real estate investments including real property acquired (or for which a ruling was requested) prior to 1 January 2012.

Exemption from tax on real estate gains – Article 5, Finance Act 2012

New for 2012, individuals disposing of residential property (other than of their primary residence) for the first time shall now be exempt from capital gains tax under certain conditions. In particular, the seller must not have owned a principal residence during the previous four years. In addition, this exemption only applies to that portion of the sales proceeds re-invested within 24 months of the sale in the purchase or construction of a building to be used as a principal residence.

This provision is intended to temper the impact of measures in the Amended Finance Act 2011 announced on 8 September 2011 regarding the taxation of real estate capital gains realized by individuals. Following that announcement, a total exemption from capital gains tax is now available on the sale of residential property not constituting a principal residence only if that property has been held for 30 years (previously 15 years).

This new exemption applies to capital gains arising on sales on or after 1 February 2012.

Capital gains taxation on sale of shares: end of holding-period based allowances – Article 80, Finance Act 2012
This provision, which would have applied starting in 2012 and would have led to a capital gains exemption after a holding period of eight years, has been replaced by a tax deferral mechanism, subject to the following conditions:

· At least 10% of the voting rights or profit entitlement of the company whose shares are being disposed, must have been held directly, indirectly or through certain family members, during the eight years before the disposal;

· At least 80% of the amount of the capital gain must be reinvested, within 36 months, in subscribing the initial capital or a capital increase of a company carrying on a business, with the contribution to capital representing at least a 5% stake in that company;

· There was neither activity as a shareholder prior to the contribution to capital nor as a part of the top management thereof.

After five years of ownership of these shares, if all of the conditions are satisfied, the deferral of the capital gain becomes a permanent exemption.

Increased rates of taxation at source applicable to passive income (dividends and interest) – Article 20, 4th Amended Finance Act 2011

The final withholding tax called the “prélèvement forfaitaire libératoire” (“PFL”) is a system of taxation at source on certain types of income which is then not subject to further income taxation. The following changes will apply:

· The rate of PFL tax on dividends has increased from 19% to 21%

· The rate applicable to returns on fixed income investment has increased from 19% to 24%.

· The rates of withholding tax on such income have been aligned with the tax rates under the PFL system. For other income from securities, the respective rates have been increased from 10% to 15%, 12% to 17%, 25% to 30%, and the rate applicable to income paid to a non-cooperative state has been raised from 50% to 55%. These rates shall apply to any income from securities paid outside of France, to all kinds of beneficiaries, and not just individuals, subject to provisions of tax treaties.

These changes apply to income received on or after 1 January 2012.

“Madelin” plans limited to subscriptions for shares in Small and Mid-Sized Enterprises (“SME”) during the start-up phase – Article 18, 4th Amended Finance Act 2011
Income tax allowances available for subscription to the capital of SMEs is now limited to the start-up phase; the investment limits giving rise to a tax reduction are €50,000 for a single person and €100,000 for a couple.

For these purposes, start-up companies include those created within the last 5 years, with fewer than 50 employees and an annual turnover or balance sheet value of less than €10 million. These companies must also pursue an industrial, agricultural or professional activity or trade, excluding the management of their own investments and real estate.

Broadening the scope of the exit tax – Article 38, 4th Amended Finance Act 2011

The 1st Amended Finance Act of 2011 introduced the concept of an exit tax for taxpayers transferring their tax residence abroad, holding a direct or indirect participation in excess of 1% in the profits of a company subject to corporation tax or holding a value of at least € 1.3 million. This threshold was initially determined for each participation.

The 4th Amended Finance Act 2011 amends these provisions: these thresholds are now considered at the level of all of the shareholding participations held by that taxpayer. In the absence of further definition of “participation” for the purposes of these rules, the scope of the exit tax would be broadened considerably, so that an individual would fall within the scope of the tax when the sum of that person’s investments in different entities exceeds the limits set out above, in particular, an investment value above €1.3 million.

In the absence of further clarification, this amendment is expected to be applicable as of the day following publication of the law.

Tax credits for work performed on the principal residence – Article 81, Finance Act 2012

Environmentally-friendly refurbishment work undertaken on the principal residence prior to 31 December 2015 (extended from the previous deadline of 31 December 2012) continues to benefit from a tax credit. The rate of the credit, previously between 13% and 45% (depending on the nature of the expenditure), will now be between 12% and 38% for work performed on or after 1 January 2012.



Furthermore, the criteria for these expenses and related work have been tightened

In 2010, the Foreign Account Tax Compliance Act (FATCA) created a new statute, Internal Revenue Code Section 6038D (Section 6038D) that requires specified persons with an interest in specified foreign financial assets that exceed $50,000 in value to file a statement with their income tax return which discloses identifying information regarding their foreign assets. Failure to report these specified foreign financial assets could result in severe penalties. 

The statute is effective for tax years beginning after March 18, 2010, which for most taxpayers will mean the filing of taxpayers’ 2011 U.S. income tax returns. On December 15, 2011, the Internal Revenue Service (IRS) released guidance in the form of Temporary Regulations under Section 6038D to assist “specified individuals” with their reporting requirements under the statute. The guidance clarifies certain key definitions and increases the asset threshold reporting requirement for certain individuals. On the same date, the IRS issued Proposed Regulations that address the application of Section 6038D to domestic entities. However, the Proposed Regulations are not currently in effect and, as proposed regulations, are not binding.

The Temporary Regulations under Section 6038D provide that certain “specified persons” who have an interest in one or more “specified foreign financial assets” with an aggregate value that exceeds certain thresholds to file a Form 8938, Statement of Specified Foreign Financial Assets. (The Form 8938 and the instructions were issued on December 21, 2011.) The Form 8938 requires identifying information about the account or asset, such as, (1) the type of account; (2) the value of the asset/account; (3) information about when the asset/account was obtained or opened; and (4) the tax items attributable to the asset/account. The filing of the Form 8938 does not relieve U.S. taxpayers from the requirement to file a Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR).

Who is a Specified Person Required to File a Form 8938?

The Temporary Regulations provide that a U.S. citizen, a resident alien of the U.S. for any part of the tax year, or a non-resident alien who has elected to be treated as a resident alien is a “specified person.” An individual is not required to file a Form 8938 if he/she is not required to file an annual income tax return in the tax year.

The Proposed Regulations for filing Form 8938 are applicable to domestic entities and only apply if the entities are formed or availed of to hold foreign financial assets and the value of the assets exceeds certain threshold requirements. The Proposed Regulations apply to taxable years beginning after December 31, 2011.

What is a Specified Foreign Financial Asset?

Specified Foreign Financial Assets include financial accounts maintained by a foreign financial institution and foreign financial assets which are held for investment and can be described as: (1) stock or securities issued by someone that is not a U.S. person; (2) any interest in a foreign entity; and (3) any financial instrument or contract that has an issuer or counterparty who is not a U.S. person. The Temporary Regulations provide a list of certain foreign assets which are excluded from reporting. For example, an asset that is used or held for use in the specified person’s trade or business, an interest in social security or a similar program of a foreign government, assets that are reported on certain other tax forms, or a beneficial interest in a foreign trust or a foreign estate where the specified person does not know or has no reason to know of the interest, are not specified foreign financial assets which require a Form 8938.

What Does it Mean to Have an Interest in a Foreign Financial Asset?

A specified person is considered to have an interest in a specified foreign financial asset if any income, gains, losses, deductions, credits, gross proceeds, or distributions attributable to holding or disposing of the asset are or would be required to be reported (or otherwise reflected on) the individual’s tax return. Further, an individual who is the owner of a disregarded entity or foreign grantor trust is deemed to have an interest in any specified foreign financial assets owned by the disregarded entity or trust. Under the Temporary Regulations, an individual who jointly owns a specified foreign financial asset is deemed to have an interest in the entire asset, and, thus, will have a reporting requirement under the new regulations.

What are the Reporting Thresholds?

As discussed above, the Form 8938 must be filed when the total value of specified foreign assets exceeds certain thresholds. The required thresholds differ depending on the individual’s filing status and where he/she resides. The thresholds are higher for taxpayers living abroad because the Temporary Regulations note that an individual residing outside the U.S. can reasonably be expected to have a greater amount of foreign financial assets than taxpayers residing in the United States.

· For unmarried taxpayers residing in the U.S. and married taxpayers living in the U.S. who file separate returns, the reporting threshold is met if the total value of the specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year;

· For married taxpayers who live in the U.S. and who file joint returns, the reporting threshold is met if the total value of the specified foreign financial assets is more than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year;

· For taxpayers living abroad and who do not file a joint return, the reporting threshold is met if the total value of the specified foreign financial assets is more than $200,000 on the last day of the tax year or more than $300,000 at any time during the tax year;

· For taxpayers living abroad and who file a joint return, the reporting threshold is met if the total value of the specified foreign financial assets is more than $400,000 on the last day of the tax year or more than $600,000 at any time during the tax year.



It is important for taxpayers to determine whether they are subject to this new reporting requirement because there are significant penalties for failing to comply. The failure to file the Form 8938 could subject a taxpayer to criminal penalties, a failure to file penalty of $10,000 per asset (which can increase to $50,000 if the failure continues after IRS notification), and a 40 percent penalty on an understatement of tax attributable to an undisclosed specified foreign financial asset.

Tax Return Penalty Relief

The IRS Fact Sheet confirms that U.S. citizens resident abroad who owe no U.S. tax for the prior six tax years (currently, 2005-2010) may file U.S. tax returns for such years without the imposition of penalties for failure to file income tax returns or to pay tax. 

For U.S. citizens who owe U.S. tax, the Fact Sheet indicates that the IRS will consider whether the failure to file or pay tax was due to reasonable cause based on consideration of the facts and circumstances. The IRS will look at whether the taxpayer exercised ordinary business care and prudence in meeting his or her tax obligations. Other factors that will be considered include:

· Reasons given for not meeting the tax obligations

· The taxpayer’s compliance history

· Length of time between the taxpayer’s failure to meet his or her tax obligations and his or her subsequent compliance

· Circumstances beyond the taxpayer’s control

Reasonable cause may be established if a taxpayer shows that he or she was not aware of specific obligations to file returns or pay taxes, depending on the facts and circumstances. The IRS will consider the following factors:

· The taxpayer’s education

· Whether the taxpayer has previously been subject to the tax

· Whether the taxpayer has been penalized before

· Whether there were recent changes in the tax forms or law that the taxpayer could not reasonably be expected to know

· The level of complexity of a tax or compliance issue.

In addition, reasonable cause for noncompliance may be established due to ignorance of the law if a reasonable and good faith effort was made to comply with the law or the taxpayer was unaware of the requirement and could not reasonably be expected to know of the requirement.
FBAR Penalty Relief

If a U.S. citizen abroad failed to file U.S. tax returns for 2005 through 2010, it is likely that he or she failed to file FBARs reporting his or her financial interest in or signature authority over certain types of non-U.S. financial accounts, including bank accounts, securities accounts, mutual funds, and Registered Retirement Savings Plans (RRSPs). FBAR penalties can be imposed for willful and nonwillful violations. The imposition of this penalty can produce harsh results, because the penalty is imposed per violation, which means per account per year. The maximum penalty imposed per nonwillful violation is $10,000; the penalty for willful violations is even higher.

The Fact Sheet provides very welcome guidance in this respect, indicating that no penalty will be imposed if the IRS determines that the late filings were due to reasonable cause. To establish reasonable cause, U.S. citizens resident outside the U.S. should file delinquent FBARs for each of the prior six years (i.e., 2005-2010) and attach a statement indicating the reasons they are late.

The IRS notes certain factors it will consider to determine if reasonable cause exists, with no single factor being determinative. Factors that may weigh in favor of finding reasonable cause include 1) a U.S. citizen’s reliance upon the advice of a professional tax advisor who was informed of the existence of the foreign financial account, 2) if the unreported account was established for a legitimate purpose and no efforts were made to intentionally conceal the reporting of income or assets, and 3) if there is no tax deficiency related to the unreported foreign account, or if there is a tax deficiency of a de minimis amount.

The IRS will also consider factors that weigh against a finding of reasonable cause, including 1) whether the taxpayer’s background and education indicate that he or she should have known of the FBAR reporting requirements, 2) whether there was a tax deficiency related to the unreported foreign account, and 3) whether the taxpayer failed to disclose the existence of the account to the person preparing the tax return.

While the Fact Sheet does not provide for automatic penalty relief for U.S. citizens resident abroad who failed to file U.S. tax returns and FBARs, it does provide helpful guidance for taxpayers that can affirmatively show that their failure is due to reasonable cause. The IRS is continuing to review these issues and may provide additional guidance.

The Facts Sheet also reminds U.S. taxpayers that, starting in 2012, interests in certain foreign financial assets with an aggregate value of at least $50,000 must be reported to the IRS with the taxpayer’s U.S. tax return on Form 8938. This is in addition to a taxpayer’s FBAR reporting obligations.

ADDITIONAL INCOME TAX BRACKET

French income tax brackets currently range from 5.5% to 41% for taxable income above €70,830. A new 45% bracket, which would apply to income received as from January 1, 2012, would be created for taxable income exceeding €150,000.
INCREASED TAXATION OF FINANCIAL INCOME

French resident individuals may currently choose between including their interest and dividend income in their overall income subject to progressive income tax rates (in which case, dividends may generally benefit from a 40% reduction), or being subject to a final withholding tax of 21% on dividends from certain entities and 24% on interest. In all cases, social contributions are payable for a total of 15.5%, 5.8% being deductible for income tax purposes when the income is subject to progressive income tax rates.

Under the proposed finance bill, French resident individuals would no longer benefit from a final withholding tax on their dividend and interest income, which would have to be included in the ordinarily taxable income, and subject to progressive tax rates. In addition, social contributions for a total of 15.5% would be payable, the deductible portion of such contributions being reduced from 5.8% to 5.1%. The 40% reduction on certain dividends would still be applicable.

Income tax on dividends and interest would be paid in two steps: first the 21% or 24% withholding tax would be mandatorily applied on the date of payment; second, the financial income would be included in the basis subject to progressive income tax rates for the relevant year, with a credit for the tax previously withheld.

This measure would be applicable to income received as of January 1, 2012.
INCREASED TAXATION OF CAPITAL GAINS, STOCK OPTIONS 

Under current rules, capital gains on shares realized by individuals are subject to a flat tax rate of 19%. Social contributions for a total of 15.5% are also payable. Subject to applicable tax treaties, foreign residents holding a substantial participation in a French company are also generally subject to the 19% tax (but not the 15.5% social contributions).

Under the proposed finance bill, capital gains realized as from January 1, 2012 would be included in the ordinarily taxable income, and subject to progressive rates. In addition, social contributions for a total of 15.5% would be payable, 5.1% being deductible.

Capital gains would benefit from a reduction in basis depending on the holding period of the shares: such reduction would amount to 5% for shares held for at least two years, and would be progressively increased to a maximum of 40% for a twelve-year holding period. The holding period would be calculated as from January 1, 2013.

The tax rate applicable to non-resident individuals holding a substantial participation would be increased to 45% for gains realized as from January 1, 2013. A refund could, however, be claimed if such tax is higher than the income tax resulting from the application of the progressive rates to such gains.
Stock Options and Free Shares

Currently, subject to certain conditions, the acquisition gain on stock options and free share grants (i.e., for stock options, the difference between the fair market value of the shares at the date of exercise of the option and the strike price, and for free shares, the fair market value of such shares at the date of their effective attribution) may be taxed as a capital gain in the year during which the shares are sold, at a flat rate of 18 or 30%.



These reduced tax rates would no longer apply to acquisition gains on shares sold as from January 1, 2012. Such acquisition gain would be subject to the progressive rates of income tax.



75% TAX ON INCOME FROM PROFESSIONAL ACTIVITIES



The 75% tax was a symbolic measure of François Hollande’s electoral campaign. Since his election, the nature and scope of this tax has been the subject of intense discussions within the presidential majority. As it is currently presented in the government’s draft budget, it would take the form of a temporary contribution separate from income tax, which would apply to the 2012 and 2013 income. The rate of this contribution would be 18%, the symbolic 75% rate being the addition of the 45% maximum income tax rate, “CSG” and “CRDS” taxes on compensation income for a total of 8%, and the 4% tax on high income introduced last year. The contribution would apply to professional income exceeding €1,000,000. It would not apply to capital gains and financial income. Consistent with their characterization as compensation income (see above), carried interest income and gains would be subject to the contribution.



INCREASED WEALTH TAX RATES



Wealth tax rates essentially similar to those that were in force prior to 2011 would be introduced: such rates would range from 0.50% for taxable net assets above €800,000 to 1.5% for taxable net assets above €10,000,000.



In order to comply with constitutional principles forbidding confiscatory taxation, a cap would be introduced to limit to 75% of a taxpayer’s net income the total of wealth tax and taxes payable on income (including certain capitalized income).

The Internal Revenue Service recently announced a special voluntary disclosure initiative designed to bring offshore money back into the U.S. tax system and help people with undisclosed income from hidden offshore accounts get current with their taxes. The new voluntary disclosure initiative will be available through Aug. 31, 2011.

The IRS decision to open a second special disclosure initiative follows continuing interest from taxpayers with foreign accounts. The first special voluntary disclosure program closed with 15,000 voluntary disclosures on Oct. 15, 2009. Since that time, more than 3,000 taxpayers have come forward to the IRS with bank accounts from around the world. These taxpayers will also be eligible to take advantage of the special provisions of the new initiative.

The new initiative – called the 2011 Offshore Voluntary Disclosure Initiative (OVDI) — includes several changes from the 2009 Offshore Voluntary Disclosure Program (OVDP). The overall penalty structure for 2011 is higher, meaning that people who did not come in through the 2009 voluntary disclosure program will not be rewarded for waiting. However, the 2011 initiative does add new features.

For the 2011 initiative, there is a new penalty framework that requires individuals to pay a penalty of 25 percent of the amount in the foreign bank accounts in the year with the highest aggregate account balance covering the 2003 to 2010 time period. Some taxpayers will be eligible for 5 or 12.5 percent penalties. Participants also must pay back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties.

Taxpayers participating in the new initiative must file all original and amended tax returns and include payment for taxes, interest and accuracy-related penalties by the Aug. 31 deadline.

The IRS is also making other modifications to the 2011 disclosure initiative.

Participants face a 25 percent penalty, but taxpayers in limited situations can qualify for a 5 percent penalty.

The loi de finances for 2011, has brought about the following modifications:

Top marginal tax rate increased by 1%

-The top marginal tax rate was increased from 40% to 41%. This rate applies to net taxable revenues in excess of 70.830 euros.

Increase in social tax rate

-The social contribution taxes (CSG & CRDS, & prelevement sociale) were increased by .2% from 12.1.% to 12.3%. This tax applies to all non-salaried income (ie dividends, capital gains, etc).

Capital gains threshold abolished

-All sales of stocks and securities that result in gains are subject to the capital gains tax. The threshold (which was 25 830 euros in 2010) has been abolished. Therefore, the entire gain is taxed and not just the amount that exceeds a thresshold. Furthermore, the capital gains tax rate has increased from 18% to 19%, in addition to the social taxes of 12.3%.

Tax increase on real estate gains 

-The tax rate on gains from the sale of real property has increased from 16% to 19%, in addition to the social taxes of 12.3%. Please note that if you own the property beyond 15 years, upon sale you will only be liable for the 12.3% social tax on any potential gain.

Dividend tax credit abolished

-The 50% tax credit on dividends, which in 2010 was limited to 115 euros for single and 230 euros for joint filers has been abolished. 

Mortgage interest tax credit abolished

-The tax credit on mortgage interest applicable to the purchase of a principal residence has been abolished.

Reduction in benefit on tax incentive schemes

-There is a 10% reduction on a number of tax incentive schemes such as loi Malraux investments, investments in the DOM-TOM, certain energy saving investments,etc.

Multi-based life policies less attractive

-As of July 2011 multi-based life insurance policies will be subject to social taxes at 12.3% annually and not only upon withdrawal of funds. 

ISF threshold increase

-The threshold for the French wealth tax has increased to 800.000 euros.

Taxpayers who fail to report their investments in foreign corporations, partnership and disregarded entities, which have foreign bank accounts, fail to file two separate information reporting forms, with two separate sets of penalties.

The penalties range from $10,000 per late form, to up to 50% of the highest balance during the taxable year in the case of foreign bank accounts, and to 10% of the fair market value of property transferred to a foreign corporation or partnership.

The following is a summary of the international information returns that your may be required to file or collect:

· Form 90-22.1 – filed if the aggregate of reportable foreign financial accounts exceeds $10,000. This is a U.S. Treasury Department form due by June 30, 2010, with no extensions; it is not filed with the tax return.

· Form 926 – filed if a U.S. taxpayer transfers property to a foreign corporation.

· Form 3520 and 3520-A – filed if a U.S. taxpayer is a grantor with respect to a foreign trust, or a beneficiary receiving distributions from a foreign trust or bequests from a foreign decedent. This form is filed separately from the tax return.

· Form 5471 – filed if a U.S. taxpayer (individual, corporate or partnership) owns 10% or more of the stock of a foreign corporation. Due with the tax return (including extensions).

· Form 8858 – filed if a U.S. taxpayer has an interest in a foreign entity which is classified as a disregarded entity for U.S. tax purposes. Due with the tax return (including extensions).

· Form 8865 – filed if a U.S. taxpayer has a greater than 10% interest in a foreign entity which is classified as a partnership for U.S. tax purposes. Due with the tax return (including extensions).

The IRS established an amnesty program that expired October 15, 2009 for taxpayers who had not filed the Form 90-22.1 (although the program also covered taxpayers who failed to file certain other international information returns as well). Although the amnesty program has expired, the IRS has announced that it is considering another amnesty. In any event, the Voluntary Disclosure Program remains in place and is available for taxpayers who have failed to file all the required international information returns in prior tax years.