While each individual tax return is unique, there are some tax rules that affect every person who files a federal income tax return. These rules involve dependents and exemptions. Here are some important facts about dependents and exemptions that the IRS has issued that will help you file your 2012 tax return.

1.Exemptions reduce taxable income.  There are two types of exemptions: personal exemptions and exemptions for dependents. You can deduct $3,800 for each exemption you claim on your 2012 tax return.

a.Personal exemptions.  You usually may claim one exemption for yourself on your tax return. You also can claim one for your spouse if you are married and file a joint return. If you and your spouse file separate returns, you may claim the exemption for your spouse only if he or she had no gross income, is not filing a joint return and was not the dependent of another taxpayer.

b.Exemptions for dependents.  Generally, you can claim an exemption for each of your dependents. A dependent is either your qualifying child or qualifying relative. If you are married, you may not claim your spouse as your dependent. You must list the Social Security Number of each dependent you claim on your return. For information about dependents who do not have Social Security numbers See IRS Publication 501.

2.Some people do not qualify as dependents.  While there are some exceptions, you generally may not claim a married person as a dependent if they file a joint return with their spouse.

3.Dependents may have to file.  If you can claim someone else as your dependent on your tax return, that person may still be required to file his or her own tax return. Whether they must file a return depends on several factors, including the amount of their gross income (both earned and unearned income), their marital status and any special taxes they owe.

4.Dependents can’t claim a personal exemption.  If you can claim another person as a dependent on your tax return, that person may not claim a personal exemption on his or her own tax return. This is true even if you do not actually claim that person as your dependent on your tax return. The fact that you could claim that person disqualifies them from claiming a personal exemption.

Remember that a person must meet several tests in order for you to claim them as your dependent. See IRS Publication 501 for the tests you will use to determine if you can claim a person as your dependent.

Reporting on a California State Bar Tax Section Meeting, Tax Notes reports that the IRS will soon (as early as the week of 11/11/13) ) begin examining U.S. taxpayers suspected of holding undeclared accounts in Indian banks, according to Nicholas Connors, a supervisory revenue agent with SEP.

Read the full Tax Notes here.

A recent IRS memo addresses the U.S. tax status of a U.S. citizen deemed to be a resident of a foreign country under a tax treaty “tie breaker” rule.

The memo was issued with respect to Israel, but the general rule stated at the conclusion of the memo would seem to apply to other treaty countries with such a tie breaker rule as well.

This is what was stated at conclusion:

“A U.S. citizen who is treated as a resident of another country under an income tax treaty would still be required to file a Form 1040 (assuming his income meets the filing thresholds) and would still be subject to U.S. tax on his worldwide income (except to the extent one of the exceptions to the saving clause applies).”

You can read the entire memo here . . . . http://1.usa.gov/Wtl65m

Description of the New Streamlined Procedure

This streamlined procedure is designed for taxpayers that present a low compliance risk. All submissions will be reviewed by the IRS, but, the intensity of review will vary according to the level of compliance risk presented by the submission. For those taxpayers presenting low compliance risk, the review will be expedited and the IRS will not assert penalties or pursue follow-up actions. Submissions that present higher compliance risk are not eligible for the streamlined processing procedures and will be subject to a more thorough review and possibly a full examination, which in some cases may include more than three years, in a manner similar to opting out of the Offshore Voluntary Disclosure Program (OVDP).

Taxpayers utilizing this procedure will be required to file delinquent tax returns, with appropriate related information returns (e.g. Form 3520 or 5471), for the past three years and to file delinquent FBARs (Form TD F 90-22.1) for the past six years. Payment for the tax and interest, if applicable, must be remitted along with delinquent tax returns.

Eligibility

The eligibility requirement is on the questionnaire that a taxpayer must submit (see attached questionnaire by clicking on http://slidesha.re/OjdYpH)

The taxpayer qualifies only if each of the following questions answered No.

1. Have you resided in the U.S. for any period of time since January 1, 2009?
2. Have you filed a U.S. tax return for tax year 2009 or later?
3. Do you owe more than $1,500 in U.S. tax on any of the tax returns you are submitting through this program?
4. If you are submitting an amended return (Form 1040X) solely for the purpose of requesting a retroactive deferral of income on Form 8891, are there any adjustments reported on the amended return to income, deductions, credits or tax?

You can read further about the program and its instructions at http://1.usa.gov/PFp8VJ

Many of my friends called me last week from US and told me that many Indian banks were calling and suggesting them to transfer US dollars to India due to an all time high rate of Rupees 56 to a dollar.

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Internal Revenue Services (“IRS”) has allowed U.S. Citizens and Resident Aliens Abroad an automatic 2 month extension of time to file their tax return and pay any federal income tax that is due.

You will be allowed the extension if you are a U.S. citizen or resident alien and on the regular due date of your return:

(i) You are living outside of the United States and Puerto Rico and your main place of business or post of duty is outside the United States and Puerto Rico, or

(ii) You are in military or naval service on duty outside the United States and Puerto Rico

If you use a calendar year, the regular due date of your return is April 15, and the automatic extended due date would be June 15.

In case of Married Taxpayers who are filing joint returns, either you or your spouse can qualify for the automatic extension. If you and your spouse file separate returns, this automatic extension applies only to the spouse who qualifies.

How To Get The Extension:
To use this automatic 2-month extension, you must attach a statement to your return explaining which of the two situations listed earlier qualified you for the extension.

Due to improved detection systems and computerized checks, the IRS can more easily identify red flags that trigger audits. It typically starts with a letter requesting more information and can lead to in-person meetings. It’s usually triggered by a tax return that contains something unusual, such as an above-average deduction or change in income from previous years. As long as the taxpayer can defend his filings with the proper paperwork and logic, they have nothing to worry about.

Here are some of the signs that you need to look into:

1. Making lot less money last year
The IRS looks out for any major changes in income, which can signify that a taxpayer is under-reporting his earnings. Since the IRS tracks historic data, people who suddenly start reporting much less income can be flagged for an audit.

2. Making too much money
Although the overall individual audit rate is about 1.11%, the odds increase dramatically for higher-income filers. IRS statistics show that people with incomes of $200,000 or higher had an audit rate of 3.93%, or one out of slightly more than every 25 returns. Report $1 million or more of income? There’s a one-in-eight chance your return will be audited. The audit rate drops significantly for filers making less than $200,000: Only 1.02% of such returns were audited during 2011, and the vast majority of these exams were conducted by mail. We’re not saying you should try to make less money — everyone wants to be a millionaire. Just understand that the more income shown on your return, the more likely it is that you’ll be hearing from the IRS.

3. Deductions above average
IRS keeps a track of average deduction in each category. The IRS looks for higher-than-average deductions in each category as a signal that things may not be right.

4. If you’re paid in cash
The IRS knows that you can more easily under report what you earn. If you’re honest about your own accounting you can avoid that audit or if audited, escape heavy fines and fees.

5. If you earn income from selling items online
If you own an online business and make a profit, make sure you report your income. Keep in mind that your selling or payment processing service, such as eBay or PayPal, is reporting sales and the IRS will notice if this income is missing on your tax return.

6. Failing to report all taxable income
Since employers send copies of all 1099 forms and W-2 forms to the IRS as well as to you, if you lose your version or forget to file it with your taxes, the IRS can flag your return for review. You want to make sure the information you provide to the IRS matches up with any other information they are receiving about you.

7. You work for yourself
It might not seem fair, but being self-employed can raise red flags for the IRS, especially if you claim your home office and other costs as business expenses but don’t earn much income. Keep careful track of all paperwork so you can defend any deductions and credits you take.

8. You claim losses from a hobby
While writing off business expenses can be legitimate, it’s illegal to pretend a hobby is a business and then write off the related expenses. For example, if you enjoy woodworking, you might practice the craft on the weekends for fun. Doing so does not enable you to write off the cost of wood and tools. (If you were selling those creations online, that would be a different story.)

9. Deducing home office (or car) expenses
While plenty of people can legitimately claim home office expenses on their taxes, some people do so incorrectly. Merely checking email from home after work, for example, does not justify a home office deduction. In order to qualify, the home office must be used for work only. Likewise, claiming a car as a business expense can also raise red flags. If you are doing this keep careful track of how much use of the car for business versus personal use.

10. You included expensive meals and entertainment costs among your deductions
The IRS often double-checks these types of claims to make sure they are legitimate business expenses.

11. Taking large charitable deductions
IRS is on the lookout for people who inflate their charitable donations, and that the agency takes a close look at taxpayers who say they donated $500 or just under, since anyone who donates more than that amount must file form 8283.

12. You maintain an overseas bank account
The IRS has added more reporting requirements this year for people with money in foreign accounts. Failing to report one could trigger an audit.

13. Your numbers don’t match
If numbers on various forms don’t match or add up correctly, the IRS is likely to notice and look into any disparities. So treat your taxes like a final exam in algebra and check over all the numbers before submitting.

Although there’s no sure way to avoid an IRS audit, you should be aware of red flags that could increase your chances of drawing unwanted attention from the IRS.

In a major development, U.S. declares “FATCA partners” with five countries whereby each pledge more tax information sharing between the Governments. The five countries are France, Germany, Italy, Spain and the United Kingdom.

Extracts of the report:

Under Treasury’s proposed “new government-to-government framework for implementing FATCA,” the governments of France, Germany, Italy, Spain and the United Kingdom will work together to create a means to collect the information from their banks and send it to the United States.

Treasury said that once these five “FATCA partner” countries finalized the framework, banks in those countries would not have to enter into separate data disclosure agreements with the IRS.

In addition, in a reciprocating agreement, Treasury said the United States would collect and share information with the five participating EU countries about accounts held by their citizens in U.S. financial institutions.

For nations not invited to become “FATCA partners” with the United States, banks and financial institutions in those countries must still cooperate on their own with the IRS.

Noticeably absent from the new framework were major international banking nations such as Canada, Switzerland and the Netherlands, not to mention tax haven jurisdictions such as Ireland, the Cayman Islands and Bermuda.

Entire Reuters article can be read here
http://www.reuters.com/article/2012/02/08/usa-tax-treasury-fatca-idUSL2E8D82J120120208

We came across an advertisement from one of the prominent Indian bank, which said   “. . . . Bank offers its NRI customers a never before opportunity to avail up to 9.5%* interest rates on NRE Fixed Deposits. With 100% repatriation, complete tax exemption on the entire interest amount and the soaring exchange rates you are sure to gain maximum returns”

We at NS Global wanted to bring clarity to the Investors on the term “complete tax exemption on the entire interest amount”.

Let us understand Indian Tax laws.

Under the Indian Income Tax Act, Interest income from Non Resident External Account (NRE A/c.) is exempt from tax under section 10(4).

So far so good.

Now let us understand from US point of view.

We have decided to draw a chart to explain the provisions.

Please note that you are still required to be compliant on your annual FBAR filing.

Hope the above would bring enough clarity on the term “complete tax exemption on the entire interest amount” to the Investors.

For tax years beginning after March 18, 2010, certain individuals must file new Form 8938 to report the ownership of specified foreign financial assets if the total value of those assets exceeds the reporting threshold amount.

Who Must File: Unless an exception applies, you must file Form 8938 if you are a specified person that has an interest in specified foreign financial assets and the value of those assets is more than the applicable reporting threshold.

Exception: If you do not have to file an income tax return for the tax year, you do not have to file Form 8938, even if the value of your specified foreign financial assets is more than the appropriate reporting threshold.

Specified individual: You are a specified individual if you are one of the following:

1. A U.S. citizen

2. A resident alien of the United States for any part of the tax year

3. A nonresident alien who makes an election to be treated as a resident alien for purposes of filing a joint income tax return

Specified foreign financial assets: Generally include the following assets:

1. Any financial account maintained by a foreign financial institution.

2. To the extent held for investment and not held in a financial account, any stock or securities issued by someone that is not a U.S. person, any interest in a foreign entity, and any financial instrument or contract with an issuer or counterparty that is not a U.S. person.

Reporting threshold: If the total value of your specified financial assets is more than the following:

Form 8938 does not relieve you of the requirement to file FBAR form TD F 90-22.1