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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 4009
Experience:  Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
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Hello, I am an employee of a US company currently assigned

Resolved Question:

Hello,

I am an employee of a US company currently assigned to a project in Russia. I have spent the entire tax year in Russia, other than that I am a regular US tax payer (my wages are on W-2, taxes are withheld according to W-4)

I need to file my tax returns in both Russia and the US. My employer and I agreed to this process:

1. I file tax returns in Russia on my own.
2. I then pass information about my Russian tax liability to a third party tax preparer in the US.
3. Third party files my US tax returns taking into account my Russian tax liability
4. Third party supplies my employer with information necessary to calculate hypothetical tax.
5. I receive a US tax refund based on hypothetical tax.

This maybe irrelevant, but due to some delays and negotiations I am really behind on my taxes and currently preparing 2010 in both countries.

The difficulty I am facing is that my Russian tax is rather high in 2010 (say, 15000USD) and ideally I would like to finance it from my US tax refund. However, I do not know whether it would be legal to supply my US tax preparer with Russian tax information and obtain US tax refund before paying Russian taxes. The situation is further aggravated by the fact that under Russian laws there are huge penalties if one files taxes late before he pays. The rule is that if you're late, pay first and file later. So ideally the sequence would be (1) get US tax refund (2) use that money to pay Russian tax authorities (3) file taxes in Russia.

Questions:
1. Would that be legal to file US taxes and get the US tax refund based on the foreign country tax liability before filing taxes in that country?
2. Does IRS require any proof that taxes in a foreign country were actually filed with a local tax authority and it is not just a form that has been filled out?
3. Do I have to disclose to my third party tax service provider in the US that I have not filed in Russia yet when I give them Russian tax forms as an indication of my foreign tax liabiltiy?
4. Foreign Tax Credit IRS publication mentions that it should be calculated based on a foreign tax "paid or accrued", what is legal definition of "accrued"? Would it qualify as "accrued" before it's paid and even filed?
5. It also says that a "tax must be imposed on me" Would it qualify as imposed before it's paid and even filed?

Please support your answer with IRS docs, case precedents, documented common practices, etc. There are plenty of sites with unsubstantiated answers (e.g. "foreign taxes must be paid before filing") most of them are inaccurate or contradict IRS.

Thank you.
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.

NPVAdvisor :


accrue (<<schwa>>-kroo), vb. (15c) 1. To come into existence as an enforceable claim or right; to arise <the plaintiff's cause of action for silicosis did not accrue until the plaintiff knew or had reason to know of the disease>. [Cases: Action
Key Number Symbol
Full Size Image
​61; Limitation of Actions
Key Number Symbol
Full Size Image
​43–64.]



“The term ‘accrue’ in the context of a cause of action means to arrive, to commence, to come into existence, or to become a present enforceable demand or right. The time of accrual of a cause of action is a question of fact.” 2 XXXXX XXXXX Schwing, California Affirmative Defenses § 25:3, at 17–18 (2d ed. 1996).





ACCRUE, Black's Law Dictionary (9th ed. 2009), accrue

NPVAdvisor :

Sorry for the atrocious formatting, ... (Wanted to give you the Black's law dictionary definition of accrue directly from the source.... Lets try this: (next, I'll address your questions one at a time:

NPVAdvisor :

accrue (<<schwa>>-kroo), vb. (15c) 1. To come into existence as an enforceable claim or right; to arise <the plaintiff's cause of action for silicosis did not accrue until the plaintiff knew or had reason to know of the disease>. [Cases: Action
Key Number Symbol
Full Size Image
61; Limitation of Actions
Key Number Symbol
Full Size Image
4364.]



“The term ‘accrue’ in the context of a cause of action means to arrive, to commence, to come into existence, or to become a present enforceable demand or right. The time of accrual of a cause of action is a question of fact.” 2 XXXXX XXXXX Schwing, California Affirmative Defenses § 25:3, at 17–18 (2d ed. 1996).

NPVAdvisor :

Now,

NPVAdvisor :


1. Would that be legal to file US taxes and get the US tax refund based on the foreign country tax liability before filing taxes in that country?



From IRS guidelines at http://www.irs.gov/Individuals/International-Taxpayers/What-Foreign-Taxes-Qualify-For-The-Foreign-Tax-Credit%3F



Generally, the following four tests must be met for any foreign tax to qualify for the credit:




  1. The tax must be imposed on you




  2. You must have paid or accrued the tax




  3. The tax must be the legal and actual foreign tax liability




  4. The tax must be an income tax (or a tax in lieu of an income tax)





Note that number 2 says paid or ACCRUED the tax.





2. Does IRS require any proof that taxes in a foreign country were actually filed with a local tax authority and it is not just a form that has been filled out?



They will not require proof in terms of what's filed with your tax filing.



You figure your foreign tax credit and the foreign tax credit limit on Form 1116, Foreign Tax Credit Note that on form 1116 you are not directed to attach filings tot ehother country.



They WILL require proof upon an audit.







3. Do I have to disclose to my third party tax service provider in the US that I have not filed in Russia yet when I give them Russian tax forms as an indication of my foreign tax liabiltiy?



I would tell them that you have calculated the numbers and know what tax has accrued and that your purpose is to use the refund to pay the taxes. This will be an opportunity to support your conention that accural and payent are not the same





4. Foreign Tax Credit IRS publication mentions that it should be calculated based on a foreign tax "paid or accrued", what is legal definition of "accrued"?



accrue (<<schwa>>-kroo), vb. (15c) 1. To come into existence as an enforceable claim or right; to arise <the plaintiff's cause of action for silicosis did not accrue until the plaintiff knew or had reason to know of the disease>. [Cases: Action 61; Limitation of Actions 4364.]


The term ‘accrue’ in the context of a cause of action means to arrive, to commence, to come into existence, or to become a present enforceable demand or right. The time of accrual of a cause of action is a question of fact.” 2 XXXXX XXXXX Schwing, California Affirmative Defenses § 25:3, at 17–18 (2d ed. 1996).



ould it qualify as "accrued" before it's paid and even filed? 5. It also says that a "tax must be imposed on me" Would it qualify as imposed before it's paid and even filed?



As you see from the legal definition, it means that there is a claim to the tax expenses, by the Russian government.



Here's an academic, accounting, definition of accrued expenses:



Expenses (such as wages, salaries, and utility charges) which are incurred but for which no payment is made during an accounting period. They are shown in the balance sheet as a current (short term) liability. Also called accrued liabilities.

Read more:
http://www.businessdictionary.com/definition/accrued-expenses.html#ixzz2dqvoCVO9



NPVAdvisor :

Questions?

Expert:  Lane replied 1 year ago.
Our chat has ended, but you can still continue to ask me questions here until you are satisfied with your answer. Come back to this page to view our conversation and any other new information.

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If you haven’t already done so, please rate your answer above. Or, you can reply to me using the box below.
Expert:  Lane replied 1 year ago.

Alex,

I have a 2:00 (ea) meeting.

I will be back online by 3:00 (ea)US

Let me know if you have any questions,

I think you have a good case, especially if you can get your US preparer to buy-in

Let me know

Lane
Expert:  Lane replied 1 year ago.

One quick follow up Alex.

A colleague at my office mentioned that the word accrual here, refers to whether the taxpayer is a cash basis or accrual taxpayer.

However, you may also want to mention the following to you US preparer:

IRC section 905(a) allows cash basis taxpayers to claim credits for foreign taxes on the accrual basis.

Hope this helps.

Let me know if you have further questions

Lane
Customer: replied 1 year ago.

Not sure whether my follow-up made it out to you, sorry.


 


To test your answer let's assume this worst case scenario, my US tax return with Russian taxes claimed is audited and Russian taxes are still neither paid nor filed. From your answer it can be concluded that the only proof IRS will request at that point is that Russian taxes are still accrued and they will not request proof for those taxes being paid or filed. It's like they do not care if they have been paid or filed as long as I still owe them.


 


Thank you

Expert:  Lane replied 1 year ago.

You have it exactly!

You may want to ask your tax prep person to file the election to change to an accrual accounting method, just so all the dots connect, if you will...

Generally, you must file Form 1128 to request IRS appro-
val to change your tax year. See the Instructions for Form
1128 for exceptions. If you qualify for an automatic appro-
val request, a user fee is not required.

See this:

http://www.irs.gov/uac/Form-1128,-Application-To-Adopt,-Change,-or-Retain-a-Tax-Year


Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 4009
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and 5 other Tax Specialists are ready to help you
Expert:  Lane replied 1 year ago.

Thanks for the rating Alex.

If you need some research let me know, I think, however, you are at a good place to manage it from here..


If you’d like to work with me again on any new questions, say “For Lane only …” at the beginning of your question.

Thanks again !

Lane

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