Roth Rollover; Failure to File; Frivolous Returns; and Real Estate Owner by Foreigner

This column, in slightly different format, originally appeared in The San Francisco Examiner Newspaper, April 19, 1998

Copyright 1998 Robert L. Sommers, all rights reserved.

Question: If I maintain two IRAs, one consisting of non-deductible contributions and another containing tax-deductible contributions, may I convert only the non-deductible IRA to a Roth?

Answer: Yes, although several major several brokerage houses are advising clients to treat any rollover as a distribution from both accounts, there is nothing in the new law, legislative history or the pending technical corrections act supporting that position.

For example: If you have an IRA with $10,000 of non-deductible contributions (no tax deduction taken the year of filing) and $5,000 of earnings, and you roll it over to a Roth, you’ll be taxed on the $5,000 of earnings only. With an IRA funded by deductible contributions (tax-deduction taken in year of filing) you’ll pay tax on the contributions and earnings.

In fact, you may convert an IRA to a Roth by merely redesigning it as a Roth. There is nothing in the new tax law or its legislative history to support the advice that you must aggregate all your IRAs for a Roth rollover, although final regulations have not been written on this issue.

Question: If I cannot pay my taxes, should I wait to file until I have the money?

Answer: No. File immediately, even if you cannot pay. Penalties for late filing are ten times the penalty for non-payment. The failure-to-file penalty starts April 16th and is 5% of the taxes owed. It increases 5% each 30 days thereafter for four additional months (a maximum of 25% if you fail to file within five months). In contrast, the failure-to-pay penalty is of 1% per month (a maximum of 25% after 50 months). Typically, IRS and the state will permit you to pay your taxes in monthly installments.

Question: Do I have the constitutional right not to file a tax return?

Answer: No. You must file an accurate and timely return. Congress became fed up with "frivolous" returns and enacted a $500 penalty in additional to the taxes, interest and other penalties that might be owed. A frivolous return is one with insufficient information, such as asterisks instead of numbers, to determine your tax liability or when a filer takes a frivolous position, such as wages are not income, or claims he is a free person and not subject to U.S. tax laws. Also, crossing out or altering the "penalty of perjury" language above the signature line makes your return frivolous.

Question: My mom, a foreigner, owns a rental home in the U.S., but has not been here for four years. She has a $1,000 loss after paying the mortgage and property taxes. Does she still have to file federal tax returns?

Answer: Yes. A foreign citizen owning U.S. real property should file a U.S. tax return and elect to treat that rental as a business. This permits these deductions to be subtracted from her income. Otherwise, she will be taxed on the rental income at a flat 30% (or lower treaty rate, if applicable) without benefit of any deductions.

To claim deductions or credits, her tax return must be filed, usually by June 15 following the close of the tax year. A foreign person’s tax return is considered timely when filed within 16 months from the due date, provided the IRS has not mailed a notice disallowing the deductions or credits.


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**NOTE: The information contained at this site is for educational purposes only and is not intended for any particular person or circumstance. A competent tax professional should always be consulted before utilizing any of the information contained at this site.**