Tax 202 Report - April 12, 2016
Published: 25 April 2016
On April 12, AARO held its Tax 202 Seminar, the second this spring. This is for more experienced tax filers, or those with more complicated U.S. tax declarations.
Tim Ramier, chairman of the tax committee, introduced the speakers for the evening: Diane Juzaitis, of Ernst & Young, a FATCA expert who travels the world advising banks as to how to become FATCA compliant; Nora Muller, an attorney specializing in tax planning; and John Fredenberger, attorney specializing in U.S. taxes, former chair of the tax committee and AARO board member, currently serving on AARO’s advisory committee. Both Tim and John have been to Washington as AARO delegates in Overseas Americans Week (OAW).
Tim and John gave brief summaries of this year’s OAW and our relationship with the taxpayer advocate’s office, treasury, and the tax experts among the staff members met on the Hill. John explained that rather than preparing the traditional tax talk, the panel had produced a smorgasbord of questions -- to honor AARO president, Lucy Stensland Laederich, and her Scandinavian background. As the audience entered the room, they were asked to tick off the four issues from the selection that most concerned them. The panel then chose the four most selected issues.
Diane Juzaitis did not go into detail about what FATCA is because the audience was already well aware of it. She emphasized that FATCA is not going to go away. The concept behind FATCA, the information exchange, has multiplied. The OECD countries have jumped on the bandwagon with the Common Reporting Standard (CRS), which is very similar, not identical to FATCA. One result is that banks are coming around to the conclusion that blocking Americans’ access to accounts is ridiculous.. Another effect is to add expenses to the banks, since FATCA and CRS reporting are not identical. They will need to create another program. FATCA stands out, however, because of the cost of compliance and the 30% withholding tax on U.S. source investments for non-compliance. In developing countries, the banks are struggling to comply because of the cost of FATCA compliance. On the U.S. side, the IRS probably does not have the capacity, whether human or IT, to handle all the information coming in. There are still concerns about the overall data protection of the account information being collected around the world and sent to the U.S. There were some questions about the W-9 forms, since some in the audience had not been asked by their banks to sign anything, but Diane assured U.S. that all new accounts are entered into the system and the banks have two years to catch up on existing accounts. FATCA data collection and transfer to the U.S. has started. It is in phases; there are delays. It will be complete by 2018.
Nora Muller, member of both the New York and Paris bars, spoke about two issues -- one concerning U.S. tax declarations and the other concerning French tax declarations.
Declaring interest in a foreign entity to the U.S.
How are U.S. taxpayers supposed to report their interest in a French (or other country) entity? The first thing to note is that this is a reporting requirement that does not necessarily lead to being taxed in the U.S. The taxpayer must identify what kind of entity it is: an SCI (Société Civile Immobilière, a real estate holding) partnership (form 8865) or a family business organized as an SARL (Société à Responsabilité Limitée) or an SAS (Société par Actions Simplifiée), both considered corporations (form 5471).
If the U.S. taxpayer owns any share, or the non-U.S. spouse or other family member owns any share of such an entity, then the declaration may be necessary. Direct ownership means the taxpayer owns a share, or more; indirect ownership means a family member owns a share, or more; constructive ownership means the taxpayer owns very little, but the family owns the rest. Sometimes an entity may own other, smaller entities. In that case, all the entities must be declared. Filing is required if: the U.S. taxpayer has 10% direct, indirect, or constructive ownership or a controlling interest or it is a controlled foreign corporation or the taxpayer is an officer or director. In addition to form 5471, the corporation’s balance sheet and income and expense sheet for the year are required. The penalty for not filing is $10K per entity.
On form 8938 (FATCA), the taxpayer needs to check the box indicating which form (8865 or 5471) is in the file.
If you own or have an interest in a family business or an SCI, you should get professional advice about how to declare it. This overview simply helps you see if you are concerned, or not.
Declaring interest in a U.S. trust to the French
The second issue Nora raised was reporting trusts to the French. The French do not have trusts. In 2011, they created an obligation for the trustee of trusts, with residents of France who have an interest as settlor or beneficiary or with an asset in France, to file a declaration by June 15. The penalty for failure to do this is €20K or 12.5% of the full value of the trust.
For the individuals concerned, the specific tax regime of a trust is less favorable than direct ownership and income. The penalty for failing to declare the trust in the income tax and the ISF (French wealth tax) is the highest applicable ISF rate. The inheritance regime changes according to who the beneficiaries are and their relationship, so if there is any confusion in the list of beneficiaries, the tax could be as high as 60%.
U.S. banks serving as trustees may be reporting the trusts to France. Some are; some are not. The French tax authorities are not yet actively pursuing individuals. Like the IRS, they may lack the proper resources to enforce.
The lamentable status of the IRS
John reported on the continuing degradation of service. Two tax declarations sent in by the IRS office in Paris before it closed have been declared “not found”. Now, of course, there are no foreign IRS offices. They were closed, probably because they cost too much in view of the low revenue from Americans overseas. The number of IRS employees has continued to decrease, from 92,000 in 2014 to 85,000 in 2015. The question is can the IRS handle all the information that is coming to it? John says, no.
Is FATCA morally offensive or illegal
The history of FATCA is that the IRS wanted the same kind of information from foreign banks that they were getting from American banks on the income reporting form 1099. This was the case in 1999, when John attended a conference in London. The IRS created the “QI” (Qualified Intermediaries), but that was unsatisfactory, so they asked for, and Congress gave them, FATCA.
Under FATCA, the foreign financial institutions must identify their U.S. person clients. They are doing this by using the W-9 form. This is the form that financial institutions use for bank reporting to the IRS in the U.S. The banks send the customer and the IRS the 1099 form each year and the IRS make sure the bank’s 1099 and the taxpayer’s tax declaration match. French banks, though, do not report to the IRS; they report to French fiscal authorities, which in turn report to the IRS, according to the IGA. The same is true in all the countries where IGAs apply. The IGA does not specify the social security number; it only asks for a tax identification number. The social security number has nine digits (XXX-XX-XXXX) and so does our passport number, which also identifies us as Americans.
According to the Taxpayer Bill of Rights, economic reality checks, such as prying questions that were used to see if a taxpayer was hiding sources of income, are now banned. FATCA, by requiring the declaration of the value of accounts, not just the income, is a form of economic reality check, John suggested. Therefore, it is illegal.
John also mentioned the lawsuits against FATCA, and more broadly, against citizenship-based-taxation. Countries, such as France, are seeing that this form of taxation by the United States is a form of extraterritoriality, an encroachment on their sovereignty. Ellen Lebelle presented this thesis of John Richardson’s -- by taxing a U.S. person residing in another country, the U.S. is removing money from that country’s economy. If an American sells his primary residence in Canada and has a non-taxable capital gain, but the U.S. taxes that gain if it is greater than $250K, then that money is removed from Canada, where the resident could have spent it. In France, the National Assembly has created a commission to look into this issue. Countries suing the United States about this practice could have much more impact than taxpayer suits against the IRS.