Due to the combination of citizenship-based taxation and complex United States tax rules applicable to non-US assets and income, Americans living outside the United States face particular tax burdens and compliance costs.
The mission of the AARO tax committee is to (1) remain current on tax matters of concern to Americans living abroad, (2) present information on topics of relevance to the community of Americans living abroad through our publications and conferences throughout the year, and (3) actively pursue redressing inequalities before our governmental representatives by raising awareness of laws and legislation which disproportionately burden Americans abroad and proposing and promoting more favorable laws and policies.
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On May 17, Marylouise Serrato, Executive Director of ACA, presented testimony on behalf of AARO, ACA and FAWCO at a Public Forum organized by Nina E. Olson, National Taxpayer Advocate. The purpose of these forums is to gather as many perspectives as possible from as many taxpayer communities as possible to help the IRS in developing its "vision" for a "Future State".
This title might seem more appropriate for the Greenpeace newsletter, but I hope it caught your attention!
It was such a pleasure to meet many of you at the recent Annual General Meeting, a great opportunity for the AARO community to exchange ideas. Your ideas there and the feedback from the member survey have energized us for the work ahead.
In a discussion after the meeting about the difficult tax situation for Americans abroad, one member aptly likened us to dolphins being caught in tuna nets. While the mission of combatting global tax evasion and criminal money laundering is a laudable one, the measures taken to achieve that purpose should not be unduly burdensome to an entire class of law-abiding citizens. AARO has made important progress in bringing the situation of us “dolphins” to the attention of Washington and the National Taxpayer Advocate (Nina Olson), as Lucy Laederich and Tim Ramier reminded us. Yet, as John Fredenberger mentioned, as global tax evasion scandals inevitably take the limelight in the international press, it is a tough environment in which to be heard!
On May 5, 2016, in response to the international press attention surrounding the release of the “Panama Papers”, the Obama administration announced a number of initiatives directed at enhancing financial transparency in the United States. In a letter to Paul Ryan, Secretary of the Treasury Jacob J. Lew highlighted the measures the Treasury have recently taken: (1) finalizing customer due diligence regulations for financial institutions and (2) issuing proposed regulations increasing information reporting requirements for certain wholly-owned U.S. entities. These entities, often organized in Delaware, may be used to shield foreign owners of non-U.S. assets or non-U.S. bank accounts. The IRS has hitched these new regulations to the existing rules for reporting non-U.S. entities with U.S. owners, which affect many AARO members. As we discussed at the recent Tax 202 meeting, these requirements are complex and subject to significant penalties for non-compliance.
Secretary Lew also called for Congress to act to take further measures, including passing legislation to require U.S. financial institutions to provide the same information that foreign financial institutions must provide the IRS under FATCA. As John Fredenberger mentioned at the AGM, lack of full reciprocity under FATCA is a topic that is currently being studied by the French government as a basis for principled objection to FATCA and its impact on the significant number of “accidental Americans” in France.
In an unfortunate turn of phrase, the Secretary’s letter states that “FATCA allows us to gain insight into the accounts of U.S. citizens abroad, limiting the ability of tax evaders to hide assets in overseas accounts.” In fact, FACTA is not directed at the accounts of U.S. citizens abroad but accounts themselves located outside the United States. This statement is illustrative of how Washington continues to confuse us dolphins for tunas, and highlights the importance of the advocacy work by AARO and its members to lobby for changes to alleviate the undue burdens of FATCA on Americans abroad, such as the “same country exception” to FATCA reporting.
The tax committee welcomes your participation and input as we work to coordinate global efforts, raise awareness and achieve solutions for the benefit of all Americans abroad.
Nora Newton Muller
Member of the AARO Tax Committee
It's FinCEN Form 114 (FBAR) filing season. We found this video useful. It provides step-by-step advice on how to file this form:
https://www.youtube.com/watch?v=fgL6u_jD8_E
Remember that your 2015 FBAR is due on June 30th 2016, and no exensions are allowed.
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.
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.
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.
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.
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.
On March 15th AARO held its annual “Tax 101” seminar, led by Tim Ramier, who invited three other tax experts to contribute to the discussion: Nora Muller, Pierre-Thomas Taponier, and Clint Bateman. The seminar addressed mainly U.S. persons filing from abroad for the first time.
U.S. reporting requirements for Americans overseas can be divided into two main categories: income reporting and information reporting. In recent years, the IRS has come up with several procedures to try to get individuals to start reporting.
All U.S. citizens and resident aliens (U.S. persons) must report their income unless they make less than the minimum filing requirement. In 2016, this amount is $10,300 for a single person under 65. If you are self-employed, the minimum filing requirement is $400.
Individuals must declare worldwide gross income: salary, wages, tips, interest, dividends, services, goods sales, rent, etc. All income must be declared in U.S. dollars. The IRS provides currency exchange tools on their website (https://www.irs.gov).
The U.S. is unique in requiring its citizens to report their worldwide income based on their citizenship and not their residency. It is unlikely this will change anytime soon, although there is talk of tax reforms happening after November’s election.
The IRS filing deadline of April 15th (in 2016 it will be April 18th, because of a holiday Friday) is automatically extended by two months to June 15th for individuals residing outside the U.S. You can file for an additional 4-month extension (to October 15th) on the condition of requesting this extension by June 15th. An additional extension – until December 15th – is also possible for U.S. persons residing overseas. It is important to note, however, that if you do have tax to pay, it must be paid by April 15th, otherwise you will be subject to late penalties. Clint Bateman recommends that everyone extend to October 15th, as it gives you more time, and may decrease your chances of being audited.
If you choose to file on paper and reside outside the U.S. and owe no tax, your returns should be sent to:
Department of the Treasury
Internal Revenue Service Center
Austin, TX 73301-0215
USA
If you owe tax, your payments should be sent to:
Internal Revenue Service
P.O. Box 1300
Charlotte, NC 28201-1300
USA
To file your U.S. returns, you’ll need your Social Security Number (SSN); salary slips; banking income information; and your host country tax reporting and assessment papers. If you are filing with foreign family, you can apply for an individual taxpayer identification number (ITIN), or SSNs for spouses, children and other dependents in order to claim exemptions for each.
If you expect to owe more than $1,000 in tax, the estimated tax is due on your 2016 income based on 2015 taxes. You can pay upfront or quarterly. Failure to pay estimated taxes can subject you to penalties and interest.
If you reside abroad, you can exclude up to $100,800 of your 2015 earned income. This amount is adjusted annually for inflation. You qualify for this exclusion if you are a Bona Fide resident abroad (living abroad for the entire year) or if you pass a physical presence test, meaning you have lived abroad for 330 days in a consecutive 12-month period.
Form 1116 enables you to take credit for foreign taxes. You can also claim a standard deduction based on your filing status, or choose to item deductions: medical expenses, charitable gifts, fees, investment expenses, etc. Certain items, such as CSG/CRDS assessed in France are not eligible for tax credits.
Tax treaties between the U.S. and other countries help individuals avoid double taxation. Tax treaty benefits generally apply to investment income, pensions and annuities, and tax credits.
If you have non-U.S. bank accounts with an aggregate amount of $10,000 or more, you must report ALL accounts via the FinCEN Form 114 (also known as the FBAR). This applies to all U.S. persons. It must be filed by June 30th of each year, and there are no possible extensions. The date will change in 2017 to be in sync with the other reporting deadlines, i.e. April 15th and extensions.
How to file? Only electronic filing is possible, via FinCEN’s website (http://bsaefiling.fincen.treas.gov/NoRegFBARFiler.html). It is not possible to file on paper; the FBAR is separate from your tax returns. Tax software can file FinCEN Form 114 for you.
Penalties for not filing are heavy: $10,000 for forgetting to file, and $100,000 or 50% of the highest amount in an account in a year for willfully not filing.
This form, filed with your tax returns, is for declaring financial assets exceeding $200,000 in the aggregate (or $400,000 if filing jointly). This amount used to be much lower before the national taxpayer advocate succeeded in having it raised to $200,000 on the recommendation of AARO. AARO is still advocating for further improvements to lessen the burden of reporting.
PFICs are investments that receive dividends or interests, comparable to a mutual fund. These are taxed on a mark-to-market basis. They must be declared on Form 8621, which is extremely complicated (the IRS estimates that it takes an average of 15 hours and 4 minutes to fill out correctly). This is important to keep in mind when considering whether or not to invest in PFICs.
Form 5471 must be filed by anyone who has 10% or more shares in a company. This form is for information purposes only, and you will not be taxed on the information declared here.
Form 3520 is used for reporting gifts or legacies, if the giver is a non-U.S. person. This form is also for information purposes only.
Form 8865 is used to declare interest in a partnership.
This is a relatively new procedure (beginning in 2014) for those living abroad to become compliant. It is a good tool for those who have not been willfully non-compliant and have recently become aware of U.S. filing requirements.
The procedure allows you to file three back income tax returns and 6 years of FBARs. This is a clean slate measure enabling those who have not previously filed to “come out of the cold”. If you use the streamlined compliance procedure, you must complete a form of certification of why you have not filed in the past. This helps the IRS understand that the non-compliance was not willful. It is important to fill out these forms accurately.
This procedure waives all late penalties. You will have to pay interest on any taxes due, but this is usually not a huge amount, and is minimal compared to what any penalties would be.
The best time to do this is NOW. The IRS could take this useful procedure off the table at any moment. You can find more information on the IRS.gov website on the procedure, but consulting a tax preparation specialist is highly recommended as the procedure is lengthy and complicated.