Category Archives: FBAR

#YouCantMakeThisUp! Married Americans abroad are more likely to meet requirements to file US tax returns than are singles – But, then again marriage to a nonresident alien is considered to be a form of tax evasion

Before moving to the post, if you believe that Americans abroad are being treated unjustly by the United States Government: Join me on May 17, 2019 for a discussion of U.S. “citizenship-based taxation” as follows:


You are invited to submit your questions in advance.
And now, back to our regularly scheduled programming.
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I begin with the conclusion …


The Every Day facts:


1. A U.S. citizen living in Canada Is married to an alien (the nonresident type)
2. Had $500 of part time employment income
3. Because she is married (in accordance with the definition of “married” in Internal Revenue Code 7703) she is of course required to absorb all the punitive consequences of the “married filing separately” filing category. The “married filing separately category” is a punitive filing category which is a “hidden tax on Americans abroad“.
In the 2017 tax (and previous) year she had NOT met the filing threshold required to file a U.S. tax return. Using the IRS Interactive “Do I Have To File A Tax Return” tool, we find that:

(Note that this refers to a threshold of $4050 which is the amount of the personal exemption for 2017. The significance of this will be further explained below.)
She did however have financial assets which exceeded the $200,000 threshold required to file Form 8938. Most of these assets were owned jointly with her nonresident alien husband. Because she had not met the filing threshold for “married filing separately” in 2017 and previous years she had not been required to file Form 8938. Notice that Form 8938 does require her to report to the IRS assets that are jointly owned with her “nonresident alien” husband. (By the way he would not be happy about this. I some cases this forces Americans abroad to choose between their U.S. citizenship and their marriage.)
April 2019 – An SOS …
I received a frantic message. She was/is trying to to determine whether she is required to file a U.S. tax return for the 2018 year (based on her $500 of income and her status as “married filing separately”).
On the one hand she is directed by IRS publication 54 (the Bible For Americans Abroad) that her filing threshold is $12,000.


On the other hand, she is being told on the IRS page describing filing thresholds that she is required to file a U.S. tax return.


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Part 22 – The 16th amendment authorises an Income Tax – but the @USTransitionTax is a wealth tax!

Part 1: The constitutional authorisation for the US income tax

As explained in a recent post at Tax Connections:

Written by TaxConnections Admin | Posted in TaxConnections

IRS- First Tax Return Form In 1913

Origin Of Internal Revenue Service

The roots of IRS go back to the Civil War when President Lincoln and Congress, in 1862, created the position of commissioner of Internal Revenue and enacted an income tax to pay war expenses. The income tax was repealed 10 years later. Congress revived the income tax in 1894, but the Supreme Court ruled it unconstitutional the following year.

16th Amendment

In 1913, Wyoming ratified the 16th Amendment, providing the three-quarter majority of states necessary to amend the Constitution. The 16th Amendment gave Congress the authority to enact an income tax. That same year, the first Form 1040 appeared after Congress levied a 1 percent tax on net personal incomes above $3,000 with a 6 percent surtax on incomes of more than $500,000.

In 1918, during World War I, the top rate of the income tax rose to 77 percent to help finance the war effort. It dropped sharply in the post-war years, down to 24 percent in 1929, and rose again during the Depression. During World War II, Congress introduced payroll withholding and quarterly tax payments.

1913 Form 1040

(PDF 126KB, 4 pages, including instructions)

A New Name

In the 50s, the agency was reorganized to replace a patronage system with career, professional employees. The Bureau of Internal Revenue name was changed to the Internal Revenue Service. Only the IRS commissioner and chief counsel are selected by the president and confirmed by the Senate.

Today’s IRS Organization

The IRS Restructuring and Reform Act of 1998 prompted the most comprehensive reorganization and modernization of IRS in nearly half a century. The IRS reorganized itself to closely resemble the private sector model of organizing around customers with similar needs.

(Note that even in 1913, the most prominent part of the 1040 was the Penalty Provision.)

1913

Part 2: Taxation must be constitutional. Is the transition tax an income tax?

A new paper by Sean P. McElroy titled: “The Mandatory Repatriation Tax Is Unconstitutional” suggests that:

Abstract
In late 2017, Congress passed the first major tax reform in over three decades. This Essay considers the constitutional concerns raised by Section 965 (the “Mandatory Repatriation Tax”), a central provision of the new tax law that imposes a one-time tax on U.S.-based multinationals’ accumulated foreign earnings.

First, this Essay argues that Congress lacks the power to directly tax wealth without apportionment among the states. Congress’s power to tax is expressly granted, and constrained, by the Constitution. While the passage of the Sixteenth Amendment mooted many constitutional questions by expressly allowing Congress to tax income from whatever source derived, this Essay argues the Mandatory Repatriation Tax is a wealth tax, rather than an income tax, and is therefore unconstitutional.

Second, even if the Mandatory Repatriation Tax is found to be an income tax (or, alternatively, an excise tax), the tax is nevertheless unconstitutionally retroactive. While the Supreme Court has generally upheld retroactive taxes at both the state and federal level over the past few decades, the unprecedented retroactivity of the Mandatory Repatriation Tax — and its potential for taxing earnings nearly three decades after the fact — raises unprecedented Fifth Amendment due process concerns.

Here is a copy of the paper …

SSRN-id3247926

The point is that the transition tax is not a tax on income. It is a tax on “fake income”. It is “fake income” on two levels:

First, by definition it is not based on income. It is based on a pool of capital that was not subject to taxation when it was earned.

Second, Sec. 965 deems it to be income precisely because it not actual income which is based on any realisation event.

Is this the simplest argument for why the Section 965 transition tax may be unconstitutional?

John Richardson Follow me on Twitter @Expatriationlaw

The proper care and feeding of the Green Card – An interview with "long term resident" Gary @Clueit

Introduction
The Internal Revenue Code of the United States imposes worldwide income taxation on ALL individuals who are U.S. citizens or who are otherwise defined as “residents” under the Internal Revenue Code. “Residents” includes those who have a visa for “permanent residence” (commonly referred to as a Green Card). A visa for “permanent residence” is a visa for immigration purposes. Once an individual receives a visa for “permanent residence” he will be considered to be a “resident” under the Internal Revenue Code. His status as a “resident” for tax purposes continues until he fulfills specific conditions to sever his “tax residency” with the United States. The conditions required to sever “tax residency” with the United States are found in S. 7701 of the Internal Revenue Code. (Basically a Green Card holder can’t simply move from the United States and sever tax residency.)
In the same way that U.S. citizens are subject to taxation on their worldwide income even if they don’t reside in the United States, “permanent residents” will continue to be subject to taxation on their worldwide income until they take specific steps to sever tax residency in the United States. In certain circumstances Green Card holders living outside the United States can avoid filing some of the “forms” that are required of U.S. citizens living abroad.
The steps to sever tax residency are found in S. 7701(b) of the Internal Revenue Code. Those wishing to explore this further are invited to read my earlier posts about Gerd Topsnik: Topsnik 1 and Topsnik 2. Those “permanent residents” who qualify as “long term residents” will be subject to the S. 877A Exit Tax rules if they try to sever tax residency with the United States. It’s probably easier to secure a “permanent residence visa” for immigration purposes, than it is to sever tax residency for income tax purposes.
On September 5, 2018 I had the opportunity to participate in a conversation with Mr. Gary Clueit who has been a permanent resident of the United States for 34 years. Interestingly Mr. Clueit is one more Green Card holder who never applied for U.S. citizenship. There are both advantages and disadvantages to a “Green Card” holder becoming a U.S. citizen. One often overlooked disadvantage to a Green Card holder becoming a U.S. citizen is discussed here. In general, “permanent residents” (Green Card holders) of the United States have certain “tax treaty benefits” that are denied to U.S. citizens. Because of the “savings clause” U.S. citizens are denied the benefits of tax treaties. Interestingly (at least until now) other countries have failed to understand that the inclusion of the “savings clause” in U.S. tax treaties means that the treaty partner is agreeing that the United States can impose worldwide taxation on the citizen/residents of the treaty partner country. The reason is simple:
The primary impact of the “savings clause” is that assists the United States in imposing “worldwide taxation”, according to U.S. rules on people who are “tax residents” of other countries and who do not live in the United States!
The following tweet links to the podcast of the conversation. Anybody considering moving to the United States as a “permanent resident” should listen to this podcast.


More from Mr. Clueit after the jump …
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Part 9: Responding to the Sec. 965 “transition tax”: From the "Pax Americana" to the "Tax Americana"


This is the ninth in my series of posts about the Sec. 965 Transition Tax and whether/how it applies to the small business corporations owned by taxpaying residents of other countries (who may also have U.S. citizenship). These small business corporations are in no way “foreign”. They are certainly “local” to the resident of another country who just happens to have the misfortune of being a U.S. citizen.
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Part 5: Responding to the Sec. 965 “transition tax”: Shades of #OVDP! April 15/18 is your last, best chance to comply!

Introduction
This is the fifth in my series of posts about the Sec. 965 Transition Tax and whether/how it applies to the small business corporations owned by tax paying residents of other countries (who may also have U.S. citizenship). These small business corporations are in no way “foreign”. They are certainly “local” to the resident of another country who just happens to have the misfortune of being a U.S. citizen.
The purpose of this post is to argue that (as applied to those who do not live in the United States) the transition tax is very similar to the OVDP (“Offshore Voluntary Disclosure Programs”) which are discussed here. Some of my initial thoughts (December 2017) were captured in the post referenced in the following tweet:


The first four posts in my “transition tax” series were:
Part 1: Responding to The Section 965 “transition tax”: “Resistance is futile” but “Compliance is impossible”
Part 2: Responding to The Section 965 “transition tax”: Is “resistance futile”? The possible use of the Canada U.S. tax treaty to defeat the “transition tax”
Part 3: Responding to the Sec. 965 “transition tax”: They hate you for (and want) your pensions!
Part 4: Responding to the Sec. 965 “transition tax”: Comparing the treatment of “Homeland Americans” to the treatment of “nonresidents”
*A review of what what the “transition tax” actually is may be found at the bottom of this post.
This post is for the purpose of the arguing that, as applied to those who live outside the United States, payment of the “transition tax” in 2018, is the financial equivalent to participation in 2011 OVDI (“Offshore Voluntary Disclosure Program”).
 


Seven Reasons Why The U.S. Transition Tax as applied to “nonresidents” is similar to the “Offshore Voluntary Disclosure Program As Applied To “Nonresidents”. In both cases there are benefits to Homeland Americans and extreme detriments to “nonresidents”. These detriments amount to a punishment for living outside the United States and becoming a “tax resident” of another country.
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Does the end of #OVDP signal a move FROM the "voluntary disclosure" model TO the "enforcement model"?

The IRS recently announced that it was ending OVDP – the “Offshore Voluntary Disclosure Program.”
The reaction of the “tax compliance community has been largely that the “retiring” of the OVDP program should be interpreted to be a “last, best chance to come into compliance!” A comment at the Isaac Brock Society asks:

“Those who still wish to come forward have time to do so.”
I haven’t finished reading John’s farewell to OVDP but that IRS statement caught my eye. It does NOT say “who must come forward” or “who have yet to come forward”. Who the heck would ever “wish” to come forward, especially after reading about Just Me’s trial by OVDP fire and the betrayal of trust suffered by our dear Dr. Marcus Marcio Pinheiro (aka markpinetree)?

I suppose there could be two possible reasons:
1. The OVDP program could be replaced with something worse; and/or
2. There could be some (few and far between) situations where OVDP might actually be better than streamlined.


What do the “tax professionals” think? A collection of comments from the twittersphere follows:


Interestingly, the IRS announcement was accompanied by the statement that:

The planned end of the current OVDP also reflects advances in third-party reporting and increased awareness of U.S. taxpayers of their offshore tax and reporting obligations.

A comment from the Isaac Brock Society asks:

Doesn’t this just mean that they will move from the “voluntary disclosure” model to the “enforcement model” where they will begin to use the information gathered in FATCA, etc, to send notices to people with large fines?
To me, this sounds more like a gunshot that begins the battle between the IRS and expats versus an expat victory.

And in the real world …
Last week I was shown a sample of an IRS form letter received by an elderly American woman who has (apparently) not lived in the United States for fifty years. During those fifty years she had dutifully and responsibly filed her U.S. tax returns. Of course, she was living in a “foreign” country outside the United States.
Those interested might have a look at the following form letter she received. Notice that the letter appears to have been prompted because the IRS received information that she had an account at a “foreign bank”.
IRS – ltr form 6019
Looks like quite the fishing expedition to me. What a “penalty laden” list of possible accusations. Would you like to receive a letter like this about your “local” bank accounts?

IRS announces the end of #OVDP: Fascinating tweets from the "OVDP Historians" who compose the tax compliance community

#OVDP: Reactions from the “tax compliance community” (and others who tweeted) to the termination of OVDP
(Note: For the purposes of this post I will use the terms “OVDP” and “OVDI” interchangeably. Each term describes a specific example of one of the “OVDP era” programs, as it existed at a specific point in time.  A particularly good analysis of the evolution of the “OVDP era” programs is found here – of interest only to those who want to “OVDP Historians“!)


On March 14, 2018 Professor William Byrnes reported that:

The Internal Revenue Service today announced it will begin to ramp down the 2014 Offshore Voluntary Disclosure Program (OVDP) and close the program on Sept. 28, 2018. By alerting taxpayers now, the IRS intends that any U.S. taxpayers with undisclosed foreign financial assets have time to use the OVDP before the program closes.
“Taxpayers have had several years to come into compliance with U.S. tax laws under this program,” said Acting IRS Commissioner David Kautter. “All along, we have been clear that we would close the program at the appropriate time, and we have reached that point. Those who still wish to come forward have time to do so.”
Since the OVDP’s initial launch in 2009, more than 56,000 taxpayers have used one of the programs to comply voluntarily. All told, those taxpayers paid a total of $11.1 billion in back taxes, interest and penalties. The planned end of the current OVDP also reflects advances in third-party reporting and increased awareness of U.S. taxpayers of their offshore tax and reporting obligations.

I have heard it said:
The good thing about bad things is that they come to an end.
The bad thing about good things is that they come to an end.
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US tax reform bill appears to confiscate 12% (updated to 14%) of retained earnings of certain Canadian Controlled Private Corporations

Update November 9, 2017
Today Chairman Brady concluded the “Mark Up” period of his proposed tax legislation. The “Mark Up” period contained NO move to “territorial taxation” for individuals. It did increase increase the “proposed confiscation” of the retained earnings of certain Canadian Controlled Private Corporation, from 12% to 14%.


See the “Manager’s Amendment” here:
summary_of_chairman_amendment_2
Now back to our regular programming …
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Kudos to Max Reed for his quick analysis of the how the proposed U.S. tax reform bill might affect Canadians citizen/residents who also have hold U.S. citizenship. You will find the bill here. His analysis, which has been widely discussed at the Isaac Brock Society (beginning here) includes provisions that are very damaging to those who are the owners of Canadian Controlled Private Corporations (noting they are also under assault from Messrs Trudeau and Morneau). The damaging provisions are both prospective and retrospective.
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Mr. Bedrosian (a pioneer in FBAR history) meets Mr. #FBAR: The good, the bad and the ugly

Why the Arthur Bedrosian meeting with Mr. FBAR is important
Synopsis:

The Bedrosian FBAR case is an incredibly important victory for taxpayers. Judge Baylson first ruled that FBAR “willfulness” in the “civil” context did NOT require knowledge that filing an FBAR was a legal duty (the criminal standard). He then ruled that Mr. Bedrosian’s failure to report the account was a form of negligence that did NOT meet the required standard of “willfulness”.
Perhaps the message is:
The failure to file an FBAR will be “willful”, if the circumstances of the failure, were evidence of conduct that the FBAR statute was designed to punish.
 
In other words, it is possible to know about Mr. FBAR, fail to file Mr. FBAR and NOT be “willful”!
The “Readers Digest” Version …
The Bad …
The District Court held that the test for what constitutes “willfulness” in the “civil FBAR penalty” context is not the test used in a criminal context – “the intentional violation of a known legal duty”. All that is required is that the person voluntarily NOT file an FBAR. (One need not know that he is violating a legal duty).


The Good …
The failure to file an FBAR can be a form of “negligence” that falls short of “willfulness”. In other words, one can know about the FBAR requirement, fail to file the FBAR and still fall short of “willfulness”.


The Ugly …
The IRS had initially taken the position that Mr. Bedrosian’s misadventures in FBAR were nonwillful. But, they changed their mind.
Round 1 goes to Mr. Bedrosian. Will the IRS appeal?


Mr. Bedrosian has earned a place in FBAR history. He is a true “FBAR Pioneer”. His “Adventures in FBAR” place him in the club of: Mr. Pomerantz, Mr. Hom , Mr. Kentera, Mr. Horsky and Mr. Warner. Fortunately, mere visitors to American do not yet have to file the FBAR. Interestingly, Mr. FBAR appears to have been the “role model” for a Russia foreign bank account reporting laws.
To learn more about the FBAR Odyssey of Mr. Arthur Bedrosian …
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