Category Archives: Form 8621

FATCA Reporting, The Banks And Their U.S. Citizen Customers: The Saga Continues

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Reposted with permission from The Isaac Brock Society.

In October I published a post about the U.K. division of Fidelity cleansing itself of U.S. citizen customers. Since the beginning, it has been clear that FATCA has made U.S. citizen customers a problems for non-U.S. banks. Today I was informed that FATCA reporting to the IRS has begun to find its way to U.S. citizens directly. As the above post from X.com indicates, some individual U.S. citizens are receiving communications from the IRS. The communication notes the existence of the “foreign financial asset” and that the asset should have been reported.

Significantly the letter notes the bank where the unreported account was located. In this case the bank was “Bank Hapoalim B.M” which is apparently one of Israel’s largest banks.

Interestingly on April 30, 2020 Bank Hapoalim admitted to helping U.S. citizen customers hide assets and avoid U.S. taxation. This resulted in a deferred prosecution agreement and a penalty. (The Department Of Justice Press Release is available online.) A reading of the press release strongly suggests that customers of this bank may be presumed to be guilty by association.

This is interesting news.

Of course:

“To be FORMwarned Is To Be Forearmed!”

John Richardson Follow me on X.com/Expatriationlaw

U.S. Citizens In Canada And Abroad: The Trauma Of Organizing Information For Your U.S. Tax Return

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Prologue

As an older post I wrote confirms, Americans abroad are subject to special provisions and those special provisions include a number of information returns!

Forms required by #Americansabroad 101 – The Explanation

My reason for writing and the purpose of this post

I am not a tax preparer. I am an expatriation lawyer. In this.capacity, I either:

– see U.S.tax returns prepared by a tax preparer; or

– discuss the necessity of U.S. tax compliance when a person wishes to become U.S. compliant through either the IRS streamlined or the IRS Relief Procedures Programs.

Americans abroad have many reasons for wishing to be U.S. tax compliant. In many cases it is associated with expatriation. In some cases it is part of estate planning (in many cases it is better to die without being a U.S. citizen). In. some cases it is to renounce and NOT create barriers to inheritance for U.S. citizen children. In some cases it is because they are likely to inherit U.S. income producing assets. In some cases it is because they fear noncompliance. In some cases (regardless of fears of penalties) they believe in. compliance with the law. The point is that U.S. tax compliance (it’s a huge industry) is an important part of people’s lives.

Regardless of one’s view of the U.S. citizenship tax regime, there are large numbers of Americans abroad who either attempt to meet their annual filing obligations or who desire to meet those obligations.

In this context I offer two important (I think) thoughts:

First, forms and tax returns are dangerous things and should be filed correctly. If you are going to file, you might as well do it correctly.

Second (and more importantly), for U.S. citizens abroad the filing of U.S. tax returns is a major cause of significant trauma in their lives. It is NOT a question of filing a. 1040 that just reports “foreign income”. It is, because of the large number of penalty-laden information returns, an accusation that is based on a presumption of “wrong doing”. (U.S. residents and their tax preparers who think this is hyperbole, just try living as a tax compliant American abroad!)

Therefore, the tax compliance question for Americans abroad is a question of how do they mange their trauma. The issue is how do they manage the tax filing issue in a way that minimizes the associated trauma. Are they likely to be audited? I don’t think so. Are they likely to think about the possibility of audit and penalties? Yes, many of them do. Furthermore, learning about previous filing mistakes is – for many people -incredibly traumatic.

The purpose of this post is to help with the management of trauma.

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The Organization Problem – How to read this post …

Identifying the information that is needed.

I have noticed that Americans abroad have difficulty organizing their information. Remember, tax preparers are not mind readers. They know very little about you. The simply process the information you provide. Sure, they have questionnaires (with varying degrees of detail). That said, I think it would be helpful to provide an overview of what it means to file a U.S. tax return, what information is relevant and how to think about retrieving that information. Those of you who wish to renounce U.S. citizenship will want to be in a position where you can certify five years of U.S. tax compliance.

I have written this post primarily from a Canadian perspective (I live in Toronto, Canada.) Although the information is generally applicable to all U.S. citizens living outside the United States, some of the information is specific ONLY to Canada. So, please don’t be lazy. Get informed! Stay informed!

While providing an overview, the information in this post cannot be complete. It is written for the average person, with a simple life and mainstream investments that are easily understood and characterized.

Finally, if you are filing U.S. taxes abroad for the first time, I suggest you should start with the following simple question:

“What would my U.S. tax tax return contain in terms of forms, schedules, etc.?”

In any case, I am writing this post because …

Yesterday I compared the U.S. tax return and the Canadian tax return of a U.S. citizen living in Canada. The Canadian return was 14 pages. The U.S. return was 59 pages. The person had a very simple life (retired and living off the usual pensions). He did NOT owe any U.S. taxes. That said, he was NOT compliant with his U.S. tax filing obligations. The reason was that his “foreign assets” were not reported properly on Form 8938. I suspect that this person had no idea how to properly identify and organize the foreign financial asset information to properly transmit it to his U.S. tax preparer. This is perfectly understandable. Assuming no Canadian Controlled Private Corporation (a presumptive instrument of tax evasion from a U.S. perspective), or other controlled foreign corporation, most tax filers will be required to file:

– FinCEN 114 AKA FBAR

– Form 8938

– Possibly Forms 3520 and 3520A (make sure that you really are dealing with a Trust or have received a foreign gift)

– and possibly more

This post is to provide very simple advice on how to organize this information to provide to your tax preparer.

U.S. tax filings are more about the disclosure of information than about the calculation of tax

Generally, you can assume that ANY and ALL financial accounts and financial assets (brokerage accounts, pensions, individual shares in non-U.S. corporations) must be reported. The reporting issue is distinct from the tax issue.

Foreign real estate owned directly by Americans abroad is NOT (at present) subject to separate reporting (although income earned from them is taxable).

Preparation for the filing of a U.S. tax return should be viewed as four categories of. tasks:

Category A – Identifying The Relevant Information

Category B – Deciding How That Information – In Terms Of The Relevant Forms – Is To Be Reported

Category C – Reporting The Information On The Relevant Forms

Category D – Deciding Whether Any Information Returns Must Be Filed Even If A Tax Return Is Not Required (For example: Form 5471, 8621 and Form 3520 and Form 3520A may have a filing requirement even if a 1040 is not required!)

Category E – Does Your Country Of Residence Have Rules Requiring The Reporting Of Foreign Assets (similar to FBAR, Form 8938, etc.)?

Be careful!!

Canada (and other countries) have very strict rules governing the reporting of foreign assets.

Once these three tasks have been. completed, one is ready to place the income on the actual tax return (1040 or 1040NR) and Schedules.

What follows are the ten steps that should prepare you to give your information to your tax preparer.

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IRS Service To Expats: Another Reason To End U.S. Citizenship Taxation

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Guest Post By Dr. Suzanne de Treville – Switzerland

Discussions about eliminating double taxation for U.S. citizens abroad often focus on reducing the significant compliance burdens these individuals face. When the U.S. taxes income or assets already taxed in a citizen’s country of residence, the resulting complexity is substantial while the extra tax revenue to the IRS that results from this double taxation by ordinary taxpayers is quite low. This complexity is particularly burdensome for the 80% of expat taxpayers with an Adjusted Gross Income of $100,000 or less.

The IRS requires expatriates to file intricate returns and is responsible for providing necessary assistance. However, while resources are available to domestic taxpayers, similar support is lacking for those abroad, despite their greater need.
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Americans Abroad Aren’t Denouncing Because They Want To. They Are Renouncing Because They Feel They Have To

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Introduction/background:

Denunciation of U.S. Citizenship – From the perspective from a U.S. Senator

Renunciation of U.S. Citizenship – From the perspective of a U.S. journalist

It’s hard to have a discussion about why Americans abroad are renouncing U.S. citizenship. There are many different perspectives about renunciation. There is very little “shared reality”. Tax academics (who have the resources to know better), “pensioned intellectuals”, politicians and most journalists see this from a “U.S. resident perspective”. They don’t understand the reality of the lives of Americans abroad. But, Americans abroad are NOT a monolith. The ONLY thing they have in common is that they live outside the United States. Their circumstances vary widely. There is little “shared reality” among Americans abroad of what the issues are. AT the risk of oversimplification, I have attempted to divide “Americans abroad” into four categories (as defined below). The categorization will explain why different groups of “Americans abroad” experience the U.S. extra-territorial tax regime differently.

Hint: Americans abroad aren’t renouncing U.S. citizenship because they want to. They are renouncing U.S. citizenship because they feel they have to.

Politicians, tax academics, “pensioned intellectuals” and many journalists deal in the world of opinions. The opinions they hold are often “myths”. They are not “facts”. They are entitled to their opinions (as misguided and ignorant as they may be). They are NOT entitled to their “facts”.

This post is to describe the facts about how the extra-territorial application of the Internal Revenue Code and the Bank Secrecy Act pressure many Americans abroad to renounce U.S. citizenship. Interestingly a large percentage of those renouncing owe ZERO taxes to the U.S. government. They renounce anyway!

First, a bit of background to the problem – what is the problem and who is affected?

They do NOT meet the test of being “nonresident aliens” under the Internal Revenue Code

As SEAT cofounder, Dr. Laura Snyder explains, in the first of her 16 “working papers” describing the problems of Americans abroad:

The people most affected by the U.S. extraterritorial tax system are not a monolithic group. Some left the United States recently, some left years or decades ago. Some left as adults (some young, some middle-aged, and some retirees), while others left as children (with their families), and some have never lived in the United States (they are U.S. citizens by virtue of the U.S. citizenship of at least one parent). Some intend to live in the United States (again) in the near or distant future, while others do not intend to ever live in the United States (again). Some identify as Americans while others do not. Many are also citizens of the country where they live (dual citizens) while others hold triple or even quadruple citizenships. In referring to this group, there is no one term that sufficiently reflects its full diversity. What unites them is that they do not meet the test of “nonresident alien” under the Internal Revenue Code. Depending upon the context, this series of papers will use terms such as “persons,” “individuals,” “affected individuals,” and “overseas Americans.” The latter term has a drawback, however: it emphasizes connections to the United States while minimizing the important connections that such persons have to the countries and communities where they live.

That said, what divides Americans abroad may be greater than what unites Americans abroad!

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How US Tax Treaties And The “Saving Clause” Prevent Countries From Establishing Retirement Programs For US Citizen Residents

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Prologue – The Circumstances Of Your Birth Should Not Determine The Outcome Of Your Life …

The above tweet references a “human interest” story where US citizen children are denied benefits in their country of residence that are available to all people who are NOT US citizens.

The description includes:

New Zealand children born to parents’ who are citizens of the United States face a difficult KiwiSaver choice: Give up your US citizenship, or face a KiwiSaver tax compliance bill of $750​ or more a year courtesy of the US taxman.

A petition has been started at Parliament asking MPs to change the KiwiSaver Act to allow people with KiwiSaver accounts facing the unreasonable demands from US tax authorities to close their KiwiSaver accounts.

The issue surfaced as a result of the plight of Auckland dual national Kira Bacal and her four New Zealand-born children, Harper, 13, Rowan, 10 and twins Malachi and Elias, 8.

It appears that the poor (New Zealand born) Bacal children are finding that the US (or at least US tax preparers in New Zealand) consider their KiwiSaver to be a possible vehicle for US tax evasion! Not only is the KiwiSaver a “trust”, but it’s a “foreign trust” which comes with all kinds of penalty laden reporting obligations and no tax advantages. An excellent analysis of the US tax implications of the New Zealand KiwiSaver is here. The story is somewhat comical in that one gets the feeling that the blame should be placed on New Zealand (and not the United States) for New Zealand’s failure to legislate special exceptions for US citizens living in New Zealand.

So what! They’re Americans and therefore they deserve it (you say)!

A previous post explained that for Americans abroad, changes in the laws of their country of residence can change their tax relationship with the United States. The purpose of this post is to expand on that theme by demonstrating that:

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IRS Relief Procedures For Former Citizens Update – Relief For Former Green Card Holders Coming!

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Introduction

On December 17, 2019 Gary Carter published a post on Tax Connections, which outlined the “Options Available For U.S. Taxpayers With Undisclosed Foreign Financial Assets“. It contained an excellent overview and analysis which included a discussion of the IRS definition of “non-willfulness” under the Streamlined Program. In commenting on the definiton of “non-willful” he noted that:

The IRS definition of non-willful covers a lot of territory. Negligence, for example, includes “any failure to make a reasonable attempt to comply with the provisions of the Code” (IRC Sec. 6662(c)) or “to exercise ordinary and reasonable care in the preparation of a tax return” (Reg. Sec. 1.6662-3(b)(1)). Further, “negligence is a lack of due care in failing to do what a reasonable and ordinarily prudent person would have done under the particular circumstances.” (Kelly, Paul J., (1970) TC Memo 1970-250). The court also stated that a person may be guilty of negligence even though he is not guilty of bad faith. So the fact that you ignored the FBAR filing requirements for many years, and failed to report your foreign income, might be negligent behavior, but it’s probably not willful. That means you likely qualify for one of the new streamlined procedures. On the other hand, if you loaded piles of cash into a suitcase and lugged it over to Switzerland to conceal it from the IRS, you don’t qualify, because that is willful conduct. If you believe your behavior may have been willful under these guidelines, consult with an attorney before submitting returns through one of the streamlined procedures. We work with attorneys who are experts in this field and we would be happy to provide a referral, free of charge or obligation.

Notably, the definition of “non-willfulness” for the Streamlined Program is the same as the definition for the new “IRS Relief For Former Citizens Program”.

Part A – IRS Relief For Former Citizens Who Relinquished U.S. Citizenship After March 18, 2010 (the date FATCA became law)

The program was announced on September 6, 2019.

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The United States imposes a separate and more punitive tax system on US dual citizens who live in their country of second citizenship

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Prologue

By John Richardson

Do you recognise yourself?

You are unable to properly plan for your retirement. Many of you with retirement assets are having them confiscated (at this very moment) courtesy of the Sec. 965 transition tax. You are subjected to reporting requirements that presume you are a criminal. Yet your only crime was having been born in America (something you didn’t even choose) and attempting to live as a U.S. tax compliant American outside the United States. Your comments to my recent article at Tax Connections reflect and register your conviction that you should not be subjected to the extra-territorial application of the Internal Revenue Code – when you don’t live in the United States.

The Internal Revenue Code: You can’t leave home without it!

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The "proper care and feeding of the Green Card": Tax Planning for the #GreenCard before coming to America

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Introduction – Where this post came from …

In July of 2018 I moderated a discussion on “tax residency”. The discussion was at an immigration conference in Los Angeles that was primarily focused on the EB-5 program. The EB-5 program will lead to a Green Card (meaning that one becomes a permanent resident of the United States).

Here is a video of the discussion. Some parts are audible and others not. But, I decided to create a post which focuses on the issues discussed.

Introduction to the world of Global Mobility

Global mobility is the norm in the 21st century. The United States, Canada and Australia are prime destinations for those seeking “permanent residency” and ultimately a second “citizenship”. Canada has been a pioneer in investor immigration. The United States has long been an area of prime interest. It is important to distinguish between “residency” for immigration purposes (are you legally allowed to live in a country) from “residency” for tax purposes (to what extent are you subject to taxation in the country).

Once you have become a “permanent resident” under the immigration laws, you will have become a “tax resident” under the tax laws. Tax residency in a CRS and FATCA world has become increasingly important. I have previously discussed OECD definitions of tax residency.

There are many “citizenship and/or residency by investment” programs. One example is Portugals’s Golden Visa Program.

The purpose of this post is to create awareness of some aspects of what it means to become a “tax resident” of the United States. When a non-citizen becomes a U.S. “permanent resident” (for immigration purposes), one becomes a “tax resident” of the United States. Once a “tax resident” of the United States (1) very specific procedures must be followed to sever “U.S. tax residency” and (2) “long term residents” will be subject to the S. 877A Exit Tax rules.

If you are a “tax resident” of a country, it is important to understand the tax rules. This is particularly true when considering becoming a “permanent resident” and “tax resident” of the United States.
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Part 9: Responding to the Sec. 965 “transition tax”: From the "Pax Americana" to the "Tax Americana"

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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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Does the end of #OVDP signal a move FROM the "voluntary disclosure" model TO the "enforcement model"?

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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?