Tag Archives: Form 8938

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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Part 2 – The Warren “Ultra-Millionaire Tax Act of 2021” and The Wealth Of Other Nations

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The fact that …

Leads to the obvious question of …

Hmm…

The fact is that Senator Warren is proposing to impose her wealth tax on property located outside the United States, purchased by individuals who live outside the United States, who have no connection to the United States other than (perhaps) the circumstance of having been born in the United States. Yup, it’s true.

On March 18, 2021, FATCA will turn on 11. The Senator’s proposed wealth tax explicitly states that FATCA is to be used to enforce this tax! Finally an (il)legitimate use for FATCA.

In the 18th Century Adam Smith wrote “The Wealth Of Nations”. In the 21st Century Senator Warren is proposing to impose a wealth tax on “The Wealth Of OTHER Nations”.

Discussion And Analysis

This is the second of what I expect to be a multi-part series on Senator Warren’s proposed wealth tax of 2021. As the above tweet makes clear, the practical utility of the tax depends on US citizenship-based taxation (to whom it applies) and FATCA (how are non-US assets located). In my first post, I referenced Senator Warren’s statement that:

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Treasury exempts applicable “tax-favored foreign trusts” from the Form 3520 (and therefore Form 3520A) requirement

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Introduction – A small step for forms, one giant leap for “formkind”

It’s true. Many Americans abroad may no longer be required to file Form 3520 and Form 3520A to report their lives abroad! Early indications appear that many Americans will (assuming their retirement vehicle does qualify as a trust) not be required to report on Form 3520. This new initiative from Treasury a positive step in the right direction.

I have long thought that Treasury could solve many of the problems experienced by Americans abroad. Here is a wonderful example of Treasury taking the initiative to clarify the obvious:

Americans abroad do NOT use non-U.S. pension plans and non-U.S. tax-advantaged investing accounts to evade U.S. taxes. Hence, there is NO reason for the Form 3520 reporting requirement. This is an example of the tax compliance industry sitting down with Treasury, explaining a problem and getting a resolution. I suggest (and hope) that the same can be done for PFIC (Form 8621), Small Business Corporations (Form 5471) and other penalty-laden forms.

Yes, this announcement from Treasury in the form of RP 20-17 is a great achievement. Although it certainly doesn’t solve all the problems, it’s:

A small step for forms, one giant leap for “formkind”

The background to this problem – It starts in 1996 (same year as the beginning of the Exit Tax)…

Since 1996 Internal Revenue Code 6048 has required extensive reporting of almost any interaction with a foreign trust. Treasury has required that the reporting take place on Forms 3520 and 3520A. The forms are complex and subject to the draconian penalty regime described in Internal Revenue Code Section 6677. In order for an entity to be a foreign trust, it must be a trust. A “trust” for IRS purposes is defined by the Treasury Regulations as:

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Exercising broad regulatory authority, US Treasury has clarified the meaning of “resident” for #FBAR Purposes

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Introduction – Looking For Mr. FBAR

What’s new?

I haven’t written a post about Mr. FBAR for quite some time. But, a post about the recent Boyd case at Tax Connections, by Darlene Hart got me thinking about FBAR again. For those interested – where the IRS successfully argued that it was appropriate to impose penalties on each individual account – here is the case:

HBe

And for a hint at the commentary:

Those who know little about Mr. FBAR might find this introduction to FBAR – although written in 2012 – helpful. Incidentally, it’s pretty obvious that Russia’s Foreign Bank account reporting laws were based on an admiration of Treasury’s success with the FBAR rules.

The purpose of this post

The purpose of this post is to explain:

1. The Congressional FBAR statute – Title 31 Section 5314 – which delegates to Treasury the responsibility of determining ALL aspects of FBAR administration including:

– who is subject to FBAR reporting

– the financial thresholds that trigger reporting

2. It is NOT the Congressional FBAR statute that defines the absurdly low $10,000 threshold for reporting. Rather it is Treasury. Although FBAR penalties are now indexed to inflation, the FBAR reporting threshold remains at $10,000. To put it simply: through inflation, Treasury has found a way to increase both the number of FBAR violations and the penalties associated with those violations. (There is a reason it’s called “The FBAR Fundraiser”).

3. It is not Congress that imposes the FBAR requirement on Americans abroad. It is Treasury. In fact, Treasury has recognized that they it has the right to exempt Americans abroad from the FBAR requirements, but has refused to do so. To be specific, Treasury’s 20111 statement found on page 10327 (middle column) was without explanation:

With respect to the comments raised by United States persons living abroad, FinCEN does not believe that an exemption is appropriate simply because a United States person chooses to live outside of the United States.

Treasury offered no reason for this decision.

Commentary on this decision at the Isaac Brock Society may be read here.

4. Treasury has by regulation “tinkered” with the meaning of “resident” over the years. I note that in 2012 (as explained by Phil Hodgen and others) the meaning of “resident” was not defined by statute. Rather, it is through Treasury regulations, that the word “resident” is given meaning. By 2017 Treasury had adopted the statutory meaning of resident used in the Internal Revenue Code (Section 7701(b)). (By expanding the definition of “United States” to include possessions and territories, it appears that Treasury has expanded the penalty base to include U.S. “Nationals”.) The FBAR statute is found in Title 31. The Internal Revenue Code is Title 26. There is neither a requirement nor a reason why Treasury should have used the definition of “resident” in Title 26 as the the meaning of “resident” in Section 5314 of Title 31. There are many different ways of defining “resident”. For example, for U.S. Estate and Gift Tax purposes, “residency” is defined in terms of domicile …

My point is this

Individuals and groups attempting to achieve justice for Americans abroad, Accidental Americans, Green Card Holders and all “U.S. Persons” would be advised to focus their efforts on U.S. Treasury. Yes, the lobbying of Congress should continue. But, meaningful change can be achieved without Congress even being aware of it. U.S. Treasury has the authority and ability to fix the FBAR related penalty and reporting injustices imposed on Americans abroad. But, FBAR is just the beginning. Almost all of the problems of Americans abroad can be fixed by Treasury.

This is the first of a series of posts in which I will explain how Treasury can solve almost all of the problems inflicted by the U.S. Government on Americans abroad.

John Richardson – Follow me on Twitter @Expatriationlaw

Appendix – For those who want to better understand the technicalities: Let me explain you …

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Changes to the filing threshold for "Married Filing Separately" filing category likely to pressure more Americans abroad to renounce US citizenship

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This post is a continuation of my post (referenced in the above tweet) which describes the reduction of the threshold for Married Filing Separately from $4050 to $5. In this post I describe why I believe that this change will result in further renunciations of U.S. citizenship. The primary incentive to renouncing citizenship is that: by requiring married low income Americans abroad to file U.S. tax returns, more financial information about their nonresident alien spouses will be reported to the IRS. On the most basic level, a Form 8938 is required only if a U.S. tax return is also required. The requirement to file a tax return increases the chances of a requirement to file Form 8938 (and others). Form 8938 does require the disclosure of some jointly owned assets. If you were a nonresident alien, would you want your financial information to be transferred to the IRS?
On December 19, 2018 Dr. Karen Alpert commenting on changes to the 2017 TCJA that would affect Americans abroad noted that:
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#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

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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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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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Green card holders, the "tax treaty tiebreaker" and reporting: Forms 8938, 8621 and 5471

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Before you read this post!! Warning!! Warning!!

Before a “Green Card” holder uses the “Treaty Tiebreaker” provision of a U.S. Tax Treaty, he/she must consider what is the effect of using the “Treaty Tiebreaker” on:

A. His/her immigration status under Title 8 (will he/she risk losing the Green Card?)
B. His/her status under Title 26 (will he expatriate himself under Internal Revenue Code S. 7701(b)) and subject himself to the S. 877A “Exit Tax” provisions?

Now, on to the post.

The “Treaty Tiebreaker” and information reporting …

The Internal Revenue Code imposes on “U.S. Persons” (citizens or “residents”):
1. The requirement to pay U.S. taxes; and
2. The requirement to file U.S.forms.

All “U.S. Persons” (citizens or residents) are aware of the importance of “Information Returns” AKA “Forms” in their lives.
What is a U.S. resident for the purposes of taxation?

This question is answered by analyzing Internal Revenue Code S. 7701(b). If one is NOT a U.S. citizen, a physical connection to the United States (at some time or another) is normally required for one to be a “tax resident” of the United States..

What happens if one is a “tax resident” of more than one country?

The “savings clause” ensures that U.S. citizens are the only people in the world who have no defence to being deemed a tax resident of multiple countries. U.S. citizens (“membership has its privileges”) are ALWAYS tax residents of the United States. U.S. citizens who reside in other nations, may also be “tax residents” of their country of residence.

In some cases, a U.S. “resident” (which includes a Green Card holder) may be deemed to be a “nonresident” pursuant to the terms of a U.S. Tax Treaty. A Green Card holder “may” be able to use a “Treaty Tiebreaker” provision to be treated as a “nonresident”.

Warning!! Warning!!

Before a “Green Card” holder uses the “Treaty Tiebreaker” provision of a U.S. Tax Treaty, he/she must consider what is the effect of using the “Treaty Tiebreaker” on:

A. His/her immigration status under Title 8 (will he/she risk losing the Green Card?)
B. His/her status under Title 26 (will he expatriate himself under Internal Revenue Code S. 7701(b)) and subject himself to the S. 877A “Exit Tax” provisions?

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Is Form 8938 required by "Green Card Holders" who are nonresidents by "treaty tie breaker"? – Any exemption is the result of "IRS grace"

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Summary:


The context: Form 8938 was created by the IRS to meet the reporting requirements mandated by Internal Revenue Code S. 6038D. S. 6038D was mandated by S. 511 of the HIRE Act.
On March 18, 2010 President Obama signed the HIRE Act into law. The HIRE Act had two targets. The first target was the Foreign Financial Institutions that were willing to do business with U.S. citizens. The second target was Americans citizens who attempted to do business with any “non-U.S. bank or other financial institution.
The first target – Foreign Financial Institutions: The HIRE Act introduced Chapter 4 of Subtitle A – AKA FATCA – into the Internal Revenue Code. Pursuant to Chapter 4 Foreign Financial Institutions are threatened with a 30% sanction for failing to “Review, Identify and Report” those who the U.S. claims as “U.S. persons“. The Canadian FATCA lawsuit, launched by the Alliance For The Defence of Canadian Sovereignty, is related to the reporting requirements imposed on the banks.
The second target – American citizens attempting to use Foreign Financial Institutions outside the United States: The second group is composed of “individuals” who are required to disclose information to the IRS. The HIRE Act imposed extraordinary reporting requirements on Americans abroad. The most visible – Form 8938 – is an intrusive form that is aimed at targeting “individuals”. The term “individuals” means every human life form on the planet.  The U.S. based “FATCA Legal Action” lawsuit (which was condemned by Democrats abroad), is a lawsuit that is primarily intended to attack the requirements imposed on individual Americans abroad.
Internal Revenue Code Section 6038D and “Foreign Asset Disclosure”
A previous post discussed the interaction among: the Internal Revenue Code, tax treaty tie breaker rules and whether a Green Card Holder is a U.S. resident for FATCA purposes. This post is to discuss the form 8938 requirement and how it applies to Green Card Holders (resident aliens) who are deemed by treaty to be “nonresidents” under a treaty “Tie Breaker” rule.
The statute – Internal Revenue Code Section 6038D – gives the “Secretary” (meaning IRS) the right to create specific exemptions. “Nonresident aliens” is one group that the IRS is allowed to specifically exempt from the form 8938 requirement. Green Card Holders are statutory “resident aliens” under S. 7701(b) of the Internal Revenue Code. Yet, in some cases “Green Card Holders” can be treated as “nonresident aliens” pursuant to a tax treaty.
What is a “Treaty Tie Breaker” rule?
It’s possible for a person to be treated as a “tax resident” of two countries. In this case a Tax Treaty can be used to determine in which country the person is a “tax resident”. For example Section 2 of Article IV of the Canada U.S. Tax Treaty says:

2. Where by reason of the provisions of paragraph 1 an individual is a resident of both Contracting States, then his status shall be determined as follows:
(a) he shall be deemed to be a resident of the Contracting State in which he has a permanent home available to him; if he has a permanent home available to him in both States or in neither State, he shall be deemed to be a resident of the Contracting State with which his personal and economic relations are closer (centre of vital interests);
(b) if the Contracting State in which he has his centre of vital interests cannot be determined, he shall be deemed to be a resident of the Contracting State in which he has an habitual abode;
(c) if he has an habitual abode in both States or in neither State, he shall be deemed to be a resident of the Contracting State of which he is a citizen; and
(d) if he is a citizen of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement.

(Note that the “Treaty Tie Breaker” rules are available to “Green Card” holders. The treaty “savings clause” prevents U.S. citizens from being treated solely as a resident of Canada.)
So, what do the IRS regulations say?
On December 29, 2014 the IRS removed the temporary regulations (which are described here) and issued final Form 8938 reporting rules. The final regulations, which took effect on December 29, 2014 (making them applicable for years 2014 and onward), make it clear that Green Card Holders, who pursuant to a treaty tie-breaker provision, are treated as “nonresidents” (nonresident aliens) are NOT required to file Form 8938.
Specifically, the IRS confirms that:

1. Dual resident taxpayers
A comment recommended an exemption from the section 6038D reporting requirements be included for an individual who is a dual resident taxpayer and who, pursuant to a provision of a treaty that provides for resolution of conflicting claims of residence by the United States and the treaty partner, claims to be treated as a resident of the treaty partner. In such a case, a dual resident taxpayer may claim a treaty benefit as a resident of the treaty partner and will be taxed as a nonresident for U.S. tax purposes for the taxable year (or portion of the taxable year) that the individual is treated as a nonresident. The final rule adopts this recommendation for a dual resident taxpayer who determines his or her U.S. tax liability as if he or she were a nonresident alien and claims a treaty benefit as a nonresident of the United States as provided in § 301.7701(b)–7 by timely filing a Form 1040NR, “Nonresident Alien Income Tax Return,” (or such other appropriate form under that section) and attaching a Form 8833, “Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b).” The Treasury Department and the IRS have concluded that reporting under section 6038D is closely associated with the determination of an individual’s income tax liability. Because the taxpayer’s filing of a Form 8833 with his or her Form 1040NR (or other appropriate form) will permit the IRS to identify individuals in this category and take follow-up tax enforcement actions when considered appropriate, reporting on Form 8938, “Statement of Specified Foreign Financial Assets,” is not essential to effective IRS tax enforcement efforts relating to this category of U.S. residents.

Why this makes sense …
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