- 1 Common Mistakes by ‘Expert’ Expat Tax Prep Services
- 2 Poorly Written Streamlined Submissions
- 3 Unpersuasive Reasonable Cause Statements
- 4 Excluding Pension from FBAR and Form 8938
- 5 Misunderstanding PFIC and 8621 Filing
- 6 Treating Treaty and Non-Treaty Pensions the Same
- 7 Current Year vs Prior Year Non-Compliance
- 8 Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)
- 9 Golding & Golding: About Our International Tax Law Firm
Common Mistakes by ‘Expert’ Expat Tax Prep Services
Thanks to the internet, any expat tax preparation service can claim to be an expert in preparing expat taxes — but unfortunately, oftentimes this is little more than some crafty marketing. Several times throughout the year our team is contacted by Expat taxpayers who paid a supposed ‘expert’ expat tax preparation company to prepare their tax returns, FBAR, and/or other international information reporting forms – only to learn that their tax preparation service did a sloppy job. This has become a much bigger issue ever since the introduction of Streamlined Procedures, Delinquency Procedures, and Reasonable Cause — which require several years of back tax filings. Here are five important mistakes to watch out for:
Poorly Written Streamlined Submissions
When a person is out of compliance for not timely disclosing their overseas assets, accounts, income, and investments, they may qualify for the Streamlined Filing Compliance Procedures. Due to the complexity involved in preparing a streamlined submission, these submissions should be handled by a tax lawyer (and preferably a Board-Certified Specialist). Oftentimes, when the IRS wants to follow up on a Streamlined Submission for audit, examination, and/or another issue, we find that the submission was not prepared properly and the certification statement was just slapped together instead of being carefully drafted to align with the specific applicant’s history and background.
Unpersuasive Reasonable Cause Statements
Oftentimes, if a Taxpayer has either been penalized or may be penalized, they can avoid or abate the penalty by showing that they acted with reasonable cause and not willful neglect. There is no specific form used to submit a reasonable cause statement; rather, it is a homemade submission based on each individual’s specific facts and circumstances. Since there is no form for an RC statement, we have found that many of the expat tax services try to use ‘samples’ they find posted online – and these samples are oftentimes incomplete or outdated.
Excluding Pension from FBAR and Form 8938
When a person has a foreign pension, such as a Superannuation, CPF, or SIPP it is reportable on the FBAR and Form 8938. While some US pensions and retirement plans with foreign accounts and assets located within them are excluded for FBAR and FATCA purposes, foreign pensions are not excluded. The IRS clarified this in the updated 2022 Publication 5569.
Misunderstanding PFIC and 8621 Filing
The term PFIC refers to Passive Foreign Investment Companies and includes investments such as foreign mutual funds and ETFs. While Form 8621 can be manageable in years where there are no Excess Distributions (ED) when there are EDs — the reporting is much more complex. Many times, we find that Expat Tax Service seek to improperly avoid 8621 reporting in years where there are EDs and come up with a way to try to justify the non-reporting, when Form 8621 was required – and can lead to potential audit issues down the line since the failure to file Form 8621 leaves the tax return (when it would otherwise be closed).
Treating Treaty and Non-Treaty Pensions the Same
When the United States has entered into a treaty with a foreign country, it can impact how pension income is reported – especially when there have not been any distributions and it is still in the growth/accumulation phase. But, if there is no tax treaty with the foreign country, then the rules are different and treaty concepts do not apply. Some expat tax services treaty the tax treaty pensions/retirement the same as the treaty country pension – which can have serious negative consequences for the Expat.
Current Year vs Prior Year Non-Compliance
Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.
Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)
In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to streamlined procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead of the Streamlined Procedures. But, if a willful Taxpayer submits an intentionally false narrative under the streamlined procedures (and gets caught), they may become subject to significant fines and penalties.
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure.
Contact our firm today for assistance.