Expat Tax FAQ – Summary of Common Frequently Asked Questions
- 1 U.S. Expat Tax FAQ
- 2 Taxes are Complicated
- 3 Worldwide Income & CBT
- 4 U.S. Citizen vs. U.S. Person
- 5 Accidental American
- 6 FBAR – Each Account Must Have more than $10,000
- 7 FBAR – Only For Bank Accounts
- 8 FATCA – Same +$100,000 Threshold for Everyone
- 9 Repeal of FATCA = No More Foreign Account Reporting
- 10 The IRS Cannot Get Me Outside of The United States
- 11 The Penalties are Not That Bad
- 11.1 The following is a summary of penalties as published by the IRS:
- 11.2 FBAR
- 11.3 Form 8938
- 11.4 Form 3520
- 11.5 Form 3520-A
- 11.6 Form 5471
- 11.7 Form 5472
- 11.8 Form 926
- 11.9 Form 8865
- 11.10 Underpayment & Fraud Penalties
- 11.11 Even Criminal Charges are Possible…
- 11.12 Get Into Compliance with IRS Offshore Disclosure
U.S. Expat Tax FAQ
Millions of US Expats live abroad in hundreds of different countries — and each country’s tax laws are very different, depending on which country the expat resides.
For example, if the U.S. Expat resides in Singapore, then his interest income is probably not taxed by the Singaporean government – and, if he is working in Singapore, he is required to contribute to his CPF.
If the U.S. Expat resides in Thailand, then her EPF (Provident Fund) may be distributed tax-free when the time for receiving the retirement occurs.
If a U.S. Expat resides in Australia then their superannuation will grow tax-free.
And, if the person resides in Taiwan or China, then they have to be very careful of current currency restrictions for out-of-country transfers, especially gifts to U.S. Persons.
Taxes are Complicated
Which leads me to my point – why do any of these individuals care less about the U.S. tax system? They are Expats, which means they reside outside of the United States, and their focus (rightfully so) should be complying with the tax law of the country(s) they reside.
Unfortunately, unless a person has properly expatriated, renounced their US citizenship and/or relinquished their green card (assuming they don’t otherwise meet substantial presence test) they are still subject to US tax.
While US tax law may seem scary (and it can be), oftentimes it is not. What has most likely occurred is that the U.S. Expat has read fear mongering (read: garbage) tax compliance websites that use words such as “jail” and “Crime” free-flowingly, and entirely out-of-context.
At Golding & Golding, we represented hundreds of U.S. Expat worldwide in a diverse range of simple-to-complex tax matters. We represent clients in more than 50 different countries, and therefore have developed a pretty solid understanding of many of the misconceptions U.S. Expats around the world have regarding the US tax system.
Worldwide Income & CBT
United States is Citizen-Based Taxation (CBT) system that follows worldwide income concepts. Boiled down to its barest, all that means that if you qualify as a US person (not necessarily a US citizen, see below) you are subject to US tax.
That does not mean you will necessarily have any tax liability, or that you even meet the threshold requirements for filing a tax return. But, it does mean that you have to at least be cognizant of the rules, and how they may impact you now and/or in the future.
U.S. Citizen vs. U.S. Person
A U.S.Citizen is usually either a person born in the United States, a person born outside the United States but otherwise meets the qualifications of a U.S. citizen (your mom is a US citizen but she resides in Costa Rica), or a person who has become naturalized.
Alternatively, a US person is pretty much anybody who meets the test of being a “US person” (sorry for the redundancy), here are the most common categories of “U.S. Persons.”
- U.S. Citizen
- Legal Permanent Resident
- Person who meets the Substantial Presence Test
- Certain corporations, partnerships, ventures, etc.
This is a very important concept to understand. That is because when a person believes that only U.S. citizens are subject to US tax, they could be in for a rude awakening down the line when the IRS wants to lien, Levy, or seize their domestic or international property due to the failure to file taxes.
*If you are a green card holder/legal permanent resident and considered a long-term permanent resident, merely moving outside of the United States and returning to the U.S. does not negate your requirement to file a tax return – you still need to expatriate properly and file a form 8854.
An Accidental American is a general term for individuals who were unaware that they were even U.S. citizens. Typically, the common example we come across is an individual who has lived their entire life outside of the United States, but because their parent(s) was a U.S. citizen, they are considered US citizens.
With the implementation of FATCA, this has become a very touchy subject for many individuals as it is unfairly burdening their daily life as they used to know it. This is mainly because hundreds of thousands of foreign financial institutions have agreed to comply with FATCA, and are finding it easier to simply close the accounts of US citizens versus the tenuous reporting they have to undergo when they financial institution houses U.S. account holders.
To that end, the IRS has a program called Streamlined Foreign Offshore Procedures, in which a person (if they qualify as non-willful and meet the Foreign Resident requirement) can waive all penalties, and legally enter into the US tax system without fear of a FBAR penalty etc.
Still, the individual may be subject to taxes depending on whether they qualify foreign earned income exclusion or foreign tax credits.
We highly recommend speaking with an experienced offshore voluntary disclosure attorney before making any affirmative representation to the IRS.
FBAR – Each Account Must Have more than $10,000
Many U.S. Expats believe that they only have to file a FBAR if they have foreign accounts that exceed $10,000. That is incorrect. Rather, any US person must file an annual FBAR statement when on any given day the annual aggregate total of their foreign accounts exceeds $10,000. It other words, it does not matter if it is one account with $300,000, or 10 accounts $2,000 each in them.
Remember, it is “aggregate total”
FBAR – Only For Bank Accounts
The FBAR is much more than just bank account reporting. It includes essentially any financial account that has an account number. This can include an investment account, foreign mutual fund, foreign pension, Provident fund, superannuation, life insurance policy, stock account, securities account, etc. While exceptions and exclusions may apply, if you are going to report, it generally benefits you to err on the side of caution and if you are in doubt, you should report the account.
FATCA – Same +$100,000 Threshold for Everyone
Whether or not a person has to file a FATCA Form 8938 depends on various different factors such as the type specified foreign financial assets the individual maintains, as well as status of the filer — and where they reside.
The +$100,000 threshold requirement is limited to individuals who reside in the United States and file married filing jointly. Noting, if a couple is filing married filing jointly and have less than $100,000 on the last day of the year in specified foreign financial assets — but have more than $150,000 on any other day of the year, they still have to file form 8938.
Repeal of FATCA = No More Foreign Account Reporting
This would be great if it was true, but it is not. Beyond filing FATCA Form 8938, when a person has foreign accounts, foreign investments, foreign real estate, foreign business ownership, foreign mutual funds, etc. there are a whole host of different forms the taxpayer may need to file. The reporting requirements of these forms have been the law for many years and they all predate FATCA (2010 drafted, 2014 enforcement).
While repealing FATCA may make life a lot easier for US Expats and other individuals residing outside of the United States, it does not reduce or limit the reporting requirement otherwise required by these individuals for all of their other income, assets and accounts.
The IRS Cannot Get Me Outside of The United States
This is also untrue. In fact, recently there was a case in which the IRS used Canada to recover more than $100,000 of penalties against a U.S. person who failed to file a form 5471 (multiple violations). The United States has entered into tax treaty agreements with over 75 countries (income tax and estate tax) and signed more than 100 bilateral intergovernmental agreements (IGA) for reciprocity of reporting under FATCA.
In accordance with the individual terms of each agreement, the IRS will have a means to try and snatch your assets, income, or accounts abroad. Moreover, the IRS now has the right to either revoke or denied a US passport when a person always more than $50,000 in debt to the IRS.
For examples of how easy it is for an individual who is not file tax to owe the IRS more than $50,000 (since without filing returns, the person has not claimed either the foreign earned income exclusion or foreign tax credit) and click here to be taken to a different article.
The Penalties are Not That Bad
The reason why compliance is so important, is because the IRS has taken to issuing gargantuan penalties against individuals whose issues seem relatively minor (Read: is the world going to explode because Marty didn’t report his foreign account?)
When it comes to penalties, the IRS has extreme leeway. On the one hand, if a person can show reasonable cause then often times penalties will be waived. On the other hand, the IRS has the right to issue penalties which can reach 100% value of the foreign account in a multiyear audits scenario (noting, that up until recently the IRS issued 300% penalties for unreported/false FBARs, when a person was found to be willful).
The following is a summary of penalties as published by the IRS:
A penalty for failing to file FBARs. United States citizens, residents and certain other persons must annually report their direct or indirect financial interest in, or signature authority (or other authority that is comparable to signature authority) over, a financial account that is maintained with a financial institution located in a foreign country if, for any calendar year, the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the year. The civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign financial account per violation. See 31 U.S.C. § 5321(a)(5). Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation.
Beginning with the 2011 tax year, a penalty for failing to file Form 8938 reporting the taxpayer’s interest in certain foreign financial assets, including financial accounts, certain foreign securities, and interests in foreign entities, as required by IRC § 6038D. The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.
A penalty for failing to file Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. Taxpayers must also report various transactions involving foreign trusts, including creation of a foreign trust by a United States person, transfers of property from a United States person to a foreign trust and receipt of distributions from foreign trusts under IRC § 6048. This return also reports the receipt of gifts from foreign entities under IRC § 6039F. The penalty for failing to file each one of these information returns, or for filing an incomplete return, is the greater of $10,000 or 35 percent of the gross reportable amount, except for returns reporting gifts, where the penalty is five percent of the gift per month, up to a maximum penalty of 25 percent of the gift.
A penalty for failing to file Form 3520-A, Information Return of Foreign Trust With a U.S. Owner. Taxpayers must also report ownership interests in foreign trusts, by United States persons with various interests in and powers over those trusts under IRC § 6048(b). The penalty for failing to file each one of these information returns or for filing an incomplete return, is the greater of $10,000 or 5 percent of the gross value of trust assets determined to be owned by the United States person.
A penalty for failing to file Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations. Certain United States persons who are officers, directors or shareholders in certain foreign corporations (including International Business Corporations) are required to report information under IRC §§ 6035, 6038 and 6046. The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.
A penalty for failing to file Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. Taxpayers may be required to report transactions between a 25 percent foreign-owned domestic corporation or a foreign corporation engaged in a trade or business in the United States and a related party as required by IRC §§ 6038A and 6038C. The penalty for failing to file each one of these information returns, or to keep certain records regarding reportable transactions, is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency.
A penalty for failing to file Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation. Taxpayers are required to report transfers of property to foreign corporations and other information under IRC § 6038B. The penalty for failing to file each one of these information returns is ten percent of the value of the property transferred, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was intentional.
A penalty for failing to file Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships. United States persons with certain interests in foreign partnerships use this form to report interests in and transactions of the foreign partnerships, transfers of property to the foreign partnerships, and acquisitions, dispositions and changes in foreign partnership interests under IRC §§ 6038, 6038B, and 6046A. Penalties include $10,000 for failure to file each return, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return, and ten percent of the value of any transferred property that is not reported, subject to a $100,000 limit.
Underpayment & Fraud Penalties
Fraud penalties imposed under IRC §§ 6651(f) or 6663. Where an underpayment of tax, or a failure to file a tax return, is due to fraud, the taxpayer is liable for penalties that, although calculated differently, essentially amount to 75 percent of the unpaid tax.
A penalty for failing to file a tax return imposed under IRC § 6651(a)(1). Generally, taxpayers are required to file income tax returns. If a taxpayer fails to do so, a penalty of 5 percent of the balance due, plus an additional 5 percent for each month or fraction thereof during which the failure continues may be imposed. The penalty shall not exceed 25 percent.
A penalty for failing to pay the amount of tax shown on the return under IRC § 6651(a)(2). If a taxpayer fails to pay the amount of tax shown on the return, he or she may be liable for a penalty of .5 percent of the amount of tax shown on the return, plus an additional .5 percent for each additional month or fraction thereof that the amount remains unpaid, not exceeding 25 percent.
An accuracy-related penalty on underpayments imposed under IRC § 6662. Depending upon which component of the accuracy-related penalty is applicable, a taxpayer may be liable for a 20 percent or 40 percent penalty.
Even Criminal Charges are Possible…
Possible criminal charges related to tax matters include tax evasion (IRC § 7201), filing a false return (IRC § 7206(1)) and failure to file an income tax return (IRC § 7203). Willfully failing to file an FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C. § 5322. Additional possible criminal charges include conspiracy to defraud the government with respect to claims (18 U.S.C. § 286) and conspiracy to commit offense or to defraud the United States (18 U.S.C. § 371).
A person convicted of tax evasion is subject to a prison term of up to five years and a fine of up to $250,000. Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000. A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000. A person convicted of conspiracy to defraud the government with respect to claims is subject to a prison term of up to not more than 10 years or a fine of up to $250,000. A person convicted of conspiracy to commit offense or to defraud the United States is subject to a prison term of not more than five years and a fine of up to $250,000.