- 1 Expat Tax Lawyers
- 2 Before FATCA
- 3 EXPATS & FATCA
- 4 Why are U.S. Expats Required to File Tax Returns
- 4.1 Why are U.S. Expats Required to Report Foreign Accounts?
- 4.2 FATCA is being interpreted unfairly and impacting U.S. Expats
- 4.3 What if the U.S. Expat Does not Disclose the Information
- 4.4 What forms are U.S. Expats required to file?
- 4.5 FBAR (FInCEN 114)
- 4.6 IRS Form 8938
- 4.7 Schedule B
- 4.8 IRS Form 3520
- 4.9 What can the IRS do to a U.S. Expat who lives in a Foreign Country?
- 4.10 But I haven’t filed Tax Returns of Filed FBARs in many years?
- 5 IRS Voluntary Disclosure of Offshore Accounts
- 6 When Do I Need to Use Voluntary Disclosure?
- 7 Golding & Golding – Offshore Disclosure
- 8 The Devil is in the Details…
- 9 What if You Never Report the Money?
- 10 Getting into Compliance
Worldwide Expat Attorneys: The nationally recognized international tax lawyers of Golding & Golding represent U.S. Citizens, Expats, Foreign Nationals, Legal Permanent Residents (“Green Card Holders”), Businesses, Trusts and Estates worldwide.
Expat Tax Lawyers
Ever since the international tax law, FATCA (Foreign Account Tax Compliance Act) was introduced, foreign tax law compliance has become much more complicated. Under the new stricter compliance requirements, Expats are finding themselves under the watchful eye of the IRS and Department of Treasury. The failure to comply may result in having their entire foreign account balance forfeited, as well as the loss of their freedom to travel.
Retaining an Expat Tax Lawyer to resolve IRS Tax issues can help get you, your family, and your business back into IRS Tax compliance.
Prior to the introduction of FATCA, international tax law compliance was relatively easy, if non-existent. U.S. citizens could simply pack up and move overseas without much hassle and/or Legal Permanent Residents could just relinquish their green cards and return home. Moreover, the “Expatriation Tax” was much simpler to circumvent – with a much less strict definition of covered expatriates.
Then came 9/11 followed by stricter international regime and subsequently, FATCA. Even beyond FATCA , there is a new international tax law brewing which is called GATCA/CRS (Global Account Tax Compliance Act/Common Reporting Standard). GATCA/CRS is commonly referred to as the Global FATCA.
Worse yet, the U.S. is threatening individuals with more than $50,000 in tax debt of having their passport revoked – all of which has made the transition to Expat a lot more murky and dangerous.
EXPATS & FATCA
When it comes to U.S. Expats, the biggest change in international law is in the form of FATCA (Foreign Account Tax Compliance Act). Under FATCA, U.S. Taxpayers (Expats, US citizens, Legal Permanent Residents, and Foreign Nationals subject to US tax) are required to annually report their overseas and foreign accounts to the Internal Revenue Service and Department of Treasury; the failure to do so can be very costly, with FBAR penalties alone reaching 100% of the account value.
Why are U.S. Expats Required to File Tax Returns
The requirement to file U.S. tax returns (unless a person is otherwise exempted or excluded) is a requirement that comes along with being a US citizen and/or legal permanent resident. Under U.S. tax law, the United States taxes U.S. taxpayers on their worldwide income. That means that even if you are a U.S. Expat and earn the money outside of the United States (Whether you are a resident of the U.S or not), you are required to file a tax return, report the income and usually pay tax on the money (Unless the Foreign Tax Credit or Foreign Earned Income Exclusion applies).
Why are U.S. Expats Required to Report Foreign Accounts?
While people who oppose FATCA have many different reasons as to why FATCA is unfair, for the most part the law itself is not unfair – the real problem is how foreign financial institutions and other foreign banks are interpreting and applying the law.
One of the main reasons why US expats are required to disclose their foreign accounts is so that the United States can track the value of their foreign accounts for estate planning/estate tax and gift tax purposes. For example, in the United States the gift and estate tax exemption is $5.45 million per person. For purposes of this example, let’s assume that the person is single. With this exemption it means that if the person was to die in 2016 (absent complicated gift tax and claw-back rule) and he was worth $5 million, then there would be no estate taxes due.
On the other hand, let’s is the same facts only the person is worth $10 million. Now, that person’s estate may have to pay estate tax at the rate of 40% for every dollar over $5.43 Million. In other words, the state would have to pay roughly $1.85 million estate tax. Now, if the person who is a US citizen but is also US expat lives overseas and has their money in a foreign account with a foreign beneficiary that the IRS cannot trace or locate, the IRS cannot collect that nearly $2 million in tax money. As a result, by requiring all US taxpayers to report and disclose their foreign offshore accounts, the IRS can track each person’s value. (There is a specific rule for long-term U.S. Residents who relocate overseas and then gift money back to the United States)
FATCA is being interpreted unfairly and impacting U.S. Expats
Although the purpose behind FATCA may be legitimate, the law itself is being interpreted poorly by foreign countries which is having a severely negative impact on US Expats. Many foreign countries do not want to deal with a headache of reporting US taxpayer accounts to the United States and instead are either refusing to open new accounts or actually closing or downgrading US expat accounts.
**If you are US expat residing overseas and are unable to open a bank account this can be a very difficult if not impossible situation.
While this is not the intent of FATCA, it is the direct result of poor planning on behalf of the United States.
What if the U.S. Expat Does not Disclose the Information
If a U.S. Expat fails to disclose their foreign account information to the United States, then they may suffer significant fines and penalties if not forfeiture of their money. The penalties involved with the failure to disclose international and foreign money is archaic and completely unfair to the taxpayer.
What forms are U.S. Expats required to file?
The number of forms that are required to be filed will depend on the amount of offshore assets, and whether the taxpayer is married filing jointly or not. Here’s a brief list of some of the more common forms that are required to be filed by U.S. Taxpayers, including U.S. Expats:
FBAR (FInCEN 114)
This form is required to be filed with the Department of Treasury if the total aggregate total of your overseas accounts exceed $10,000 in them or more on any given day (if you have 11 accounts with $100 each of them you still have to report all the accounts). This form is not filed with your tax return but rather is filed directly with the Department of Treasury and is now required to be filed online. This form cannot be filed late otherwise it is considered a silent disclosure and could lead to potential fines and even criminal penalties.
IRS Form 8938
This form is filed with your tax returns, and the thresholds for filing them depends on whether you are single or married, and if you reside in the U.S. or overseas. The minimum threshold is that if you have $50,000 or more in foreign accounts on the last day of the year or $75,000 in the account at any time during the year then you are required to file this form.
Schedule B is generally filed when you earn a certain amount of dividends or interest income during the year (U.S. or Foreign Interest/Dividend income). It is important to note that if you have any interest in a foreign account then you are still required to file the form even if you did not earn any interest or dividends another job.
***If you filed a Schedule B but did not disclose your foreign accounts in accordance with question 7, you should speak with an international tax attorney to discuss the implications.
IRS Form 3520
This form is required to be filed depending on whether you have an overseas trust or receive gifts that meet or exceed the threshold amount.
What can the IRS do to a U.S. Expat who lives in a Foreign Country?
If you are a U.S. Expat who lives in a foreign country and the IRS finds that you were required to, but did not file you U.S. tax returns, they will seek to put a lien or levy – or worse – against both your United States and foreign bank accounts and property. The reason they will be able to do this is because many countries have entered into intergovernmental agreements (IGAs) with the United States, which are reciprocal arrangements by the countries to report and take any means necessary in order to ensure all taxes are paid.
Further, in countries that do not have an intergovernmental agreement (IGA) with the IRS, if your bank account in this country is either a US bank, a bank that has US branches, or a foreign bank that uses a third-party US-bank such as HSBC to transfer funds to different countries, U.S. Expats will most likely get caught in the web as well.
But I haven’t filed Tax Returns of Filed FBARs in many years?
If you have not filed tax returns or filed FBARs, the best strategy is usually to enter Offshore Voluntary Disclosure:
IRS Voluntary Disclosure of Offshore Accounts
Offshore Voluntary Disclosure Tax law is very complex. There are many aspects that go into any particular tax calculation, including the legal status, marital status, business status and residence status of the taxpayer.
When Do I Need to Use Voluntary Disclosure?
Voluntary Disclosure is for individuals, estates, and businesses who are out of compliance with the IRS and the Department of Treasury. What does that mean? It means that if you are required to file a U.S. tax return and you don’t do so timely, then you are out of compliance.
If the IRS discovers that you are out of compliance, you may become subject to extensive fines and penalties – ranging from a warning letter all the way up to tax liens, tax levies, seizures, and criminal investigations. To combat this, you can take the proactive approach and submit to Voluntary Disclosure.
Golding & Golding – Offshore Disclosure
At Golding & Golding, we limit our entire practice to offshore disclosure (IRS Voluntary Disclosure of Foreign and U.S. Assets). The term offshore disclosure is a bit of a misnomer, because the term “offshore” generally connotes visions of hiding money in secret places such as the Cayman Islands, Bahamas, Malta, or any other well-known tax haven jurisdiction – but that is not the case.
In fact, any money that is outside of the United States is considered to be offshore; the term offshore is not a bad word. In other words, merely because a person has money offshore (a.k.a. overseas or in a foreign country) does not mean that money is the result of ill-gotten gains or that the money is being “hidden.” It just means it is not in the United States. Many of our clients have assets and bank accounts in their homeland countries and these are considered offshore assets and offshore bank accounts.
The Devil is in the Details…
If you do have money offshore, then it is very important to ensure that the money has been properly reported to the U.S. government. In addition, it is also very important to ensure that if you are earning any foreign income from that offshore money, that the earnings are being reported on your U.S. tax return.
It does not matter whether your money is in a country that does not tax a particular category of income (for example, many Asian countries do not tax passive income). It also does not matter if you are a dual citizen and/or if that money has already been taxed in the foreign country.
Rather, the default position is that if you are required to file a U.S. tax return and you meet the minimum threshold requirements for filing a U.S. tax return, then you have to include all of your foreign income. If you already paid foreign tax on the income, you may qualify for a Foreign Tax Credit. In addition, if the income is earned income – as opposed to passive income – and you meet either the Bona-Fide Resident Test or Physical-Presence Test, then you may qualify for an exclusion of that income; nevertheless, the money must be included on your tax return.
What if You Never Report the Money?
If you are in the unfortunate position of having foreign money or specified foreign assets that should have been reported to the U.S. government, but which you have not reported — then you are in a bit of a predicament, which you will need to resolve before it is too late.
As we have indicated numerous times on our website, there are very unscrupulous CPAs, Attorneys, Accountants, and Tax Representatives who would like nothing more than to get you to part with all of your money by scaring you into believing you are automatically going to be arrested, jailed, or deported because you have unreported money. While that is most likely not the case (depending on the facts and circumstances of your specific situation), you may be subject to extremely high fines and penalties.
Moreover, if you knowingly or willfully hid your foreign accounts, foreign money, and offshore assets overseas, then you may become subject to even higher fines and penalties…as well as a criminal investigation by the special agents of the IRS and/or DOJ (Department of Justice).
Getting into Compliance
There are five main methods people/businesses use to get into compliance. Four of these methods are perfectly legitimate as long as you meet the requirements for the particular mechanism of disclosure. The fifth alternative, which is called a Quiet Disclosure a.k.a. Silent Disclosure a.k.a. Soft Disclosure, is ill-advised as it is illegal and very well may result in criminal prosecution.
We are going to provide a brief summary of each program below. We have also included links to the specific programs. If you are interested, we have also prepared very popular “FAQs from the Trenches” for FBAR, OVDP and Streamlined Disclosure reporting. Unlikes the technical jargon of the IRS FAQs, our FAQs are based on the hundreds of different types of issues we have handled over the many years that we have been practicing international tax law and offshore disclosure in particular.
After reading this webpage, we hope you develop a basic understanding of each offshore disclosure alternative and how it may benefit you to get into compliance. We do not recommend attempting to disclose the information yourself as you may become subject to an IRS investigation insofar as you will have to answer questions directly to the IRS, which you can avoid with an attorney representative.
If you retain an attorney, then you will get the benefit of the attorney-client privilege which provides confidentiality between you and your representative. With a CPA, there is a relatively small privilege which does provide some comfort, but the privilege is nowhere near as strong as the confidentiality privilege you enjoy with an attorney.
Since you will be dealing with the Internal Revenue Service and they are not known to play nice or fair – it is in your best interest to obtain an experienced Offshore Disclosure Attorney.