Expat Tax Guide (2018) – Tax Help for U.S. Citizens Living Abroad
At Golding & Golding, we represent a diverse range of U.S. Expatriates, “Expats” who have relocated to more than 65 countries worldwide with getting into (or back into) U.S. and foreign tax compliance. We have prepared an Expat Tax Guide to assist Expats in dealing with the IRS,
The complexities of the United States tax code catches many people off-guard — especially those who never had any intent to continue subjecting themselves to U.S. tax after relocating overseas.
Unfortunately, the IRS has a hard time letting go…
Expat Tax Guide
Conversely, the U.S. Tax Code also snags individuals and businesses who operate wholly outside of the United States, but due to the fact that they are technically a U.S. Citizen, and/or Current of Former Legal Permanent Resident (aka “Long-Term Residents”), or Foreign National Subject to US tax through the Substantial Presence Test (SPT) they are still required to report and pay tax.
We have provided the following summary below of general expat tax law questions we have received from clients worldwide.
Do U.S. Expats Still Get Taxed by the U.S.?
Yes. Under U.S. Tax Law, if a person is a U.S. Citizen, Legal Permanent Resident, or Foreign National Subject to tax under the Substantial Presence Test (SPT) the person must still file taxes on their worldwide income — no matter where they live. In fact, depending on whether you are classified as a “Long-Term Resident” you may also be required to pay U.S. Tax after you relinquish your Green-Card and/or pay an “Exit Tax.”
Accidental Americans – Born in the United States and Live Overseas
An Accidental American or Accidental Expat is an unfortunate situation from a tax perspective.
If you were born in the United States or born outside of the United States to U.S. parents, chances are that unless a specific exception applies, you will be considered a US citizen. As such, you still have a requirement to file an annual tax return (if you meet the threshold requirements) and report your worldwide Income – even if you have lived overseas your entire life.
Accidental Americans – Did Not Relinquish your Green Card
This is probably the most common scenario we deal with often: You received your green card and became a legal permanent resident in the United States. You love traveling around the world and it is just too much of an annoyance to relinquish the green card and re-apply for visas each time you travel (c’mon, you know who you are). Therefore, you have kept your green card status even though you have no intent of remaining in the United States as required by US law.
The Bad News: Since you are receiving the benefits of having a green card, it will be very difficult for you argue that you should not be subject to US tax just because you live overseas. Technically, if you live overseas then you should have had to relinquish the green card since presumably you have not met the annual residence requirements necessary to maintain the green card.
Accidental Americans – Substantial Presence Test
This specific “exception” really is unfair, but if you qualify as a US taxpayer under the Substantial Presence Test (SPT), then at least for the period of time that you qualified for the substantial presence status you must file US taxes with a 1040 and not a 1040NR – which means significantly more reporting and disclosure requirements.
For example, if you were in the United States on an H-1B, L, E, or other work visa and met the substantial presence test of being in the United States for 183 days during the current year or using a specific equation and looking back three years, then for the time-period you qualified under the SPT, you must pay tax on your worldwide income just as you were a US Citizen or Legal Permanent Resident.
What is the Substantial Presence Test (SPT)?
As a non-US citizen and non-US green card holder, you are generally only required to pay tax on your “US Effectively Connected Income” (money you earn while working in the United States). However, if you qualify for the Substantial Presence Test (SPT), then the IRS will tax you on your WORLDWIDE income.
IRS Substantial Presence Test generally means that you were present in the United States for at least 30 days in the current year and a minimum total of 183 days over 3 years, using the following equation:
- 1 day = 1 day in the current year
- 1 day = 1/3 day in the prior year
- 1 day = 1/6 day two years prior
Example A: If you were here 100 days in 2016, 30 days in 2015, and 120 days in 2014, the calculation is as follows:
- 2016 = 100 days
- 2015 = 30 days/3= 10 days
- 2014 = 120 days/6 = 20 days
- Total = 130 days, so you would not qualify under the substantial presence test and NOT be subject to U.S. Income tax on your worldwide income (and you will only pay tax on money earned while working in the US).
Example B: If you were here 180 days in 2016, 180 days in 2015, and 180 days in 2014, the calculation is as follows:
- 2016 = 180 days
- 2015 = 180 days/3= 60 days
- 2014 = 180 days/6 = 30 days
- Total = 270 days, so you would qualify under the substantial presence test and will be subject to U.S. Income tax on your worldwide income, unless another exception applies.
What is the Foreign Earned Income Inclusion?
The Foreign Earned Income Exclusion (FEIE) is when the US government permits a person subject to U.S. tax, who resides overseas and earns money overseas through employment or self-employment to exclude the income from their US tax return.
It does not mean a person is not required to include the income on their tax return, but rather they can file a form 2555 along with their tax return in order to eliminate upwards of $100,000 (with a COLA adjustment for inflation) of income from their tax return.
*There are two tests a person can use to qualify for (FEIE) – BFT or PPT
What is the Physical Presence Test for FEIE?
In order to qualify for FEIE a person has to meet either the Physical Presence Test (PPT) or the Bona Fide Resident Test (BFR). Under the Physical Presence Test (Easier Test), a person must reside overseas outside of the United States (it does not have to be in one country) for at least 330-days.
The 330-days does not need to be January through December. For example, if you lived outside of the country for 330-days from March through March, you can apply the PPT exclusion accordingly to the specific 330-day time period.
What is the Bona-Fide Resident Test for FEIE?
The Bona-Fide Resident Test is the second test and much more difficult to meet. That is because unlike physical presence test, which is essentially a “counting days” test, with the Bona-Fide Resident Test, a person must show that they are actually a bona-fide resident of a foreign country(s).
In order to meet BFR, a person must show that he or she has become integrated into the foreign country’s society (for example: obtaining a local driver’s license, join the local chamber or other organizations, shop at local stores, etc.)
Is an Overseas Government Contractor a Bona-Fide Resident?
Generally, no. In fact, a decision was issued in which the IRS essentially said it is nearly impossible for a government contractor to ever meet the bona fide residence test.
Usually, because the government contractor is not only working for a U.S. company but is normally living in housing provided by the company for US government and/or shopping at government-sponsored locations.
*The reason why government contractors normally apply for BFR is because they do not meet the 330-day test, and not because they actually meet the BFR classification requirements.
If I work for the U.S. Government, do I Qualify for FEIE?
No, it is expressly written into the law that if a person is employed overseas by the US government, they do not qualify for the Foreign Earned Income Exclusion.
If I am Self-Employed, can I Qualify for FEIE?
Yes, the mere fact that somebody is self-employed does not automatically disqualify an individual from claiming the foreign earned income exclusion.
Do Foreign Housing payments Qualify for FEIE?
Yes, but the US government has decided to make it unnecessarily difficult to calculate. There is a certain equation that is used and to keep the numbers simple: the first $15,000 (give or take) of foreign housing cannot be excluded, but then the next 15,000 or so of foreign housing can be excluded under the FEIE. Thereafter, the exclusion phases out
*In addition, depending on the type of area in person lives in and how expensive it is to live, there may be a higher exclusion about permitted such as those who work and live in expensive locations, such as London and Tokyo.
Do I just leave out the Income on my Tax Return?
No, the IRS is not in the business of making your life easy. Rather, in addition to filing a tax return you will have to file a rather complicated form called a Form 2555. It is not that the form is necessarily difficult, but rather it is important that you understand which test to qualify for (PPT or BFR) before attempting the form.
Foreign Tax Credit (FTC) – Individual or Business
The Foreign Tax Credit (FTC) is different than the Foreign Earned Income Exclusion. The FTC is used when a person or business has already paid foreign tax on earned income, passive income or corporate income. Essentially, it allows an individual or business to obtain a credit against taxes they paid in a foreign country so they do not have to pay tax on the money again (double taxation).
Report of Foreign Bank and Financial Accounts (FBAR)
Reading about FBARs online is enough to make your head spin and eventually explode. Essentially, if you have more than $10,000 in overseas accounts, then you are required to file an annual FBAR statement with the Department of Treasury. It does not matter if you have one account with $15,000 in it, or 11 accounts with $1000 in each account. It does not matter if you inherited the money, or if you only have a signature authority on the account. Once your foreign “annual aggregate total” exceeds $10,000 you are required to file the form and include all the accounts.
*Golding & Golding has prepared a comprehensive FAQs devoted entirely to FBAR Statements, which can be found by clicking this link here.
Generally, What Types of Accounts are Included on the FBAR?
The following accounts are generally included on an FBAR: Foreign Bank Accounts; Foreign Savings Accounts; Foreign Securities Accounts; Foreign Mutual Funds; Foreign Trusts; Foreign Retirement Plans; Foreign Business and/or Corporate Accounts; Insurance Policies (including some Life Insurance); Foreign Accounts held in a CFC (Controlled Foreign Corporation); or Foreign Accounts held in a PFIC (Passive Foreign Investment Company)
What is the Foreign Account Tax Compliance Act FATCA?
FATCA is the Foreign Account Tax Compliance Act and it is a law designed to bring international tax evasion and foreign account reporting avoidance to an end. FATCA is complex, but for individuals — FATCA generally means a person is required to report their foreign account information as well as foreign earnings. It also requires Foreign Financial Institutions to provide taxpayer information for those who have accounts at the foreign banks orForeign Financial Institutions.
What is a Statement of Specific Foreign Financial Assets (IRS Form 8938)?
This form is similar to an FBAR except while the FBAR is filed electronically online directly with the Department of the Treasury, the 8938 is filed along with a tax return. There are different threshold requirements for individuals who have to file these forms depending on whether they reside in the United States or overseas. Essentially, if you are an expat and reside overseas you are not required to file this form until you have at least $200,000 in specified foreign assets.
What is an Information Return by a Shareholder of a Passive Foreign. Investment Company or Qualified Electing Fund (8621)?
The 8621 Form is one of the more complicated forms that must be filed with the IRS when a person has a Passive Foreign Investment Company (PFIC). The reason why this form causes so much concern is twofold:
-Investing in a foreign mutual fund is almost always considered a PFIC; and
-If this form is not filed then the IRS can argue that unless you can show reasonable cause the entire tax return is subject to audit forever (in other words, the return is not considered properly filed since it was missing the 8621 and the Statute of Limitations has not commenced yet)
*There are certain exemptions regarding filing this form and if you have a foreign holding company or foreign mutual fund then you should consider speaking with an experienced international tax lawyer before filing your taxes or entering and offshore disclosure program.
**Even though there are no penalties directly associated would be 8621 form, if a person fails to file this form they can still be penalized under the language of IRS Form 8938 penalties.
What is a Information Return of U.S. Persons With Respect to Certain Foreign Corporations (5471)?
A 5471 is a very complicated form required for individuals who have ownership interest in certain types of foreign corporations. There are certain requirements for individuals involving foreign corporations and not everyone is required to file the form. It should be noted that if you do not file this form, there are penalties that may apply.
What is an Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts (3520)?
The 3520 form must be filed by US taxpayers who receive certain gifts or distributions either from foreign individuals, foreign trusts, or foreign businesses during the tax year. For most individuals, this form is required when they receive a gift of more than $100,000 from a foreign person as either one gift, or a series of transactions throughout the year. It should be noted that the threshold requirements for having to file this form reduces significantly for gifts from foreign businesses and/or foreign trust distributions.
**It should be noted that the 3520 generally is filed at the same time as the tax return but even if a person does not have a tax return filing requirement, and the generally still must file the 3520 if they otherwise qualify for having to file a 3520
What is an Annual Information Return of Foreign Trust With a U.S. Owner (3520-A)
The 3520-A form is a complicated form that must be filed when a US person has ownership or interest in a foreign trust. If the trustee filed the form already, then the form does not have to be filed again, but a copy of the filed form should be included with the taxpayer’s 3520.
IRS – Streamlined Program (Foreign Disclosure)
If your actions were non-willful and your taxes are a mess, or you never filed them but you have resided overseas for at least 330 days in the tax year (as opposed to any 12-month period) then you may qualify for the IRS Streamline Foreign Offshore Disclosure Program. If you qualify for this program, then all of your penalties are waived.
OVDP – Offshore Voluntary Disclosure Program
If your actions were willful The Offshore Voluntary Disclosure Program is open to any US taxpayer who has offshore and foreign accounts and has not reported the financial information to the Internal Revenue Service (restrictions apply). There are some basic program requirements, with the main one being that the person/business who is applying under this amnesty program is not currently under IRS examination. The reason why is simple: OVDP is a voluntary program, and if you are only entering because you are already under IRS examination, then technically, you are not voluntarily entering the program – rather, you are doing so under duress.
Treaty Benefits – Tax Reduction and Elimination Strategies
The United States has entered into income tax treaties with nearly 60 countries, and estate tax treaties with around 16 different countries. Under these tax treaties, there are reductions in taxes, benefits and exclusions depending on the classification of income and other factors as well.
It is important that you understand the specific tax treaty in the country in which you are now an expat, in order to determine whether you have certain benefits that can help alleviate your U.S. Tax situation.
IRS Audit and Levies – But I Live Overseas?
The IRS could not care less that you live overseas. In fact statistics seem to show that you have a higher chance of being audited if you live overseas. In other words, if the IRS knows you reside overseas that they also know there’s a lesser chance that you’re going to want to fight the audit. Moreover, is more difficult for you to compile paperwork and protect your US assets.
The IRS can definitely levy your US accounts in place liens on your property in the United States, but under new FATCA laws and other regulations, the IRS may also be able to lien or levy your foreign accounts (especially if they’re being held by foreign branch of a US bank)
Out of IRS Compliance?
If you are out of IRS compliance for not properly filing/reporting foreign income, assets. accounts or investments, we can help.
Making an IRS Voluntary Disclosure – Use an Attorney
The voluntary disclosure material provided by the IRS indicates that the attorney should make the submission. There is no attorney-client privilege with a CPA, which means the information you discuss with your CPA may not be confidential or protected by privilege.
That also means the IRS maybe able to question a CPA about the contents of the submission. This is why you will not want to utilize a CPA to make this submission but rather an attorney to ensure you have the attorney-client privilege.
IRS Voluntary Disclosure is All We Do!
We represent all different types of clients. High net-worth investors (over $40 million), smaller cases ($100,000) and everything in-between.
We represent clients in over 60 countries and nationwide, with all different types of assets, including (each link takes you to a Golding & Golding free summary):
- Unfiled Tax Returns
- Unreported Income Penalties
- International Tax Investigations (FATCA and more)
- FBAR Investigations
- International Tax Evasion
- Structuring Investigations
- Eggshell and Reverse Eggshell Audits
- Divorce and Offshore Accounts
- Foreign Mutual Funds
- Foreign Life Insurance
- Fixing Quiet Disclosure
- Foreign Real Estate Income
- Foreign Real Estate Sales
- Foreign Earned Income Exclusion
- Subpart F Income
- Foreign Inheritance
- Foreign Pension
- Form 3520
- Form 5471
- Form 8621
- Form 8865
- Form 8938 (FATCA)
Who Decides to Enter IRS Voluntary Disclosure
All different types of people submit to IRS Voluntary Disclosure. We represent Attorneys, CPAs, Doctors, Investors, Engineers, Business Owners, Entrepreneurs, Professors, Athletes, Actors, Entry-Level staff, Students, and more.
You are not alone, and you are not the only one to find himself or herself in this situation.
Sean M. Golding, JD, LL.M., EA – Board Certified Tax Law Specialist
Our Managing Partner, Sean M. Golding, JD, LLM, EA is the only Attorney nationwide who has earned the Certified Tax Law Specialist credential and specializes in IRS Offshore Voluntary Disclosure and closely related matters.
In addition to earning the Certified Tax Law Certification, Sean also holds an LL.M. (Master’s in Tax Law) from the University of Denver and is also an Enrolled Agent (the highest credential awarded by the IRS.)
He is frequently called upon to lecture and write on issues involving IRS Voluntary Disclosure.
Less than 1% of Tax Attorneys Nationwide
Out of more than 200,000 practicing attorneys in California, less than 400 attorneys have achieved this Certified Tax Law Specialist designation.
The exam is widely regarded as one of (if not) the hardest tax exam given in the United States for practicing Attorneys. It is a designation earned by less than 1% of attorneys.
Our International Tax Lawyers represent hundreds of taxpayers annually in over 60 countries.
IRS Penalty List
The following is a list of potential IRS penalties for unreported and undisclosed foreign accounts and assets:
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.
FATCA Form 8938
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.
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
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
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.
What Should You Do?
Everyone makes mistakes. If at some point that you should have been reporting your foreign income, accounts, assets or investments the prudent and least costly (but most effective) method for getting compliance is through one of the approved IRS offshore voluntary disclosure program.