Form 8854 (2018) – IRS Basics of Expatriate Tax for Green Card Holders
- 1 Form 8854
- 2 Tax Compliance for Green Card Holders
- 3 FATCA Form 8938
- 4 Green Card Holders – Long-Term
- 5 Form 8854 – Certify Tax Compliance
- 6 IRS Offshore Penalties Can Be Very Bad
- 7 IRS Offshore Penalty List
- 8 What Should You Do?
- 9 Summary of IRS Offshore Voluntary Disclosure
- 10 When Do I Need to Use Voluntary Disclosure?
- 11 Common Un-filed IRS International Tax Forms
- 12 Golding & Golding – Offshore Disclosure
- 13 What To Look For in an OVDP Attorney?
Form 8854 (2018) – Green Card Holders & IRS Expatriation Tax Rules
While may people believe that the Expatriate Tax is something limited to U.S. citizens who decide they are going to renounce their citizenship, that is not the case.
Common IRS Form 8854 issues we handle involve:
- Renouncing U.S. Citizenship
- Relinquishing a Green Card
- Who is a Long-Term Resident (LTR)?
- Who is a Covered Expatriate?
- Determining Expatriation Tax
Specifically, it is important that Green Card Holders (Legal Permanent Residents) who are considered long-term green card holders are aware that they too may be subject to the expatriate tax and may require the assistance of an experienced International Tax Lawyer.
As far-fetched and unfair as that seems, if a person is a Green Card Holder and intends on relinquishing their Green Card and returning back to their home country or third-party country to live — it is important that the individual is in tax compliance just as if they were US citizens.
Tax Compliance for Green Card Holders
A Green Card Holder or Legal Permanent Resident is someone who resides in the United States with the intent of remaining. As such, aGreen Card Holder is afforded many protections that a US citizen receives as well. The downside is that when it comes to Taxation, the United States treats a Green Card Holder nearly the same as a citizen.
Thus, a Green Card Holder is generally required to report all of their worldwide income on their tax return. They are also required to report their foreign accounts on an annual FBAR (Report of Foreign Bank and Financial Accounts aka FinCEN 114) for each year they have more than $10,000 in annual aggregate total of foreign money outside of the United States, on any day of the year.
We understand, if you are originally from Portugal and you have $2 million in a Portuguese Bank Account than to you that is not a “foreign account.” As you can imagine, the IRS differs; to the IRS, if you are a Green Card Holder — any account you have in a foreign country outside of the United States is considered a foreign account.
There are two main issues for Green Card Holders involving the FBAR:
– The failure to file the FBAR may be to extensively high fines and penalties; and
– The failure to file the FBAR may impact the person’s ability to certify proper tax status on form 8854, which is required for expatriation by long-term green card holders.
FATCA Form 8938
Under new FATCA (Foreign Account Tax Compliance Act) rules and regulations, individuals are also required to update the Internal Revenue Service as to their foreign accounts and specified foreign assets – when they meet certain threshold requirements. If a person resides in the United States and the two main threshold requirements are as follows:
– Single/Married Filing Separate: If a person has more than $50,000 on December 31, or if they have less than $50,000 on December 31 but had more than $75,000 on any day of the year, they may be required to file Form 8938 along with their tax return.
– Married Filing Jointly: if a person has more than $100,000 on December 31 or if they have less than $100,000 on December 31 but had more than $150,000 on any day of the year, they may be required to file Form 8938 along with their tax return.
Just as with the FBAR, the same two (2) rules apply to FATCA Form 8938:
– The failure to file FATCA Form 8938 may be to extensively high fines and penalties; and
– The failure to file theFATCA Form 8938 may impact the person’s ability to certify proper tax status on form 8854 which is required for expatriation by long-term green card holders.
Green Card Holders – Long-Term
Not all Green Card Holders may be subject to the expatriate tax. Rather, that ‘right’ is limited to Green Card Holders that are “long-term residents.” The United States defines a long-term resident as somebody who has lived in the United States for at least eight (8) of the last 15 years.
If you have lived in the United States for at least eight (8) of the last 15 years as a Green Card Holders than when it is time for you to relinquish your Green Card, you are required certify your tax status and financial status (to a degree) on form 8854.
Form 8854 – Certify Tax Compliance
One of the requirements in order to successfully expatriate and avoid future taxation is to complete Form 8854. The form is called an Initial and Annual Expatriation Statement and depending on wha year you commenced your expatriation, there are certain sections you will have to complete.
One of the most important sections is to confirm your tax compliance with United States tax.
Namely: “Do you certify under penalties of perjury that you have complied with all of your tax obligations for the 5 preceding tax years (see instructions)?
If you have not complied with your tax obligations (Tax Returns, FBAR, FATCA) then you are considered a covered expatriate and will have a continuing tax obligation until you properly certify (and possibly meet other qualifications depending on your annual salary and/or network at the time you intend to expatriate).
IRS Offshore Penalties Can Be Very Bad
In order for the U.S. Government to issues many different international informational return Civil Penalties, which can be staggeringly high, the standard burden of proof is mere “Preponderance of the Evidence,” which is the lowest standard of proof.
IRS Offshore Penalty List
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.
Summary of IRS Offshore Voluntary Disclosure
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 for one or more years, you were required to file a U.S. tax return, FBAR or other International Informational Return and you did not do so timely, then you are out of compliance.
Common Un-filed IRS International Tax Forms
Common un-filed international tax forms, include:
- 1040 (Tax Returns)
- Schedule B (Ownership or Signature Authority over Foreign Accounts)
- FBAR (FinCEN 114)
- FATCA (Form 8938)
- Form 3520 (Gift from Foreign Person)
- Form 5471 (Foreign Corporations)
- Form 8621 (Foreign Investments, aka PFIC)
- Form 8865 (Foreign Partnership)
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 IRS Offshore 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.
What To Look For in an OVDP Attorney?
There are only a handful of Law Firms that focus their entire tax practice on IRS Offshore Voluntary Disclosure (We are one of them). We have represented several hundred clients in OVDP, Streamlined and Offshore Disclosure.
You will want to make sure you use an OVDP Attorney who has:
- Litigation Experience
- IRS Audit Experience
- At Least 15-20 years of Attorney Experience
- An advanced Master’s of Tax Law Degree (LL.M.); and
- Either a CPA or Enrolled Agent (EA) license.
Why? Because you never know how the OVDP or Streamlined submission will go. Sometimes, a person is already under IRS investigation and may not know it. Then, when the person submits to OVDP they are rejected. In this type of situation, you need an Attorney with all the above required experience.
Using a CPA or Junior Attorney with no real experience, is not going to help (and you will then realize why the fees they charged were so low). We know this, because each year we receive many inquiries from clients seeking to retain our services after their initial OVDP or Streamlined junior tax attorney (without the experience mentioned above) flubbed their submission and made numerous mistakes in the submission process.
Alternatively, once you are in OVDP, you may want to:
- Make an MTM Election
- Argue a FAQ 55 Penalty Reduction
As a result, for this highly specialized area of law, you need an OVDP Attorney who is experienced specifically in OVDP, but also has the background and experience to fight on your behalf.
Contact us Today, We can Help You!
Sean holds a Master's in Tax Law from one of the top Tax LL.M. programs in the country at the University of Denver, and has also earned the prestigious Enrolled Agent credential. Mr. Golding is also a Board Certified Tax Law Specialist Attorney (A designation earned by Less than 1% of Attorneys nationwide.)
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