Expatriate Tax Preparation

AMERICAN EXPATRIATE TAX ACCOUNTANT

American expatriates are still taxed on their worldwide income, but they have major exclusions they can claim.  The only way to claim them is through a properly filed federal income tax return.  This is what I handle from my Florida office.  I have impeccable credentials, listed below.  But first let’s discuss the playing field for expatriates.

A very useful tool for avoiding double taxation includes the proper use of the Foreign Earned Income Exclusion in connection with the Foreign Income Tax Credit. You qualify for another exclusion, the Foreign Housing Exclusion, if you meet the physical presence test or bona fide resident test. The physical presence test means that you’re physically present in a foreign country for 330 days.  A bona fide resident means you’ve been there one year and have no intention of leaving. You need to present sufficient evidence to pass this test.  There is a limit on the Foreign Housing Exclusion, which is a percentage of the amount you exclude based on the Foreign Earned Income Exclusion.

The Foreign Income Exclusion is designed for those living in no-tax or very low-tax jurisdictions.  If you use both techniques in a high-tax foreign country you can actually increase your tax rate.  You have to be selective.  The Foreign Tax Credit is useful if you are working abroad, in a high-tax country. 

Some US expats want to “catch up” with their taxes.  They haven’t filed for years.  What’s the answer?

It’s good news.  The IRS has an amnesty program for late, late filers.  They consider your late filing “inadvertence or a mistake.”  That qualifies you for the Streamlined Foreign Offshore Procedures.  That’s assuming you aren’t under current audit or have ignored a series of letters.  That’s 90% of the expat population that qualifies, therefore. Non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.

You just come forward on a voluntary basis.  More than 70,000 taxpayers have taken advantage of this procedure.  All you need to do is to file 3 years of prior returns and 6 years of FBARs, which are reports of foreign bank accounts. Even signature authority can bring an account into the reporting threshold. The one condition – you lived abroad the last three years.  I would take advantage of the program before it ends – no one knows the end date as of now.

REASONS TO FILE A U.S. TAX RETURN FOR EXPATRIATES:

  • The three-year statute of limitations.  If you don’t file this will run in perpetuity (subjecting you to audits as far back as your non-filing took place)
  • To receive the Foreign Earned Income Exclusion you must file
  • If you owe taxes and don’t pay, penalties will accrue which after a period of years may equal the taxes themselves
  • If you marry a non-US citizen and want to visit the US, you have to first provide proof of the last three years of filed returns to obtain a visa
  • The government cannot go back and audit or change your returns once they are filed, and the 3-year statute of limitations runs out
  • Remember, exclusions are not automatic – they must be filed
  • A reminder – when you claim the Foreign Earned Income Exclusion, on that specific level of income you cannot claim any further credits – for example, a foreign tax credit
  • If you make less than the Foreign Earned Income Exclusion, you must still file a federal return
  • If you fall under audit, you will lose the right to obtain and claim the Foreign Earned Income Exclusion
  • If you need a “pass” from the IRS because you haven’t filed Foreign Bank Account Reporting requirements, you can only obtain that once you are up to date on your personal federal tax return filing requirements
  • Even though foreign bank accounts produce no taxable income, they may be fully reportable
  • Not reporting foreign bank accounts can subject a taxpayer to significant penalties – this must be a part of your expatriate tax strategy

The U.S. government is actively working with numerous countries to pursue expatriates who have decided not to file. It’s only a matter of time.  It is common sense and protection to file.  Here’s a list to date of countries cooperating with U.S. authorities: Australia, Belgium, Bermuda, Brazil, Canada, Cayman Islands, Columbia, Croatia, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Guernsey, Hungary, Iceland, India, Ireland, Isle of Man, Israel, Italy, Jamaica, Jersey, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Mauritius, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Republic of Korea, Slovakia, Slovenia, South Africa, Spain, Sweden and the United Kingdom.

You are liable for income taxes if you are a US person.  That means a citizen born in the US or outside of the US with at least one parent who is a citizen.  No matter if you are offshore now, you are liable for taxes to the US government on your worldwide income.

If you have invested in a non-US mutual fund you are subject to the Passive Income Foreign Company rules, which are so complex you could write a book about them.

If you are an inactive Green Card holder, until you surrender it you must pay taxes.  Green Card holders are considered US residents even if you live abroad.

If you have final administrative notice of the revocation of your Green Card, at that point and only at that point can you safely decide to not file.

If you are a resident of a treaty country (where your country has a tax treaty with the US), then you can file a form 1040 NR (Nonresident) Income Tax Return for federal purposes.  You must attach a special election to the return.

A key point is that foreign tax credits, when utilized, must be prorated to reflect the level of US tax liability versus total tax liability.  Foreign tax credits are subject to the carryback and carryover rules.

If you are self-employed you are still subject to the self-employment (Social Security) tax on self-employment income.  In this case a Schedule C has to be filed and attached to your federal filings.

As a permanent resident out of the country, you have until June 15th each year to file your federal requirements.  You can extend this to October 15th with the filing of a proper extension with the IRS.

Also as a reminder – foreign income from dividends, interest and rentals is not excluded under the Foreign Earned Income Exclusion.  This exclusion applies to wages and earned income only.  US pensions are similarly not excluded.  US government employees may also not utilize this exclusion.

Many taxpayers make the fatal error of filling out both bona fide residency test and physical presence test data on their IRS forms.  When you do this, the IRS will reject automatically the Foreign Earned Income Exclusion. The IRS normally examines returns 18 months after filing.  When they take away that exclusion they will assess both penalties and interest.

If you also own a foreign corporation or trust, there are additional information-filing requirements which have significant penalties attached if not followed.  If you transfer property to a foreign partnership or foreign corporation there are federal laws that require certain filings take place.

How does the IRS get alerted to those who are not filing?  Many ways – here are some of them:

  • You open a US-related security account or bank account
  • You apply for social security or some type of pension
  • Information-sharing under a treaty
  • If a suspicious activity form is filed related to one of your financial transactions by a financial institution
  • Often if you form a foreign corporation  information is transmitted at that time

The Conclusion

File voluntarily and report all sources of income.  Do not wait for an audit.

There are so many potholes in expatriate tax planning we cannot even begin to cover them in depth.  That’s the reason you need an expatriate tax consultant and expert.

A reminder: The Form 8938 filing requirement does not replace or otherwise affect a taxpayer’s obligation to file FinCEN Form 114 (Report of Foreign Bank and Financial Accounts). Unlike Form 8938, the FBAR (FinCEN Form 114) is not filed with the IRS. It must be filed directly with FinCEN, a bureau of the Department of the Treasury, separate from the IRS.

Individuals and domestic entities must check the requirements and relevant reporting thresholds of each form and determine if they should file Form 8938 or FinCEN Form 114, or both.  The reporting threshold for the Form 8938 is $50,000 on the last day of the tax year, or $75,000 at any time during the tax year.  If you have an interest in foreign financial assets that exceed this threshold, you must report them.  The actual rules are rather complex – what qualifies and what doesn’t. The threshold for the FinCEN form (foreign bank accounts) is $10,000 at any time during the calendar year.  Penalties for non-filing are quite severe.  These are important forms to attend to.

I handle all types of expat tax preparation from my Florida office. You can contact me at: Jerry@capecoraltaxaccountants.com

I operate with PayPal, making it easy to conduct business.  I’m glad to send you a copy of my CV and Firm Brochure upon request.  Fees generally range in the area of $325 to $425, and I provide a quote.  Of course I operate on a Retainer basis.  We handle most everything by email but if you need a Skype meeting, I can provide my Skype ID as well.

My background is inclusive of:

  • Bachelor of Science in Accounting from the University of Louisville
  • Writing a variety of reports designed for Sr. Management, CEOs, and Boards of Directors of Fortune 1000 Companies
  • Testing and performing forensics on Internal Control systems with responsibility for up to $ 2 Billion of Assets
  • Proficiency in research and utilization with the MS Office Suite including Excel, Access, Outlook, Word, Visio and Power Point
  • Utilizing online university library tools such as General OneFile, a comprehensive resource which gives me access to more than 8,000 full-text titles, more than 3,600 journals and more than 25 years of backfiles.  With more than 100 million records available, it is the largest collection of full-text periodicals available and highly useful in research
  • Experience with corporations, trusts, estates and partnerships
  • Author of a book on Economics
  • Author of a book on Research
  • Published in a variety of Trade Magazines
  • Published by Thomson – Reuters
  • Specialist in Business Valuations and Discount Methodology
  • Have tax preparation and strategy background for expatriates