86 thoughts on “IRS says it’s “OK” to own PFIC’s through a “US” tax deferred account”
Yes you are correct – I assume this was the sale of a house/residence and there are capital gains issues between two different tax jurisdictions. For one it is a taxable event for the other it is not. This sucks.
The SOL for income tax starts when the original return is filed or deemed filed (deemed filed on 4/15 if filed earlier), provided the original return itself was not fraudulent. The filing of a nonfraudulent amended return does not start or re-start the SOL. (If the amended return is fraudulent, for some purposes, the fraudulent amended return could re-start a statute of limitations or start a new statute of limitations, at least for criminal purposes.)
You’re SOL on the SOL for un filed tax returns:
“It’s not something you want to think about, but old taxes can come back to haunt you. This is especially true of returns you’ve never filed. The statute of limitations—that legal egg timer, normally set to three years—never starts to run on unreported activities. And there are cases now of the IRS going back decades, collecting big money—plus penalties and interest—on form-filing failures, accounting errors, and innocent mistakes by unwary people.”
Just a reminder for Canadians the CRA will not collect IRS taxes (if you were a Canadian) and the Canadian Courts will not collect. There is not even the 30% withholding on US income. If you are not able to beat the FATCA system. No current US indices for under $1 million for each FI and you did not tell the banks you are American or place of birth.
The question for some people is;
How much do you you want to pay the IRS to cross the border?
@GeorgeIII
*CRA will not collect IRS*
What maybe the rule today may not be the rule for tomorrow…. US gov’t may change the game plan & demand that canada or any other country… pursue all money owed… if our own gov’t is willing to make us 2nd class citizens… what makes u think they won’t go along with it… they are sharing border info… mental health issue… maybe even our medical records… as 2nd class citizens.. I have no clue what they will give up on us or what recourse will be available if the info is wrong… The IRS is the modern day terrorists… the US are harming all US persons with this… I didn’t know the rules… better yet… how to figure all this out… I am up the creek without a paddle. I appreciate all the info that is shared here… not to sound like a dolt.. but some.. ok.. alot of it is over my head…lol. Thank u all who are sharing their experiences.
@Neill
Your story has me so angry I could spit. You and your wife are clearly benign actors, but the IRS used intimidation tactics that contributed to your decision not to opt out where you could have mitigated some, if not all of your penalties through the IRM. JUST WHO DO THESE PEOPLE WORK FOR?
@bubblebustin
After July 1… u will hear more & more stories like this… Expats may have it bad… immigrants are going to have it worse… The IRS is going to use every dirty trick to squeeze out as much money as they can… immigrants will have no legal recourse… cause I betcha… they will use… u will go to jail…. we will deport ya… basically being a bully to alot of immigrants whose 1st language is not english… put the fear of god in them so they will meekly obey… then to top if off… quietly take what they are dished out by the IRS
@neill Have you considered tidying up that PFIC program and selling it commercially to re-coup some money? Seriously if you can automate that calculation – missing from most software – you could be on to a winner (then flog it to some of the big boys) Oh just don’t forget to put the profits on your return LOL
BTW did your pensions require 3520s? It sounds like not… I’m not too surprised by them not being treated as Pfics, it would really not sit well with treaty treatments, but one never knows when the other side are making up the rules as they go along.
@Neill,
The IRS behaviour (which is sourced from both the Treasury and Congress) is shameful. Absolutely shameful. For the US government to treat anyone in this fashion is bad, but to expect immigrants to somehow comply with obscure, never before enforced laws, is pretty pathetic. I cannot imagine how angry you must feel.
@nolongerauscitizen,
>@neill Have you considered tidying up that PFIC program and selling it commercially to re-coup some money? Seriously if you can automate that calculation – missing from most software – you could be on to a winner (then flog it to some of the big boys) Oh just don’t forget to put the profits on your return LOL
Actually my tax attorney has suggested this a number of times. I already make a very good living writing s/w in a different domain to this. It makes more sense to push in the direction I know is lucrative than go a different direction and neglect the winner I am on. I was forced to hack up some stuff and learn the rules because I had no choice. I will be quite happy to help people out to get up to speed quickly on this stuff if anyone else needs to do sec 1291 calcs.
It’s not clear to me what needs 3520 forms beyond an inheritance my wife got. The IRS didn’t ask for this stuff. We didn’t try to claim the ISA’s were trusts but I did think about it. It worries me that they may need something like this for a pensions (we have a lot of them all small, in fact my wife had more money in ISA’s). Luckily only a few weeks ago the UK passed pension reform that will let us bleed out the money in 5 years to rid ourselves of the compliance problems. Our life insurance policy matures in 2018 as well.
@bubblebustin,
>… where you could have mitigated some, if not all of your penalties through the IRM.
I thought about this a lot. After talking to people here on this many months ago I talked to my attorney about it at length.
First I was never going to get out of the PFIC taxation. The IRS really wanted that money. Under sec 1291 99.9% of our taxes fell in 2010 and 2011. More than 50% in 2011 outside of OVDP. I hope to escape any penalties in 2011 and my chances have to be good. PFIC taxes were a big chunk of the problem.
Realistically I would be arguing for reduced penalties like no balance penalty, no accuracy penalty etc. We got the biggest account out of that game at the last minute. The balance penalty dropped late in the game as well when the agent discovered my conversion error. We realistically thought our after expenses savings didn’t warrant us rolling the dice and getting another agent like the one we got already especially since the IRM is virtually worthless.
@uscitizenshipnightmare,
I am more upset that we elect somebody like Obama. His US tax policy will take more from me in a couple of years than they stole from me with PFIC and OVDP. If we elect another tax and spend president just because she is a woman a whole new set of tax laws can rain down on me like the parallel tax system in NIIT.
@ Neill,
That is a fair point. Personally, I am far more incensed by the asset confiscation inherent in the FBAR enforcement than I am about tax (admittedly, I live in a high tax jurisdiction abroad).
Another question: did you use a lawyer for the OVDP? If so, did you find that he/she added any value? If so, at what stage? I find that my counsel pretty much confirm what I already know (and charge me plenty for it), perform administrative tasks that I have to correct (and charge me for it) but don’t provide any real insight or advocacy. I am early in the process but would be interested in whether added value might comeduring the determination of the OVDP penalty base or in negotiations with the IRS or in deciding whether to opt out. Otherwise, I wonder whether I could do the process myself without counsel but with the help of a technical accountant.
More unbelievable rubbish on 8621.
I thought people might be interested in some quirks of 8621. I think these quirks pretty much prove the form is useless, a waste of resources to fill in and has a use other than reporting taxes (like bashing people).
The form is split up into two sections in part 5 (apart from the info at the start of the form you spend all your time puzzling over this and reading and rereading the instructions).
Box’s 15a-e is for distributions (dividends of PFICs).
Box 15f is for dispositions (sales of PFICs)
Box 16a is just an instruction to put the real data in a text file and print it out so they could actually check it if they like.
Box 16b-f just take box 15a-f and allocate the excess distributions to PFIC days and non-PFIC days etc and calculate the tax.
Now look at box 15d and e.They tell you to divide by 3 (or the prior number of years you held the stock) and multiply by 125%. Legally according to sec 1291 you must do this calculation in a foreign currency:
26 U.S. Code § 1291 (b)(3)(E) if the distributions are received in a foreign currency, determinations under this subsection shall be made in such currency and the amount of any excess distribution determined in such currency shall be translated into dollars,
So this form must contain values that are in a foreign currency. That’s the only way to satisfy the legal requirement and follow the forms instructions. We are calculating here the average of three years worth of dividends with at least three different exchange rates (my wife had funds with 4 dividend payouts per year) against at least one exchange rate in the 4th year (and you could have more like my wife did).
Form 8621 despite needing an estimated 11h to understand makes no mention of this.
Once you subtract 125% of the average last 3 years dividend payments to calculate the excess distribution you are legally required to convert it to dollars and distribute it proportionally to each of the dividends you got in the 4th year. The exchange rate for the dividends in the 4th year are likely different so what exchange rate do you use? Nothing in the law defines this. I used the average exchange rate. Changing the exchange rate to different values here just changes how it gets distributed and what portion is an excess and what is not. To make life more complicated in year 5 and beyond you can’t use the average dividend rate over three years but instead must use only the non-excess distribution you calculated.
If you didn’t hold the stock for a full year you must annualize the dividend. This isn’t defined. The general acceptance would be that if you held the stock for x days you would multiply it by 365/x. This doesn’t make any sense for a dividend. You either got all of them, or all but one,,.. none of them. Why do we make up missing days in a year out of 3 but we don’t make up missing years? Why the hell should your taxation depend on the money other people got and not what you got?
One nice feature is that all of these rules drive the massive number of forms for each tax lot and dividend. Your legally required to round form values to the nearest dollars. If your dividends are small like ours were dividing them up by tax lot made them really small except for the main lot. The forms divide the dividend up into buckets (excess distribution, ordinary income). This split makes the values smaller. Calculating the maximal tax makes them smaller and the sec 1291 interest is small as well.
Of the ~500 form 8621 I had only 6 or so change my income tax for dividends. I ended up paying less tax than if they had just treated them as ordinary income. Hundreds of them became essentially zero despite having lots of positive numbers in the calculations. The guys remaining are the main purchased lots (my wife’s initial investment). Of course each sale of a tax lot generated a form and most of these affected my taxes badly enough. Smaller lots though could lose their sec 1291 tax, sec 1291 interest or ordinary income because of rounding and what day they were purchased in.
We never made more than ~$450 in dividends in any year summed across all funds and most years had much less than this. The IRS really needed this cash though to support a nanosecond of one of Obamas golfing trips. We made real money in gains mind you.
@uscitizenshipnightmare,
>Another question: did you use a lawyer for the OVDP? If so, did you find that he/she added any value? If so, at what stage?
I used an expensive tax attorney. Looks like he was charging up to $350 an hour. It was a sliding scale though based on what he did. He didn’t always charge me if they what he was doing would be generally useful to other clients. He knows the PFIC rules very well. He wrote some code to do PFIC calcs as well as spreadsheets. So he was an amateur programmer and I was an professional programmer and amateur tax guy. Admin stuff was done by an admin at a much lower rate. She didn’t do much for me as I could do it myself.
Quickly he told me that I was much more engaged than any other client he had had. He changed how he worked with me. Anything he thought I could do he gave to me so I wouldn’t have to pay for it. I looked up tax treaty arguments and PFIC laws for example. He would sometime change my attack. I led with the deemed dividend statement on non-PFIC days but he used the temp regs instead. I attack worked instantly. Mine might not have. I’ll never know.
He offloads tax prep to a CPA. He made recommendations. My CPA was good but slow. They tend to put things off to the last minute and I wanted to be done. I spend $8k on tax prep with the CPA for 8+1 years worth of tax returns. I took many months for him to do them. I don’t think my tax attorney would have let me do the taxes on my own at this point and I would have struggled. By the end I didn’t even ask him if I could do them myself. I just told him I was and he didn’t bat an eyelid. By this time I had learned so much and I could do them. Even so it was a massive gamble. I purchased Lacerte (Intuits high end pro s/w). I pretended I had a company called ‘Overseas Income’ to avoid explaining. I had a small practice you know :-). That cost about $350. I used the single REP license to pay on a return by return basis. So it cost me $50 * 8 to do the tax returns. So $750. I could also use the s/w to redo 2011 and prepare my 2012 taxes for an additional $100. I got my 10 years worth of taxes done in one week and I found problems with the CPA’s work (which actually was very good).
This had a massive benefit. It was now incredibly easy for me to pretend to be a CPA on taxalmanac. Lacerte users are drive to this site as a research resource and it’s run by intuit (though badly). I could ask questions there and they would believe I was a pro. After all, who the hell uses Lacert to do their personal taxes or fills in hundreds of form 8621s? Neill had a client in the OVDP with an assigned agent! Somewhat unusual it seems. My poor clients were being put though the wringer by the IRS don’t you know.
So on balance I could have done without the CPA but I wouldn’t have been able to pull that off with the tax attorney.
My tax attorney I really needed. I don’t think I would have survived without him. He was the source of some of my problems though. He advised us to enter OVDP which was wrong. This is backed up by the pros on tax almanac who asked why my clients were in the OVDP given the circumstances. It’s all down to the tax attorney my clients have!
I had to argue with the attorney until he was convinced about my extra non-PFIC days. Even though he knows this area well he didn’t know about this. It is obscure though.
I think he should have known the 2008 refund would be denied up front. That would have saved me a lot of wasted time. We should have done sec 1291 from the start but he only goes this path with clients with millions of dollars in the accounts because of the costs.
My only interaction with the agent was short and terse. I could have easily gotten nasty with her (hell I would have). He on the other hand was always polite and that’s worth something.
He gave me examples of other cases and how they turned out. Some people got really great treatment like you see posted here. Some got it really bad. Much worse than me. An 85 year old was being killed by the agent because for some reason they had it in for him.
He helped me understand the risks vs. rewards of opting out vs just paying to be rid of it. This helped me feel a lot better with paying up. In the end I can afford to throw money at a problem even if I am generally a miser.
I wish I had learned more earlier. I guess the depths of despair can bring out your desires to learn better though.
Has it always been the practice of banks to put a very long hold on any US source cheque? Even a small one which you just want to cash out? My husband got a $15 refund USD cheque awhile back. In order to cash it he had to deposit it and it took almost a month for the CND equivalent of that cheque to appear in his account as being “available”. I don’t remember it ever taking this long years ago. It appears electrons flying through the internets are moving very slowly these days when it involves clearing a USD cheque. How in the world do cross-border businesses manage this delay or do businesses not even deal with cheques anymore? You can tell I have a days gone by mindset. You can tell PFICs go right over my head which has only ever had to deal with a savings account, a chequing account and GICs which I hope to goodness are not PFICs.
@Em, re: Canadian banks putting 30 day holds on all US source cheques.
I’ve been running an Internet business serving US companies since 1998. I used to allow big US customers to buy from me on 30 days credit and pay by cheque. Until about 2007, a US sourced cheque would clear within about the same amount of time as a Canadian sourced cheque.
I think Canadian banks were some of the first in the world to realize how fragile the US banking system was and started putting 30 day holds on US sourced cheques around late 2007. That meant that if my customer paid exactly on time, the earliest I would receive payment in our account was 60 days.
As a business person who pays my suppliers in 30 days, this became untenable. Starting in late 2007, I started telling all my US customers that they had to pay for their purchases with a credit card since waiting an additional 30 days for a US sourced cheque to clear would make it impossible for me to run my business.
That was one of the smartest business decisions I ever made, making Americans prepay for their purchases with a credit card. As the recession progressed, I’ve heard horror stories from my American suppliers about how their US customers just don’t pay their bills. I tell them I don’t have that problem since I cut them off at the pass before the problems even started.
@ OMG
Thanks for that information. Many years ago my husband had a very small business in the USA (not crossborder, not even intercity) but it would have killed us if our customer’s cheques took forever to clear. It was hard enough to get a few of those cheques in the first place. We simply didn’t have a big enough business account to absorb delayed cheque clearance. Despite this, I hope I’m dead before the cashless society becomes a full-blown reality, even if everything would happen in a blink of the all-seeing surveillance eye. It’s going to be a tight race because I know this is the goal of TPTB.
@Em
I recently got a $15US cheque from an American company as a PR refund. I cashed it immediately in my bank account. No hold at all.. I rarely get any US cheques. The last one maybe years ago.
@ northernstar
Interesting. This was a Big Five bank that my husband set up an account with for almost the sole purpose of eventually withdrawing his money in an audible huff, should they EVER question his citizenship. (I know, it’s kind of a snarky thing to do but they deserve it.) We both use credit unions and a provincial FI for our serious banking.
I should add that when my husband asked about the delay they told him they had to do this for the US government. This bank has branches in the USA.
@Em
mine is big 5 . I have had the account over 4 decades.. maybe that is why. and have enough to cover $15.00 LOL
@Em
Mine only has in investment offices in 5 cities in the USA. The green chair has more regular banking branches in the USA than in Canada. creepy to see them when I did the tourist thing. a few years ago.
@ northernstar
Of course my husband had more than enough to cover it too but it’s the fact that should he ever want to completely close this account he would have to wait for all US dollar deposits to clear, IF he had some at that time — no quick exit. I guess it’s another way for a bank to cling to your money as if it were their own and at the very least slow down your departure. They are always looking for ways to create a tie that binds you to them.
@neill
I would love to take you up on your offer of PFIC help – not quite sure how one does that?
I take it that the gain made upon cancelling your PFICs was the real tax issue – rather than taxation on the ongoing yearly dividends? I’m guessing – as you wanted to remain a US person – keeping them until AFTER renunciation was not really an option – i.e. delaying the ‘gain’ part.
Aside: I wish you unimagined success with your software – and hope some day you will find a country that is actually grateful for having such talent amongst its ranks.
@Em
I don’t have to worry about US funds in my account. Won’t be going there any more. Have no one there who would send me money. I do sympathize those with those banks cheque holds. I have some friends who have to wait for Canadian cheques to clear before they get in their Canadian accounts. Banks have the upper hand, unfortunately.
Yes you are correct – I assume this was the sale of a house/residence and there are capital gains issues between two different tax jurisdictions. For one it is a taxable event for the other it is not. This sucks.
The SOL for income tax starts when the original return is filed or deemed filed (deemed filed on 4/15 if filed earlier), provided the original return itself was not fraudulent. The filing of a nonfraudulent amended return does not start or re-start the SOL. (If the amended return is fraudulent, for some purposes, the fraudulent amended return could re-start a statute of limitations or start a new statute of limitations, at least for criminal purposes.)
You’re SOL on the SOL for un filed tax returns:
“It’s not something you want to think about, but old taxes can come back to haunt you. This is especially true of returns you’ve never filed. The statute of limitations—that legal egg timer, normally set to three years—never starts to run on unreported activities. And there are cases now of the IRS going back decades, collecting big money—plus penalties and interest—on form-filing failures, accounting errors, and innocent mistakes by unwary people.”
http://www.nestmann.com/no-statute-of-limitations-for-failing-to-file-u-s-tax-returns#.U08jaCe9KSM
Just a reminder for Canadians the CRA will not collect IRS taxes (if you were a Canadian) and the Canadian Courts will not collect. There is not even the 30% withholding on US income. If you are not able to beat the FATCA system. No current US indices for under $1 million for each FI and you did not tell the banks you are American or place of birth.
The question for some people is;
How much do you you want to pay the IRS to cross the border?
@GeorgeIII
*CRA will not collect IRS*
What maybe the rule today may not be the rule for tomorrow…. US gov’t may change the game plan & demand that canada or any other country… pursue all money owed… if our own gov’t is willing to make us 2nd class citizens… what makes u think they won’t go along with it… they are sharing border info… mental health issue… maybe even our medical records… as 2nd class citizens.. I have no clue what they will give up on us or what recourse will be available if the info is wrong… The IRS is the modern day terrorists… the US are harming all US persons with this… I didn’t know the rules… better yet… how to figure all this out… I am up the creek without a paddle. I appreciate all the info that is shared here… not to sound like a dolt.. but some.. ok.. alot of it is over my head…lol. Thank u all who are sharing their experiences.
@Neill
Your story has me so angry I could spit. You and your wife are clearly benign actors, but the IRS used intimidation tactics that contributed to your decision not to opt out where you could have mitigated some, if not all of your penalties through the IRM. JUST WHO DO THESE PEOPLE WORK FOR?
@bubblebustin
After July 1… u will hear more & more stories like this… Expats may have it bad… immigrants are going to have it worse… The IRS is going to use every dirty trick to squeeze out as much money as they can… immigrants will have no legal recourse… cause I betcha… they will use… u will go to jail…. we will deport ya… basically being a bully to alot of immigrants whose 1st language is not english… put the fear of god in them so they will meekly obey… then to top if off… quietly take what they are dished out by the IRS
@neill Have you considered tidying up that PFIC program and selling it commercially to re-coup some money? Seriously if you can automate that calculation – missing from most software – you could be on to a winner (then flog it to some of the big boys) Oh just don’t forget to put the profits on your return LOL
BTW did your pensions require 3520s? It sounds like not… I’m not too surprised by them not being treated as Pfics, it would really not sit well with treaty treatments, but one never knows when the other side are making up the rules as they go along.
@Neill,
The IRS behaviour (which is sourced from both the Treasury and Congress) is shameful. Absolutely shameful. For the US government to treat anyone in this fashion is bad, but to expect immigrants to somehow comply with obscure, never before enforced laws, is pretty pathetic. I cannot imagine how angry you must feel.
@nolongerauscitizen,
>@neill Have you considered tidying up that PFIC program and selling it commercially to re-coup some money? Seriously if you can automate that calculation – missing from most software – you could be on to a winner (then flog it to some of the big boys) Oh just don’t forget to put the profits on your return LOL
Actually my tax attorney has suggested this a number of times. I already make a very good living writing s/w in a different domain to this. It makes more sense to push in the direction I know is lucrative than go a different direction and neglect the winner I am on. I was forced to hack up some stuff and learn the rules because I had no choice. I will be quite happy to help people out to get up to speed quickly on this stuff if anyone else needs to do sec 1291 calcs.
It’s not clear to me what needs 3520 forms beyond an inheritance my wife got. The IRS didn’t ask for this stuff. We didn’t try to claim the ISA’s were trusts but I did think about it. It worries me that they may need something like this for a pensions (we have a lot of them all small, in fact my wife had more money in ISA’s). Luckily only a few weeks ago the UK passed pension reform that will let us bleed out the money in 5 years to rid ourselves of the compliance problems. Our life insurance policy matures in 2018 as well.
@bubblebustin,
>… where you could have mitigated some, if not all of your penalties through the IRM.
I thought about this a lot. After talking to people here on this many months ago I talked to my attorney about it at length.
First I was never going to get out of the PFIC taxation. The IRS really wanted that money. Under sec 1291 99.9% of our taxes fell in 2010 and 2011. More than 50% in 2011 outside of OVDP. I hope to escape any penalties in 2011 and my chances have to be good. PFIC taxes were a big chunk of the problem.
Realistically I would be arguing for reduced penalties like no balance penalty, no accuracy penalty etc. We got the biggest account out of that game at the last minute. The balance penalty dropped late in the game as well when the agent discovered my conversion error. We realistically thought our after expenses savings didn’t warrant us rolling the dice and getting another agent like the one we got already especially since the IRM is virtually worthless.
@uscitizenshipnightmare,
I am more upset that we elect somebody like Obama. His US tax policy will take more from me in a couple of years than they stole from me with PFIC and OVDP. If we elect another tax and spend president just because she is a woman a whole new set of tax laws can rain down on me like the parallel tax system in NIIT.
@ Neill,
That is a fair point. Personally, I am far more incensed by the asset confiscation inherent in the FBAR enforcement than I am about tax (admittedly, I live in a high tax jurisdiction abroad).
Another question: did you use a lawyer for the OVDP? If so, did you find that he/she added any value? If so, at what stage? I find that my counsel pretty much confirm what I already know (and charge me plenty for it), perform administrative tasks that I have to correct (and charge me for it) but don’t provide any real insight or advocacy. I am early in the process but would be interested in whether added value might comeduring the determination of the OVDP penalty base or in negotiations with the IRS or in deciding whether to opt out. Otherwise, I wonder whether I could do the process myself without counsel but with the help of a technical accountant.
More unbelievable rubbish on 8621.
I thought people might be interested in some quirks of 8621. I think these quirks pretty much prove the form is useless, a waste of resources to fill in and has a use other than reporting taxes (like bashing people).
The form is split up into two sections in part 5 (apart from the info at the start of the form you spend all your time puzzling over this and reading and rereading the instructions).
Box’s 15a-e is for distributions (dividends of PFICs).
Box 15f is for dispositions (sales of PFICs)
Box 16a is just an instruction to put the real data in a text file and print it out so they could actually check it if they like.
Box 16b-f just take box 15a-f and allocate the excess distributions to PFIC days and non-PFIC days etc and calculate the tax.
Now look at box 15d and e.They tell you to divide by 3 (or the prior number of years you held the stock) and multiply by 125%. Legally according to sec 1291 you must do this calculation in a foreign currency:
26 U.S. Code § 1291 (b)(3)(E) if the distributions are received in a foreign currency, determinations under this subsection shall be made in such currency and the amount of any excess distribution determined in such currency shall be translated into dollars,
So this form must contain values that are in a foreign currency. That’s the only way to satisfy the legal requirement and follow the forms instructions. We are calculating here the average of three years worth of dividends with at least three different exchange rates (my wife had funds with 4 dividend payouts per year) against at least one exchange rate in the 4th year (and you could have more like my wife did).
Form 8621 despite needing an estimated 11h to understand makes no mention of this.
Once you subtract 125% of the average last 3 years dividend payments to calculate the excess distribution you are legally required to convert it to dollars and distribute it proportionally to each of the dividends you got in the 4th year. The exchange rate for the dividends in the 4th year are likely different so what exchange rate do you use? Nothing in the law defines this. I used the average exchange rate. Changing the exchange rate to different values here just changes how it gets distributed and what portion is an excess and what is not. To make life more complicated in year 5 and beyond you can’t use the average dividend rate over three years but instead must use only the non-excess distribution you calculated.
If you didn’t hold the stock for a full year you must annualize the dividend. This isn’t defined. The general acceptance would be that if you held the stock for x days you would multiply it by 365/x. This doesn’t make any sense for a dividend. You either got all of them, or all but one,,.. none of them. Why do we make up missing days in a year out of 3 but we don’t make up missing years? Why the hell should your taxation depend on the money other people got and not what you got?
One nice feature is that all of these rules drive the massive number of forms for each tax lot and dividend. Your legally required to round form values to the nearest dollars. If your dividends are small like ours were dividing them up by tax lot made them really small except for the main lot. The forms divide the dividend up into buckets (excess distribution, ordinary income). This split makes the values smaller. Calculating the maximal tax makes them smaller and the sec 1291 interest is small as well.
Of the ~500 form 8621 I had only 6 or so change my income tax for dividends. I ended up paying less tax than if they had just treated them as ordinary income. Hundreds of them became essentially zero despite having lots of positive numbers in the calculations. The guys remaining are the main purchased lots (my wife’s initial investment). Of course each sale of a tax lot generated a form and most of these affected my taxes badly enough. Smaller lots though could lose their sec 1291 tax, sec 1291 interest or ordinary income because of rounding and what day they were purchased in.
We never made more than ~$450 in dividends in any year summed across all funds and most years had much less than this. The IRS really needed this cash though to support a nanosecond of one of Obamas golfing trips. We made real money in gains mind you.
here is some info on PFIC’s from the Canadian Tax Foundation web page http://www.ctf.ca/ctfweb/EN/Newsletters/Canadian_Tax_Focus/2014/1/140102.aspx
very interesting this article
@uscitizenshipnightmare,
>Another question: did you use a lawyer for the OVDP? If so, did you find that he/she added any value? If so, at what stage?
I used an expensive tax attorney. Looks like he was charging up to $350 an hour. It was a sliding scale though based on what he did. He didn’t always charge me if they what he was doing would be generally useful to other clients. He knows the PFIC rules very well. He wrote some code to do PFIC calcs as well as spreadsheets. So he was an amateur programmer and I was an professional programmer and amateur tax guy. Admin stuff was done by an admin at a much lower rate. She didn’t do much for me as I could do it myself.
Quickly he told me that I was much more engaged than any other client he had had. He changed how he worked with me. Anything he thought I could do he gave to me so I wouldn’t have to pay for it. I looked up tax treaty arguments and PFIC laws for example. He would sometime change my attack. I led with the deemed dividend statement on non-PFIC days but he used the temp regs instead. I attack worked instantly. Mine might not have. I’ll never know.
He offloads tax prep to a CPA. He made recommendations. My CPA was good but slow. They tend to put things off to the last minute and I wanted to be done. I spend $8k on tax prep with the CPA for 8+1 years worth of tax returns. I took many months for him to do them. I don’t think my tax attorney would have let me do the taxes on my own at this point and I would have struggled. By the end I didn’t even ask him if I could do them myself. I just told him I was and he didn’t bat an eyelid. By this time I had learned so much and I could do them. Even so it was a massive gamble. I purchased Lacerte (Intuits high end pro s/w). I pretended I had a company called ‘Overseas Income’ to avoid explaining. I had a small practice you know :-). That cost about $350. I used the single REP license to pay on a return by return basis. So it cost me $50 * 8 to do the tax returns. So $750. I could also use the s/w to redo 2011 and prepare my 2012 taxes for an additional $100. I got my 10 years worth of taxes done in one week and I found problems with the CPA’s work (which actually was very good).
This had a massive benefit. It was now incredibly easy for me to pretend to be a CPA on taxalmanac. Lacerte users are drive to this site as a research resource and it’s run by intuit (though badly). I could ask questions there and they would believe I was a pro. After all, who the hell uses Lacert to do their personal taxes or fills in hundreds of form 8621s? Neill had a client in the OVDP with an assigned agent! Somewhat unusual it seems. My poor clients were being put though the wringer by the IRS don’t you know.
So on balance I could have done without the CPA but I wouldn’t have been able to pull that off with the tax attorney.
My tax attorney I really needed. I don’t think I would have survived without him. He was the source of some of my problems though. He advised us to enter OVDP which was wrong. This is backed up by the pros on tax almanac who asked why my clients were in the OVDP given the circumstances. It’s all down to the tax attorney my clients have!
I had to argue with the attorney until he was convinced about my extra non-PFIC days. Even though he knows this area well he didn’t know about this. It is obscure though.
I think he should have known the 2008 refund would be denied up front. That would have saved me a lot of wasted time. We should have done sec 1291 from the start but he only goes this path with clients with millions of dollars in the accounts because of the costs.
My only interaction with the agent was short and terse. I could have easily gotten nasty with her (hell I would have). He on the other hand was always polite and that’s worth something.
He gave me examples of other cases and how they turned out. Some people got really great treatment like you see posted here. Some got it really bad. Much worse than me. An 85 year old was being killed by the agent because for some reason they had it in for him.
He helped me understand the risks vs. rewards of opting out vs just paying to be rid of it. This helped me feel a lot better with paying up. In the end I can afford to throw money at a problem even if I am generally a miser.
I wish I had learned more earlier. I guess the depths of despair can bring out your desires to learn better though.
Has it always been the practice of banks to put a very long hold on any US source cheque? Even a small one which you just want to cash out? My husband got a $15 refund USD cheque awhile back. In order to cash it he had to deposit it and it took almost a month for the CND equivalent of that cheque to appear in his account as being “available”. I don’t remember it ever taking this long years ago. It appears electrons flying through the internets are moving very slowly these days when it involves clearing a USD cheque. How in the world do cross-border businesses manage this delay or do businesses not even deal with cheques anymore? You can tell I have a days gone by mindset. You can tell PFICs go right over my head which has only ever had to deal with a savings account, a chequing account and GICs which I hope to goodness are not PFICs.
@Em, re: Canadian banks putting 30 day holds on all US source cheques.
I’ve been running an Internet business serving US companies since 1998. I used to allow big US customers to buy from me on 30 days credit and pay by cheque. Until about 2007, a US sourced cheque would clear within about the same amount of time as a Canadian sourced cheque.
I think Canadian banks were some of the first in the world to realize how fragile the US banking system was and started putting 30 day holds on US sourced cheques around late 2007. That meant that if my customer paid exactly on time, the earliest I would receive payment in our account was 60 days.
As a business person who pays my suppliers in 30 days, this became untenable. Starting in late 2007, I started telling all my US customers that they had to pay for their purchases with a credit card since waiting an additional 30 days for a US sourced cheque to clear would make it impossible for me to run my business.
That was one of the smartest business decisions I ever made, making Americans prepay for their purchases with a credit card. As the recession progressed, I’ve heard horror stories from my American suppliers about how their US customers just don’t pay their bills. I tell them I don’t have that problem since I cut them off at the pass before the problems even started.
@ OMG
Thanks for that information. Many years ago my husband had a very small business in the USA (not crossborder, not even intercity) but it would have killed us if our customer’s cheques took forever to clear. It was hard enough to get a few of those cheques in the first place. We simply didn’t have a big enough business account to absorb delayed cheque clearance. Despite this, I hope I’m dead before the cashless society becomes a full-blown reality, even if everything would happen in a blink of the all-seeing surveillance eye. It’s going to be a tight race because I know this is the goal of TPTB.
@Em
I recently got a $15US cheque from an American company as a PR refund. I cashed it immediately in my bank account. No hold at all.. I rarely get any US cheques. The last one maybe years ago.
@ northernstar
Interesting. This was a Big Five bank that my husband set up an account with for almost the sole purpose of eventually withdrawing his money in an audible huff, should they EVER question his citizenship. (I know, it’s kind of a snarky thing to do but they deserve it.) We both use credit unions and a provincial FI for our serious banking.
I should add that when my husband asked about the delay they told him they had to do this for the US government. This bank has branches in the USA.
@Em
mine is big 5 . I have had the account over 4 decades.. maybe that is why. and have enough to cover $15.00 LOL
@Em
Mine only has in investment offices in 5 cities in the USA. The green chair has more regular banking branches in the USA than in Canada. creepy to see them when I did the tourist thing. a few years ago.
@ northernstar
Of course my husband had more than enough to cover it too but it’s the fact that should he ever want to completely close this account he would have to wait for all US dollar deposits to clear, IF he had some at that time — no quick exit. I guess it’s another way for a bank to cling to your money as if it were their own and at the very least slow down your departure. They are always looking for ways to create a tie that binds you to them.
@neill
I would love to take you up on your offer of PFIC help – not quite sure how one does that?
I take it that the gain made upon cancelling your PFICs was the real tax issue – rather than taxation on the ongoing yearly dividends? I’m guessing – as you wanted to remain a US person – keeping them until AFTER renunciation was not really an option – i.e. delaying the ‘gain’ part.
Aside: I wish you unimagined success with your software – and hope some day you will find a country that is actually grateful for having such talent amongst its ranks.
@Em
I don’t have to worry about US funds in my account. Won’t be going there any more. Have no one there who would send me money. I do sympathize those with those banks cheque holds. I have some friends who have to wait for Canadian cheques to clear before they get in their Canadian accounts. Banks have the upper hand, unfortunately.