From @TaxConnections: Demonstrating the penalties awarded to those #Americansabroad who attempt the Sisyphean task of membership in the U.S. Tax, Form and Penalty Club. The greater the effort, the greater the penalties! https://t.co/lyga00Yscd
— U.S. Citizen Abroad (@USCitizenAbroad) July 7, 2019
Introduction
For those wondering what is meant by the “Sisyphean task” …
In the ancient world …
In Greek mythology Sisyphus or Sisyphos (/ˈsɪsɪfəs/; Ancient Greek: Σίσυφος Sísuphos) was the king of Ephyra (now known as Corinth). He was punished for his self-aggrandizing craftiness and deceitfulness by being forced to roll an immense boulder up a hill only for it to roll down when it nears the top, repeating this action for eternity. Through the classical influence on modern culture, tasks that are both laborious and futile are therefore described as Sisyphean (/ˌsɪsɪˈfiːən/).
In the modern world …
In the modern world “Americans abroad” are U.S. citizens who had the temerity to leave the Homeland and make a life somewhere else. They are punished for their self-aggrandizing craftiness and deceitfulness by being forced to file tax and information returns, only to find that when they think they have complied, they are assessed penalty after penalty. They are forced to repeat this year after year until their death or expatriation.
I urge you to read the post referenced in the above tweet. It appears to describe a situation that is unremarkable – Americans abroad who have some kind of tax deferred vehicle, which is assumed (probably incorrectly) to be a foreign trust (and all the compliance horror associated with it).
This raises the question for Americans abroad:
Is it riskier to attempt compliance with the U.S. tax system or not attempt compliance? What other lessons are there?
If you have been assessed penalties in relation to International Information returns, could you please comment.
No penalty assessment – yet.
It is becoming abundantly clear from the inaction of my congressional representative, Elise Stefanik, in regards to FATCA, Citizenship Based Taxation, (Am not on that comittee,…) that my only recourse will be to renounce and just be Canadian and happy again!
I moved abroad when I was 21, and filed an IRS 1040 return from overseas. The IRS fined me USD 500, which could only be contested in the USA. I later learned that this was something they routinely did, because any higher amount would trigger some sort of review. Never filed again.
That $500 fine and the resultant end of your tax filing means that you will be able to retain U.S. citizenship (if you want it). What is increasingly clear is that the people who attempt to comply are the ones who will have to renounce.
Too bad the tax compliance people don’t warn people that they have a choice:
I have just been told I have to file these forms for a estate account that is in my name. They say that makes it a trust account. I have to do a streamline for it as they were not filed when I did the streamline 4 yrs ago. The whole thing has me so sick with worry. What is one to do! ? Seems so many grey areas..seems you are punished for being honest..and filing. I have so many friends that do not and will not. I just wish there were some way to know…keep filing or quit. Accountants that make mistakes…cost you, not them. so here I am paying over 4500$ cdn…to have someone throw me to the wolves by the sounds of this article. What should I do?
@Paisley
You really need to get some different/additional advice. I am not suggesting that what you are being told is wrong (necessarily), but:
1. If you are delinquent with 3520s, this link from the IRS suggests that a streamlined may not be appropriate/necessary:
https://www.irs.gov/individuals/international-taxpayers/delinquent-international-information-return-submission-procedures
2. You really need to get clarity on whether a 3520 is required at all – starting with the question of “What is your factual relationship to this account?” Is there really a beneficial interest or is this just signing authority?
I suggest the last thing you should do is try to amend a streamlining filing. Talk about a can of worms. If they don’t know about the estate, for your own sake, don’t tell them about it now.
if one does not file, does one no longer renew passport on expiry as there is a question on being up to date with tax returns?
@Mark
Not sure why you think that …
Here is the general link for passport renewal
https://www.usa.gov/passport
You use Form DS-82 which DOES ask for your Social Security number but does NOT appear to ask about tax compliance.
@USCitizenAbroad
last time I checked (last year, I think) at the London Embassy website I am sure the application process asked the question (true/false) that tax compliance was up to date.
I have just gone through the process two minutes ago and it is not there. I must be going nuts. Thanks.
I have just realised my accountant has been filing my 3520-A late every year, and this is the year the IRS is cracking down. Im almost done with my last tax return (renounced June 2018) and I would normally mail this form as part of the return process, but now I’m wondering if I should take the gamble of not filing it…
@ mark My husband’s entire family have been renewing their US passports from Australia for decades and never filed a return, they have yet to have a problem. Some even own property in the US.
Paisley – If you paid a tax adviser to prepare and file your streamlined submissions, and the tax adviser knew about the estate but neglected to file required forms – you might want to consider going back to the firm and pointing out their mistake, so they can put it right. Explain to them that otherwise you will have to file the form (using the Delinquent Information Return procedures, as per US Citizen Abroad’s suggestion, and attaching an explanation making it clear exactly how it happened that the required form did not get filed.)
I suggest the tax adviser may then correct his error himself, without charge, as he should.
However, if he couldn’t have known that the file was needed (for example, if he wasn’t aware of the need because you didn’t realise you needed to give him certain information), then you can just file it yourself as per US Citizen Abroad’s suggestion.
My tuppence-worth.
@Mark
It’s the DS-4079 (part of the renunciation process in London that asks about the question of whether you file tax returns. But, even then, it’s for the purpose of determining your attitude toward U.S. citizenship.
Paisley: “seems you are punished for being honest..and filing. I have so many friends that do not and will not.”
It’s not dishonest not to file if you don’t owe any tax.
It might not be what the IRS wants you to do, but it’s not dishonest. The penalty for not filing is a percentage of the tax owed, so if $0.00 tax is due, the penalty for not filing is $0.00.
If it was a crime not to file, you can bet the penalty would not come out to zero.
Feeling so glad that I did not follow the advice of a condor who insisted that something which is clearly not a trust be treated as one.
I mentioned to the condor that there’s no way someone in their right mind could consider this specific account a trust. He insisted it is smarter to “stay on the safe side” and treat it as one anyway and of course fill out the costly 3250 and 3250a every year with fields on it that are clearly not appropriate for this account. He insisted, so I dropped that accountant. Now I’m very happy that I’m not facing the same problems as described in the link because of an accountant “staying on the safe side”
One of the problems of these foreign information returns (5471, 8621 definitely) and I believe 3520/A (but don’t have time to check) is that there is a requirement to file these returns regardless of whether there is an independent requirement to file a form 1040. In other words, owners of certain foreign corporations are required to file a 5471 even if they have zero income and are not themselves required to file a tax return.
This significantly “ups the ante” on the initial decision of whether to file these forms. If it all possible you need to arrange or interpret your affairs to avoid entities that meet the “form filing” requirements.
Questions you might ask:
Is my foreign corporation really a corporation under the U.S. entity classification rules? If not, then a 5471 is not required.
Is my nonUS tax deferred vehicle really a trust under the trust definitions?
Is this mutual fund really a PFIC?
See the following from the IRS and you will see what the U.S. concern is about foreign trusts …
https://www.irs.gov/businesses/international-businesses/foreign-trust-reporting-requirements
Finally, it’s important to understand that this stuff is enormously complex and is WAY BEYOND the competence of the basic tax preparer. So, don’t expect much from them (other than trying to protect themselves).
I know what question I would’ve asked, if I’d ever heard of these forms while I was still a US citizen, living in the UK, receiving no US-source income, owning no US assets, owning a UK business, getting gifts quite regularly and never filing a US tax form of any kind.
My question(s) would have been: what happens if I don’t?
I didn’t, and nothing ever happened.
As I see it, nothing could’ve happened, even if the IRS knew about my business and my gifts, because I was not evading US tax. No US tax was due, and all the UK tax that was due was paid.
If I had filed US tax forms, reporting my UK-source income as US-taxable — then I might’ve owed US tax — and might’ve had some whopping penalties too.
The above question is: “To file Form 3520 or not to file Form 3520 – which carries the greater risk?”
In my situation I decided that filing anything with the IRS, as a Canadian (and U.S.) citizen living in Canada, and married to a non-U.S. Canadian, carried an unacceptable risk of harm for my innocent wife.
As a consenting U.S. citizen I did file yearly both 3520/3520A for a tiny trust. One year IRS argued that I made two filing errors (one mistake I corrected, the other IRS was in error — no penalties imposed).
My first response to the general situation above was to get rid of the trust, which generated practically no income, because of the significant risk of excessive penalties should I make an easy to do filing mistake. [Of course this led to a new risk that I would make a different mistake, generating a different penalty, on filling out the final “getting rid of a tiny trust” form.]
Later, I appreciated more fully that “…my United States citizenship is a threat to my [Canadian] wife’s privacy and financial survival” [part of my 9/15/2016 Declaration to U.S. Sixth Circuit Court of Appeal] and I renounced my U.S. citizenship. Renunciation was my final response.
To get back to Paisley, The safest course is to do nothing. Don’t tell them anything they don’t already know.
Given that you are a Canadian I suspect that whatever you were filing the 3520 for was NOT a trust at all and carried no 3520 requirement to begin with.
I would like to suggest that the following points are accurate …
There are a large number of American abroad who do not file U.S. taxes. They seem to be able to maintain their U.S. citizenship. They do NOT have any IRS tax liabilities. Therefore, their U.S. passports cannot be revoked. Within this context …
1. If an American abroad does NOT file U.S. taxes and forms he may be subject to penalties only if he is discovered..
2. If an American abroad does file U.S. taxes and forms he is eligible to receive penalties and he may be subjected to penalties.
3. If an American abroad begins filing U.S. taxes and stops he may be subjected to penalties.
4. If an American abroad renounces citizenship he may be subjected to penalties.
The point is that there is no conceivable circumstance under which an American abroad can guarantee a penalty free life.
Bottom line: One can file U.S. taxes or one can retain U.S. citizenship, but one can’t do both.Also filing your first tax return is the first step toward renunciation.
The first step to renunciation for me was being told by a bank clerk that because I was born in the US, I could no longer open a bank account without presenting either my SSN or proof of non-US-citizenship.
So I renounced.
Never filed a US tax return since I left America, lo these many years ago.
Never had a guarantee that I wouldn’t get murdered; never had a guarantee that my teeth wouldn’t fall out.
Never got murdered; the dentist fixed the tooth.
Mark: “if one does not file, does one no longer renew passport on expiry as there is a question on being up to date with tax returns?”
Passports are handled by the State Department. Taxes are handled by Treasury via the IRS. They rarely communicate with one another, and are certainly not set up to do so routinely. It is possible to imagine this changing at some point in the future, as more people skip the country in order to avoid paying alimony / child support / student loans etc.
The passport form asks for your US Social Security number, but they understand that not all US citizens have them (especially overseas). In some countries (including within the USA itself?) one signs a statement, under penalty of perjury, that one has never been issued a SSN. In at least one country the procedure is different–one contacts the nearest Social Security office, confirms with them that no SSN is on record, and submits a print-out of that e-mail when applying for passport renewal. In this case no mention is made of perjury. It is theoretically possible to submit false data to the Social Security office (which does not keep records of these e-mails, or so they say), then change the text before printing it out for the consular agent. Of course, if you have already submitted a SSN in connection with previous renewals, then they’ve got you.
The problem with “trust” is that Canadians sometimes hold investments such as a RESP. Some investments cause quagmires. We don’t call them trusts. They are a vehicle to save money for a child’s education. However, The US may very well view them differently. The accountant that I used requested clarification regarding the RESP. Guess what? NO answer. That wasn’t a big surprise. We filed a 3520 for them when I did the streamline. I renounced. It cost me an extra $3500 for the 3520s. I fault the banks for not asking clients their nationality and informing them that such investments might be viewed differently by the US. I moved the money from a savings account to a RESP. What a mistake.
I don’t fault the banks. We demand that they don’t ask our citizenship. So why would we expect them to warn us away from RESPs TFSAs and other products.
I blame ouselves and the accountants. There is no good reason to report these as trusts.