US expat tax and FBAR: Discussion thread (Ask your questions) Part Two
Please ask your questions here about US Expat tax and FBAR.
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NB: This discussion is a continuation of an older discussion that became to large for our software to handle well. See US expat tax and FBAR: Discussion thread (Ask your questions) Part One.
Hi guys
Looking for some advice here and any ideas would be much appreciated.
I know someone who was born abroad in country X and is still a citizen of that country. They unfortunately became a naturalized US citizen some years ago in their teens/twenties and lived in the US only for college. That was 30 years ago, all with the idea that it would provide opportunity, but it did not. They have not lived there but only visited for short times on occasion.
The person is looking to renounce however is unsure of what will happen to their assets. They have a sizable net worth but is cash poor due to financial difficulties and cannot liquidate as easily as one thought. The assets could be worth a large amount which would likely be taxed by the net worth tax. They would not be able to afford the net worth tax on their assets especially if they are a covered expatriate. They have been filing annual tax forms and do not owe any tax and is very much below the exclusion limit.
Considering that persons situation, does the net worth tax still apply to them or is there a certain criteria in which the net worth tax is not applicable to this person?
I can provide additional details of this person if needed. Unfortunately relinquishment is not an option as they have used their passport and renouncing is the only option. They were also not born in the US and have no intention to go back.
Also if they renounced and *hypothetically* did not include some of their non-financial assets on the form 8854, how would the authorities find out about any of them?
What if the person did not *hypothetically* file form 8854 after renouncing?
Thanks and any advice or ideas would be appreciated.
Mr. G
manyproblems, Not sure what you mean by net worth tax. There is an exit tax which , I think, applies to any capital appreciation with a deductible of 625,000.
No one knows what happens to someone, living outside the US, who renounces and doesn’t include all of his assets on form 8854 or who doesn’t file 8854. Any ideas would be speculative. If your friend were living in Canada and had Canadian citizenship, the Gov’t of Canada has stated it would offer no assistance to the US in collecting taxes. Little if any info has been gathered about any other countries. We do know the IRS is terribly underfunded and overworked.
@ Portland PLC
Apologies. Yes, I was talking about the exit tax. It is not Canada, it is half-way around the world.
Noted. The person has not done anything, just looking at options. Just hypotheticals….
If anyone else has any other suggestions or ideas, it would be helpful.
Just to note, is there a certain criteria in which the exit tax is not applicable for an individual? Or no matter the circumstance the exit tax is applied to everyone regardless of being born as another citizen?
Thanks
@manyprobems2015, no, not really. Even if you’re below the financial thresholds, unless you file a 8854 form, you become a covered expatriate. The instructions for the 8854 are given here:
http://www.irs.gov/pub/irs-pdf/i8854.pdf
That said, if he/she never intends to travel to/over the States again then that may not bother them. Whether the IRS would come after them no one can say for certain. The department is overworked and understaffed, but if they suspect there’s a large amount due they may make the effort.
@many problems
Only if you are born with dual citizenship and you have lived 5 of the last 15 yrs outside the US in your other citizenship country and you can certify that you have filed the last 5 yrs including fbars.
You should read tax lawyer Phil Hodgens blog at the bottom of this site. He has some useful info how to lessen or avoid the exit tax by gifting /transferring assets before you renounce. Please note you will only pay tax on ‘unrealised’ gains with an aprox 650,000 allowance.
@manyproblems2015
Covered expat status is to be avoided at all costs and your friend should thoroughly investigate (and take legal advice if necessary) on how to avoid it. The exit tax is just one of many evil consequences of being a covered expat. For a covered expat, ALL retirement assets are deemed distributed and treated as ordinary income in the year of renunciation. That would likely mean kissing goodbye to 40% or more of lifetime retirement assets.
@manyproblems
I think if one lives in one`s “country of origin” then the expatriation tax is dropped. So if he went home, so to speak, he will not owe an exit tax. You might want to verify with an expert, but I believe this to be true. So if he is from Thailand and he lives in Thailand, then no exit tax. If however he is from Thailand but is living in India- then he will have to a an exit tax.
that last sentence should say: ” have to p a y an exit tax”
No Polly. It ‘s only if you are born dual. I believe manyproblems said his friend naturalised as a student.
To support what Polly has said…..
The person also should look at the Tax Treaty between the USA and the country concerned as I have noticed in the ones I looked at covered this topic which MAY run contrary to what the form instructions say.
Also the person in question should seek legal counsel in the country of residence and preferably not by a person who is admitted to the US Bar!!
The question that must always be answered is to what can ANY FOREIGN power do in said sovereign nation. There is another treaty that covers that one dependent on where one lives…
@Polly
What you say is not correct. The dual citizen exemption wouldn’t apply to anyone who acquired US citizenship through naturalisation (as is the case with manyproblems2015’s friend). You have to be a dual citizen from birth and meet other criteria.
@Heidi, yes you are correct and that is one more example of people falling through the cracks…
But the person does need to consult the particular tax treaty as they all differ slightly from the form instructions.
@Edelweiss, here is some language from one of the tax treaties on who would not be considered to have expatriated for tax reasons;
“(ii) at the time of the loss of such citizenship (or within a reasonable
period thereafter), the individual was or became a citizen of the other
Contracting State, and that other Contracting State was that individual’s country
of birth, or the country of birth of that individual’s spouse or of either of that
individual’s parents;”
If I recall, that clause is suppose to tie into the exit tax regime but the instructions are muddled.
Others can chime in and clarify or rebut.
@tax treaties are only for the treatment of retirement funds etc if you are NOT a covered expat. Otherwise it 40% on rrsps and 15% on any unrealized gains over the 650000 allowance for covered expats.
See renunciation guide and Phil’s blog at the bottom of page. It explains all.
@Edelweiss@Heidi
AH so. You have to be a dual AT BIRTH. Because it then says if you haven’t lived more than 10 years….yada yada yada…..It certainly doesn’t sound like this friend lived in America for 10 years. But if it only applies to Americans who were dual AT BIRTH, then this isn’t a get free card.
Only consolation: a 650000$ exemption.
@polly and manyproblems
The exit tax only applies if your net worth is over 2million. Then you get the 650,000 exemption, on any unrealized gains. The tax is NOT assessed on your total wealth only on any gains you have made that have not been taxed.
Ie house, shares, stocks,etc and deferred pension contributions ( that’s the nasty one).Some people may be covered but not pay any tax if they have made less than 650,000.
BUT then their heirs get hit with an estate tax of 40% if the heirs are US persons and they inherit from a covered expat.
@Heidi
“Unrealised gains” means that IF you were to sell your property, that phantom gain would be taxed. So they pretend that all you own was sold on the day of expatriation.
Hi everybody. I’m curious as to houses on form 8854. What if you own a house that is worth a million dollars with your husband? Would you have to declare a million or 500,000 (your half?) and what if you needed to bring down the amount so you didn’t hit the 2 million mark on total worth. Could you add your daughter’s or mother’s name to the house so your share would only be 33%? Just to bring your net worth under the 2 million mark…just a thought.
If the house is in both your names then the value would be split. There are rules governing the amount a us person can gift a non us person. I am traveling and have limited access to the info but again phil hodgen deals with this in his blog. If you are concerned about avoiding covered status then you should take advice from a US tax lawyer before renouncing.
Polly . Correct but it’s the day before expatriation that all assets are assessed.
I agree that in such cases a professional should be consulted!!
@Heidi, I declared 100% of the value of our flat because we own it ‘jointly’ rather than as ‘tenants in common’. At least in UK law they make this distinction; as a joint owner In would thus inherit 100% of the property whereas I would have had to own a mere percentage (50%) if were tenants in common. It was explained to me that as far as the IRS was concerned, I consequently had a 100% interest in it (as does my NRA husband).
For me it was a mere technicality because I was well below the $2 million mark but imagine that this could be a grey area for many.
@manyproblems2015
As others have mentioned, net worth becomes an important issue if it’s over $2 million USD.
So, is your friend’s net worth over $2M?
If so, also as others have mentioned, they still have the possibility of gifting away assets to get below the $2M threshold. They can gift away up to about $5.4M, meaning that if their net worth is under about $7.4M, it’s still possible to escape the exit tax. The only issue is whether your friend has one or more people that they’d be willing to gift such large sums to (spouses and children come to mind).
I suppose another potential work-around is to crystallize the unrealized gains prior to renunciation, so as to slip under the $650K exemption for covered expats.
The problems with this are:
1) you’d have to pay tax immediately on those gains
2) it’s just not possible to do this with some assets (e.g. defined benefit pension).
Having said that, it sounds like it’s not a possibility for your friend due to the illiquidity of their assets.
As for 8854, in theory if you don’t file it, you’re hit with a $10K penalty, and more importantly for your friend, I believe you will be deemed a covered expat. Would the IRS ever get around to harassing your friend about this? Who knows? And if they do, would this harassment have actual teeth? It’s tough to say what can and can’t happen in the future (witness FATCA, and FBAR and CBT enforcement), so I won’t hazard a guess. I don’t know if there would be a statute of limitations on this, but it would be worth finding out. I seem to recall reading there’s a 10 year SOL for collecting money owed (can anyone confirm this?), but if you don’t file 8854, there’s no explicit amount owing, and so the SOL clock likely wouldn’t start ticking (assuming this SOL could apply).
I understand that existence of any fraud or funny stuff would mean SOL stays open forever. Get squeaky if you plan to get CLN?
Hi there!
I am a Swedish citizen with a Green Card since a few years back. My aggregate account balances in my home country have been between $30k to $100k in the last 6 years, with negligible income and capital gains (on average $200 per year, with no more than $1000 in any year, which has been fully taxed in Sweden with no taxes due in the US).
The accounts are still open, and FATCA reporting to the US has already begun with some Swedish banks, but will be in full force in Sweden later this year.
The problem: I have never filed an FBAR, nor have I included the income from my foreign accounts on my US tax return. I simply either did not know, or did not care enough to find out. I will confess that last year I checked the “Yes” box on the Schedule B (the first time I saw it), but then I started reading about FBAR’s, freaked out, and ended up not failing by the June 30 deadline. Which takes me up to today..
I have spoken to three lawyers about my situation (and have retained one of them, Lawyer 1), and each of them have said different things, and now I’m confused about what to do.
Lawyer 1) Go with Streamlined Domestic, and assume the non-willful certification will work with 90% chance, and simply pay the $5,000 (which is the estimated penalty).
Lawyer 2) Follow the Delinquent FBAR procedures since there are no taxes owed.
Lawyer 3) Amend 3 tax returns, and back-file 6 FBARs. Don’t do the Streamlined as I don’t owe the IRS any money. It’s unclear if we would attach a reasonable cause letter with the FBARs / tax returns (did not get that level of information).
Looking for some advice here. Can anyone please chime in with which approach might be better for me, or if there is a different approach that I haven’t thought about?
I don’t think I would mind too much paying the $5,000 if I go with Lawyer 1 / Streamlined, but it is the non-willful certification that scares me. $100,000 in fine if found willful? Since I checked “Yes” on Schedule B, it’s kind of hard to argue why I wouldn’t be willful… also I’m not sure I want to be at the mercy of the IRS like that. Just my two cents.
Thank you so much in advance if anyone here has time to give me some tips 🙂
Ran