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.
Don’t open a gigantic can of worms by changing anything. Presumably you get T4s and your earnings are reported to CRA accordingly. Also presumably they don’t send information slips to IRS. Leave well enough alone.
Yes, I do get T4s. It just feels strange to fill out the FEC form and type the California company address on it. By no means do I want to open that can of worms! However I may still have to amend the prior year returns as I haven’t reported TFSA/RESP on any of them with the exception of FBARs. Searched the Internet for a definitive direction regarding those and I’m still not sure whether or not I should have filed 3520/3520A.
Oh Dear. Another can of worms best left unopened. It is virtually impossible to get a 3520/3520A right. Treat them as savings accounts with no earnings.
@OhDear
My understanding is that as you were physically in Canada while working, the income is not US sourced (as far as taxes go), regardless of getting T4s or not. Note IANAL and certainly IANATL.
See “Source of Earned Income” at https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion-what-is-foreign-earned-income where it says:
Re RESP and TFSA: I don’t think you’ll find a cross-border tax professional who says that a RESP is not a foreign trust, so they’d say that 3520 and 3520A filings are required. TFSAs are more of a grey area (for the life of me I don’t see why they should be considered trusts, but apparently there is an argument to be made that they are).
I paid someone to do the 3520 and 3520A filings for my RESP and TFSA. And, of course there were mutual finds in there, thus additional filings for these PFICs (form 8621, I believe). Note that I had not been filing all along and was doing Streamlined, so my filings would likely be expected to get more scrutiny than those from someone like yourself.
Having said that, I believe lots of people do something similar to what DoD says to do and forget about the foreign trust (and PFIC) thing and just treat these accounts and account holdings as regular accounts with non-toxic holdings. I think most folks, though, probably declare earnings in them (as regular passive earnings).
If indeed you’ve been filing all along I’d tend to give thought to what DoD says [we often differ :-)]. However, I’d also say that you should fully educate yourself on what is technically expected and understand the potential ramifications of your actions if you decide to “cut corners”. In the end, you’re the only one that can decide what will let you sleep at night.
@tdott Thanks for your insight! Great explanation on foreign source income, learn something new every day, eh?
Both my RESP and TFSA are small, not long-lived and had no mutual funds. RESP has been closed this year as I expended all the funds on my son’s education. And potential US tax on my very small TFSA earnings (if I were to go back and report them on amended returns for past years) would likely be wiped out by the FTC, when lumped together with other passive income on form 1116. That’s why I’m on the fence RE even putting any effort into going back to amend and report something that will produce a few $$ (if at all) US tax due. That said, I am thinking whether or not I should at least comply in my 1040 for 2016 which I haven’t filed yet, and report both TFSA and RESP… Decisions, decisions… I really wish to get away from all this for good!
Reading the 8854 instructions – is a person who renounced not off the hook even after filing the initial 8854??? Why does it say “annual” on the form? Can one ever be free of the “land of the free”???
@OhDear
The annual form 8854 is primarily for folk who were ‘covered expatriates’ and who expatriated before 2008. It had to be filed immediately on expatriating and then each year for ten years after expatriating. After the ‘exit tax’ law passed in 2008, form 8854 became a one-shot deal. You file it along with your final year return, and you’re done.
The instructions for it still cover both cases, though.
@Watcher – Whew, thanks. And I have already started to freak out WTF!!
@OhDear
You’re welcome. I can personally attest to the fact that an annual 8854 becomes a royal PITA. I will finally file my last 8854 around April next year. It will be my eleventh. All with zero additional revenue to the US, so really nothing more than time-wasting sand in their processing gears, then.
BTW, remember to pay attention to the part of the 8854 instructions that indicate that you have to append a copy of the 8854 to your final tax return and also send a standalone duplicate 8854 separately to Philadelphia. (Why would the IRS ask for something just once when twice is sufficient?)
@Watcher – Good to know, thanks for pointing that out. I’m not surprised. To be honest, I am flabbergasted by the complexity of US taxation vs Canadian. I’m filing my own returns and seeing how many traps one can fall into with IRS – it’s unbelievable! No wonder making a mistake is SO EASY, even among the accountants.
Question about loan proceeds and FBARs. I have a joint checking account with my non-American wife, and last summer we did a consolidation loan for all of our home reno expenses. The bank for some reason disbursed the loan into our checking account, then withdrew the payments to the other creditors from there. We normally keep less than $4000 in this account since we’ve had it, but for one day the loan proceeds kicked it to over $50,000, and it dropped the next day back to its normal levels.
Does this one-day excursion into the $10K+ realm trigger the need for a FBAR?
@Arjan, welcome and technically yes it does.
“Who Must File an FBAR
United States persons are required to file an FBAR if:
1.the United States person had a financial interest in or signature authority over at least one financial account located outside of the United States; and
2.the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year reported.”
https://www.irs.gov/businesses/small-businesses-self-employed/report-of-foreign-bank-and-financial-accounts-fbar
Doesn’t matter that it was only in your account a day, it went over at some time during the year and should be reported according to the IRS. Whether you actually report it or take a risk not to is up to you.
Arjan. I’ve had the same question. There is no correct answer. Your month end statement will show the smaller balance. So it’s really up to you. Does your bank report your account to the IRS? Do you normally file fubars? The risk is small either way.
A number of people have asked how to evaluate pension income for the purpose or 8854
With the caveat that I’m not an actuary (which would make my advice expensive), here is my simple solution.
Remember you are not required to have exact numbers. In other words your best estimate should suffice.
Google ‘ present value of annuity.’ There are a number of online calculators to choose from.
They will ask for the number of payments in months or years. For that you can turn to the social security admins’ life expectancy calculator. The IRS publishes life tables but they are above my pay grade. Again let Google be your friend.
Finally you will need an interest rate. Future interest rates are a guess. The higher the number you enter the better. Higher rates lower the present value. But the rate should be justifiable.
Google ‘ IRS discount rate’ and you have an official rate .
All of this might produce a present value that is far to high for comfort in which case a sharper pencil would be needed.
Looks like an important and interesting analysis of the FBAR and IRS failure to meet terms of the APA Administrative Procedures Act;
ex.
“…..Because FBAR penalties are imposed under Title 31 of the U.S. Code and not the Internal Revenue Code, the assessment and collection procedures for FBAR penalties are different than for tax penalties, and those procedures may be more susceptible to challenge based on Administrative Procedure Act (APA) violations………..”;
http://www.thetaxadviser.com/issues/2017/may/developing-strategy-fight-fbar-penalties.html
Sorry if this has been asked before, but I am confused about whether I have to file FBARs as well as tax returns for the five years prior to renouncing. I am a Canadian citizen born to Canadian parents in the U.S. but have lived my life in Canada and never filed tax returns in the U.S. I renounced the (unwanted) U.S. citizenship at the end of last year and am sending my 8854 form to the IRS. I was actually born a dual citizen and haven’t lived in the U.S. for the past 10 years so apparently I should not be a covered expat anyway. I received by CLN and have completed 5 years of of back tax returns (forms 1040) and am sending them to the IRS as well so that I can check the box on 8854 that says I have done this. But I am also supposed to send 5 years of FBARs? Even my lawyer said this was unclear, as the legal obligation seems to revolve around the tax returns. Can anyone provide advice? I just want to be done with the U.S. once and for all.
Nick, this may help your decisions.
Attach your initial Form 8854 to your income tax return (Form 1040 or Form 1040NR) for the year that includes your expatriation date, and file your return by the due date of your tax return (including extensions). Also send a copy of your Form 8854, marked “Copy,” to the address under Where To File, later.
2016 Instructions for Form 8854 – Internal Revenue Service
https://www.irs.gov/pub/irs-pdf/i8854.pdf
One conclusion re FBARs:
https://hodgen.com/expatriate-without-filing-fbars-sure-thing/
Canadian Protections from IRS
Good luck — you’re almost done with the US.
Posting in case this is useful for those with PFICs?
http://www.thetaxadviser.com/issues/2017/jun/cleansing-pfic-taint-planning-pitfalls.html
‘Cleansing the PFIC taint: Planning and pitfalls’
By Charles A. Barragato, CPA, Ph.D.
June 1, 2017
Note that this site has other useful info on various CBT topics, ex.
‘International information return penalties remain a significant issue for taxpayers and advisers’
By Shamik Trivedi, J.D., LL.M., and Cory Perry, CPA, Washington
April 1, 2017
http://www.thetaxadviser.com/issues/2017/apr/international-information-return-penalties.html
(mentions ‘First time penalty abatement waiver’, and ‘reasonable cause’, Taxpayer Advocate assistance, etc.)
‘Using the First-Time Penalty Abatement Waiver’
By Jim Buttonow, CPA/CITP
July 1, 2013
http://www.thetaxadviser.com/issues/2013/jul/buttonow-july2013.html
AICPA also does some valuable advocacy work on issues relevant to extraterritorial CBT – ex. see their letter re the US treatment of Canadian local registered savings such as TFSAs, RESPs and RDSPS.
As per my comment above re AICPA advocacy;
ex.
https://www.aicpa.org/Advocacy/CPAAdvocate/2016/Pages/US-Canada-Cross-Border-Accounts.aspx
‘AICPA Presses U.S. Treasury to Adopt Recommendations to Ease Tax Burden on U.S. and Canadian Citizens Holding Certain Cross-Border Accounts ‘
Published March 30, 2016
Thank you, once again, badger for bringing this forward.
In *the letter* are recommendations for the Canadian Registered Disability Savings Plan (RDSP). If the Canadian who qualifies for an RDSP account has *a mental incapacity* which prevents him or her from renouncing a US citizenship (and does not allow a parent, a guardian or a trustee to act on that person’s behalf), that person with that specific qualifying disability is still entrapped into yearly US-deemed US citizenship with US tax and reporting compliance requirements and is punished further because he or she as the beneficiary of an RDSP (held by another because of the beneficiary’s mental incapacity) cannot renounce the US-deemed US citizenship and thus would be double-taxed by, in addition to Canada (which is legitimate as for all others who are beneficiaries of an RDSP), the US — with recommendation,
************
Hello all,
Does anyone know of a simple way to check whether or not a paper return was received by the IRS (i.e. easier than asking for a transcript)? This was a typical expat return with $0 owed/refunded so I can’t tell indirectly from the movement of funds. I’ve seen some people suggest using the “check my refund” IRS page but it states that one should wait 4 weeks after mailing the return before using (and it’s not clear if it works with 0 refund returns) it, and 4 weeks have not yet elapsed for me.
The return itself was sent via international tracked mail, and tracking continued in the US via USPS. It reached Austin, but for over a week its tracking status has been stuck on “mail is in transit to destination”. I’m guessing (hoping) that it was received but the system was not properly updated at the last step.
Thanks in advance!
@CoffeeBean – Mine never got fully received according to the tracking. My understanding is that this is normal that they don’t bother to complete the tracking at IRS.
@CoffeeBean
In the past, I’ve called to enquire about this (and other issues). With just one exception, the agents I talked to were cheerful and helpful.
See: https://www.irs.gov/individuals/international-taxpayers/u-s-citizens-and-resident-aliens-abroad
Where you’ll find this blurb that includes the phone #:
I’d normally call around 10:30pm EST and only have to wait a few minutes. Apparently the wait can sometimes be brutal.
@JustGetItDone
It’s good to hear that this is a common issue. I think that last year my tracking did actually complete but perhaps I was just lucky.
@tdott
Thank you for your suggestion. Should I wait for some amount of time to elapse from the date of mailing for the return to “enter the system” before I call, or is it acknowledged immediately after receipt?
@CoffeeBean
I *think* mine entered the system fairly quickly after receipt. Processing time is a different matter, however, and that (processing status) was my primary interest.
Really, it’s just the cost of a phone call, so if it’s keeping you up at night, just call. Like I said, with only one exception in several calls, the agents I talked to were professional and some were downright cheerful.