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.
Sorry, but this keeps editing and creating loads of typos. What I’m trying to say is that if I only had U.K. citizenship, I believe I’d be subsequently safer. WITH the I.G.A., I don’t think I’d receive much if any protection as a dual national; but if I only became British, I’d have more protection in the U.K. courts. I’m being honest and cooperative anyway; with limited resources, they have bigger fish to fry.
@petros.
From what we understand from the lawyer we consulted, the tax liability on covered expatriates with a net worth of over 2 million only comes into play when the unrealized gains from that net worth is more than $651,000. I am nowhere near that. However I will probably get an accountant to complete 8854, I just need to familiarize myself with all the info needed!
@ monalisa ….. they do not have to be draconian… $5K per year is enough …remember FBAR is a compliance weapon a.k.a revenue enhancer and they have something now called a Reasonable Cause Assistant (RCA) which is a decision-support interactive software program developed to reach a reasonable cause determination according to IRM 20.1.1.3.6.1. This little “tool“ provides an option for penalty relief for the FTF, FTP, and/or FTD penalties if the taxpayer has not previously been required to file a return or if no prior penalties (except the Estimated Tax Penalty) have been assessed on the same account in the prior 3 years
unfortunately we are living in a global world these days and unfortunately they can with the help of the British government try to freeze your assets in your new home country BUT this would require that you have been a realy BAD GIRL with a lot of criminal energy .
Nevertheless actions to collect FBAR penalties asserted by the IRS (not Trasury) do not lend themselves to early resolution on brief. The district court emphasized in rejecting the government’s motion for summary judgment that the question of whether the taxpayer “willfully” failed to file an FBAR for a certain year is an “inherently factual question,” which generally needs to be developed through the trial process…….So it always boils down to how much of a revenue enhancer can you be for them (cost/benefit analysis)
Check this post from “Consumed with Fear” from a fellow dual citizen Canadian.
http://federaltaxcrimes.blogspot.com/2013/02/report-of-government-comments-on-fbar.html
Anyone has an idea of when a new IRS commisionner might be apointed? I still have some hopes that the new guy might implement Nina Olson’s recommendations. I don’t understand why it takes so long to put in place what she recommends.
@Heidi: the tax liability on covered expatriates with a net worth of over 2 million only comes into play when the unrealized gains from that net worth is more than $651,000. I am nowhere near that.
Nowhere near $651k? Or nowhere near $2MM? One nasty little extra piece of spite congress rammed into HEART is that if you’re over $2MM the expat tax bites on retirement savings (pensions, IRAs and so on) without any benefit from the $651k unrealized gains exception. In other words, someone could have $0 unrealized gain yet still face a tax liability from form 8854 on your pension funds. Questions 7a and 7b in part IV section B. Barely believable, isn’t it?
MonaLisa Things aren’t going to get nasty. You have nothing to worry about. You can relax right now. You are too small for them to concern themselves with AND you live in the UK out of their reach. Anyone who suggested going after you would be fired for incompetence. At worst you might get a form from a computer which you could use to wrap the garbage.
@ Heidi,
As I understand it, the accounting fees deduction is tied to one’s status as a taxpayer, not one’s status as a citizen, as Just a Canadian mentioned
A space to claim it appears on the 1040NR, and IRS Pub 529 makes reference to both forms 1040 and 1040NR regarding this.
But I share Just a Canadian’s caveat, too — “But I am not a tax expert so you might want to research it a little further.”
`Watcher Read the instructions for 8854 again. RRSPs and other foreign pension plans are ‘eligible deferred compensation plans’ They are not subject to the mark to market or any other exit tax. Having said that, 8854 is an intrusive, abusive nasty piece of work.
@Watcher, you make a good point of how a covered expat could still land with taxes on retirement savings, for instance, even if their overal mark to market gains were far below the $651,000. This could thus present a problem for anyone renouncing who hasn’t been tax-compliant for five years and filed 8854 even if well below the $2,000,000 asset marker because they’d technically be deemed covered expatriates.
@Mike, I agree, I could be hit with huge fines for past failure to file FBAR. But I’m sure my accountant would have referred me on to an attorney if she really felt it was that dire. She warned me before preparing my amended returns that if my tax liability was over a certain amount that she’d have no choice but to refer me on to a tax attorney. I trust that she felt that I was a strong case for reasonable cause, especially as I’ve lived abroad for almost 25 years; it’s not as though I had been keeping fully abreast of all the IRS regulations.
As soon as I realized my mistakes I did everything to put things right. 🙂
Heidi current year means the year for which the form pertains I.E. 2012. 8854 is due with your final partial year 1040. If you are a small fry, remember who they are really after- there are multi millionaires and billionaires out there that are the real targets.
@Watcher
Yep, had to give some of husband’s retirement savings away to our US kids to bring him below the magic $2,000,000. Better for the kids to have it now rather than after we are dead and gone as then there would be much more of a draconian tax on it! I’ m above the magic mark but have no pension funds and am below the 651,000 in unrealized assets.
Unbelievable? Nothing surprises me now.
I remember a practitioner saying to me last year that CI feels like a boy in a candy store…..and unfortunately a lot of Minnows will be collateral damage in this process.
Still ,I believe that more and more the FBAR warning letter 3800 will be issued in lieu of asserting those penalties.
@Heidi, better to exit not an uncovered expatriate if your desire is to bequeath your assets to children living in the US:
Source
The issue is that even if you owe no exit taxes, your inheritance to your children will be subject to withholdings; otherwise things may get complicated.
@Heidi
Don’t IRS gifting rules limit what can be given to kids (and anyone for that matter)?
Due to principal residence appreciation, I may be too close to the magic $2M for comfort and am considering similar strategies.
@KalC: Read the instructions for 8854 again. RRSPs and other foreign pension plans are ‘eligible deferred compensation plans’. They are not subject to the mark to market or any other exit tax. Having said that, 8854 is an intrusive, abusive nasty piece of work.
http://www.irs.gov/irb/2009-45_IRB/ar10.html#d0e723
“Section 877A(c)(1) provides that the tax under the mark-to-market regime provided in section 877A(a) does not apply to any deferred compensation item, as defined below. Instead, alternative tax regimes apply to “eligible deferred compensation items” and “ineligible deferred compensation items.” … In the case of “ineligible deferred compensation items,” section 877A(d)(2)(A) provides that a covered expatriate generally is subject to taxation on the ineligible deferred compensation item as if received by the covered expatriate on the day before the expatriation date.”
So… RRSP and other “foreign” (that is, non-US) pension plans are ineligible deferred compensation plans. They’re not subject to mark-to-market, but they are taxed immediately as if distributed entirely on the day before expatriation, without any deduction or exemption whatsoever. By and large, section 877a treatment of retirement plans is even worse that the mark-to-market on appreciated assets. Outrageous rather than merely spiteful.
No argument from me on your last sentence.
@ tdott
$14,000/ year tax free by you and your spouse to each child, their spouse or any number of grandchildren without having to fill in a gift tax form, BUT you can give your children or anyone else for that matter any amount from your estate up to a certain limit. That amount will be eventually deducted from the total you are allowed to give from your estate upon your death..
Sorry it’s not that well explained but you can google it or look at this link
http://money.cnn.com/magazines/moneymag/money101/lesson21/index7.htm
It is worth taking advice from a tax lawyer. It cost us around $2000 for about 2 hrs of his time plus a written report.
@ Petros.
” better to exit not an uncovered expatriate if your desire is to bequeath your assets to children living in the US:”
I know, but we have given them both a good education and now part of our pension savings! They are both dual nationals and I hope that they will see the light and renounce before we die. It is slowly dawning on them just what ‘freedom’ really means.
@ petros.
PS…
If my kids don’t eventually see the light and renounce, i’ll leave whatever I have left to WSPA rather than give it to the IRS!
For those, like me, who have wondered about not getting any notice of receipt of US tax returns, here’s the way it is done:
Latest IRS Tax Tip (probably closest thing to Canada Revenue Agency’s Notice of Assessment) http://www.irs.gov/uac/Newsroom/How-You-Can-Get-Prior-Year-Tax-Information-from-the-IRS
[4th try for this post – first 3 didn’t seem to make it in]
Thanks for the response, Heidi. I did not know about deducting the excess gift amount from the “unified lifetime gift and estate tax exclusion of $5.25 million” (as stated in the article) rather than paying taxes on it.
Do you (or anyone else) know if that still applies if the recipients are *not* USCs?
BTW, I most certainly do intend to talk to a tax lawyer. However, as is repeatedly stated here by a number of folks, the more you know about these things *before* diving in, the better
You can give the money to anyone. You are then supposed to file a gift tax return. You can give up to 143,000 per year to a non USC spouse without filing a gift tax return.
http://wills.about.com/od/understandingestatetaxes/qt/giftstospouse.htm
Watcher is right. Most non-US pension plans are deemed to be “ineligible” in the eyes of the IRS and receive “special” treatment under 877A. A non-US pension is ineligible under 877A if contributions to it have been declared as taxable income in the year they were made (you can call this a double whammy). First, the present accrued value of the pension must be calculated and added to the individual’s net worth on the 8854 (i.e., not split between husband and wife, even if the pension has a surviving spouse clause). Then if the net worth is above 2 million, the entire accrued amount is considered as taxable income in the year of renunciation.
Depending on the age of the individual and the size of the annuity, the accrued present value of a non-US pension may have a major impact on one’s net worth for the purposes of the 8854.
All this is true even if the pension is part of a defined benefit plan, under which the individual has no access to or authority over the funds other than the yearly distribution, and the pension stops when the individual and surviving spouse die. If the net worth comes to more than 2 million, then immediate tax must be paid on the total amount, even before it is received.
So, yes, agree that the 8854 is an abusive, nasty piece of work.
@tdott
I am pretty sure our lawyer said that you can gift to persons who are not USC’s (we had considered a college fund for my Nephew) but again I am sure that it’s out there and you can google and check on this. All this has to be done pre renunciation of course. Phil Hodgen’s blog has some interesting info.
Thank you. The answer then is to avoid being a covered expatriate no matter what.