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.
@allou
I wish I could give you a definitive answer. It seems that if you had to reduce the standard exemption and any other credits by the number of days you were a citizen, it would be fair to reduce any tax due proportionately as well. (Just as an example, I’m not suggesting you do that.) Of course the IRS doesn’t address any of these points in their publications. If in doubt, it may be best just to go by what the instructions state regardless of whether it is a full year or not. That’s all you have to go on, after all, and I personally wouldn’t want to second guess what the IRS might have wanted without seeing it in black and white. Just my opinion.
@shunrata
“Why are you filing 1040nr if you have no US income or assets for that part of the year?”
Because I did not know any better before asking for comments in this forum! I suppose the info given on Phil Hodgens is more geared to persons with US source income. One less form to file.
So thank you again
@Duke of Devon
So much to learn and consider.
Thanks for input
@To All, I was told that to actually send two separate tax returns (i.e. A 1040 for the time I was a USC followed by a zero 1040nr for the time I was a NRA) is technically incorrect, though I get the impression that the IRS tolerates it for minnows. My understanding is that my accountant was correct that she filed a 1040nr as my return which showed my Income that was connected to my time as a US person (using the attached 1040 as a statement). She probably assumed she could still use 2555 to produce a simpler (and less expensive) tax return for me. As the their rejection of the FEIE lost me less than $300, I’m inclined to not fight over ‘small potatoes’…I’m just relieved that the IRS has received and processed my paperwork so I can hopefully smoothly log out of the system. Bon Voyage!! 😉
Briggs You asked
Not quite. When you receive your CLN you will be told that you are supposed to contact the IRS
What this actually means is that you are supposed to file form 8854. which covers the exit tax and on which you are supposed to attest that you have been tax compliant for 5 years. You won’t be liable for any exit tax but filing 5 yrs. will be a pain-but not impossible.
No-one knows what happens to those of us who don’t bother. So far there are no reports of them coming after minnows.
Duke of Dean
Presently I know there is no tax owing on my part. Filing with them looks like a real pain in the… My concern is in the future. What if in the future I start a business and it generates income or I inherit something with monatary value. Could they come after me then and have me file 5 years back from that day they contacted.
They are greedy and desperate. Maybe some day they will realize that generating revenue from war and taxes is no longer a benefit to the economy.
Briggs. The sun might rise in the west. The cow could jump over the moon. The IRS could come after a Canadian citizen completely unknown to them and ask for money. Such request would best be ignored. They may be greedy and desperate but they only have the resources to chase after prey where there is some chance of success.
Sorry. Bold didn’t work well on my ipad. Didn’t mean to shout.
Duke. Where I sit the Sun rises to the east. As long as it rises that’s all that matters.
It’s the not knowing. I have time to ponder.
I am sorry to inform you about the cow jumping over the moon. A fews years back it was determined those bones found on the moon belonged to a cow. Guess he didn’t make it…lol
P.S. This joke actualy came from someone in NASA, or maybe it’s true.
@Briggs
As Duke of Devon notes there are issues with not filing those past returns. The exception is that you likely don’t have to if you have a CLN (back)dated to before June 2004 (I think it’s June 2004 when the rules changed). However, that is not 100% certain AFAICT.
Below is my now standard buzz kill blurb (with added bit on being a covered expat) on why renouncing and not filing is not, IMO, a good idea.
——–
There is no statute of limitations on those unfiled returns, because they’re unfiled. So that will hang over your head for the rest of your life.
By not filing returns, you have probably moved into the wilfully non-compliant category. I don’t know what the ramifications of that are, but I don’t see how it could be a good thing. FWIW, if you don’t file 8854, then you’re subject to a $10K penalty, and 8854 specifically asks about those 5 years of returns.
By not filing returns, you have definitely become a covered expat. That means, among other things, that you are subject to the exit tax. You will be taxed on mark to market capital gains subject to a $600K exclusion. As well, you will be taxed on the total (not gain, total) amounts in any RRSPs and, I believe, pensions that you may have, and there is no exclusion. RRSPs/pensions are, I believe, taxed at the highest marginal rate. The RRSP/pension tax is a major issue for covered expats IMO.
Unless you like to live dangerously, travel to the US is out – that would include plane connections though any of the major hubs. For some people, not a big deal; for others, a very big deal. And, you’d always be concerned when flying over the US to, say, Mexico if you’re a risk averse type of person, due to the (admittedly unlikely) possibility of the plane making an unscheduled landing in the US. Note that increased inter-agency and inter-country data sharing means there’s a reasonable chance that in the future US border people will be aware of all former USCs’ tax status.
The US-Canada tax treaty will protect you (at least in Canada) from the IRS if you were Canadian at the time the liabilities were incurred. I don’t see how there is any guarantee that the treaty could not be changed for the worse in the future. And although it would clearly be unfair if the changes were retroactive, nobody has ever accused the IRS of being overly fair (and the FATCA fiasco has indicated how much we can expect the Canadian government to stand up for fairness).
So, IMO, you would have to have a really, really good reason to not file those returns. One concern people often have about filing those returns is the cost of getting someone to do it for them. A possible route is to DIY and just do the best you can. I’ll leave it to you to determine what “best you can” involves given that you’re almost certainly not a cross-border tax professional. At any rate, at worse you could be audited later and assessed some $$. If it’s a large amount of $$ that you are unable or unwilling to pay, you could then invoke your treaty right and not pay up; leaving you in more or less the same situation as having not filed. OTOH, at best you did a bang-up job on the returns that can withstand any amount of scrutiny, or, more likely, you can expect the IRS to not have the resources or inclination to worry about your piddly returns, leaving you home free (at least after the SOL runs out).
@Idot
I have been giving much thought to all the what if I do and don’t’s. If I don’t then that would mean I spend the rest of my life looking over my shoulder wondering. If I do then that means when all is said and done my private life is my sancturary once again and the US has no business in it. Being compliant is a small price to pay for my peace of mind. My freedom is priceless.
On a happy note, I think spring is here, frogs are out singing and robins have returned.
Enjoy the day everyone!
@Briggs and others
Just my 2 cents (Euro cents) worth. I went with the DIY “best you can” route. Where I live there are no US cross border tax experts. And after an initial $400(US) spent when I contacted an online tax service which I didn’t use, I plodded on alone – with the spirit of IBS helping me. I have adult dual children who also renounced. When I realised how complicated the US system was, and how disadvantageous for anyone perhaps planning to work internationally, there was no other choice. I don’t see CBT ending anytime soon, and there are just too many pitfalls. I did all the back filing, Fbars etc. as that was the official way to go, and I can honestly say I did my best.
@allou
I will also take the DIY route. Will do my best and if I need direction I will have the IRS in PA help. I have a great phone plan so no worries with long distance charges. I refuse to pay a few thousand dollars to fill out forms when I know I won’t owe a dime. I think the IRS will see in my filings that I’m no catch to them and they won’t make to big of a deal if I make a mistake. I’m not a accountant,lawyer or belong or work in organized crime, so Ignorance is my excuse and that is acceptable to them.
Good job allou!!!
@pacifca777 – the Department of State Manual on expatriation and the Immigration and Nationality Act are not the same thing. A unilateral oath of allegiance made with full intent to be meaningful and to relinquish fits within the four corners of the statute as an expatriating event even if the State Department manual suggests otherwise.. The State Department may not like it and may contest it in an appropriate case. However, I think it entitles the oath-maker truthfully to answer that they have relinquished as of the date of that oath. The Manual relies on the Gillars case to allege that there must have been a formal requirement of the foreign state to sign it. While there are certainly quotes in that case that support the Manual guidelines, it should be noted that Gillars was a treason case, that she had stipulated at trial that she was American, that the evidence of an oath of allegiance to Germany that came out at trial was ambiguous and equivocal and it a copy was not even produced.
I think it fair to say that a unilateral oath of allegiance – sworn formally before a lawyer or notary done for the express purpose of relinquishing by someone who WANTS to relinquish has not been tested by any case in court. Prior cases (including one cited in Gellar) of people who wanted to remain Americans and had taken an oath (in the case cited in Gellar, it seems to have been a pre-war Air Canada employee) are not precisely on point. I think such an oath certainly entitles the maker to answer in good faith “I am not a US citizen” if asked by their Canadian bank. It will not relieve them of the IRS rules regarding notification and exit taxes and there is of course the risk the US may not acknowledge it (but to what end? ).
My only point being following the Manual may deliver certainty, but it is not necessarily the only path out of Hell. Others may be less tried and true, but they may have advantages and reduce other risks. To each his or her own.
@ Anne Frank,
I am aware that the DoS Manual and the Immigration and Nationality Act are not the same thing and that, although the INA confers on the Dept of State (under the Sec of State),
the Department’s regulations and procedures must be within the law – or else they’ll get (or should get) overturned.
My sense is that many people, probably the vast majority, who want a CLN just want to get one as expeditiously as possible and get on with their lives, in which case Dept of State, not the court system, will be, by the person’s own choice, the end of the line for them.
So, in that case, I think it’s important before approaching a consulate, that the person evaluate what result they’re likely to get from DoS. [Actually I think that’s sound practice for everyone, even if one is willing to go as far as the Supreme Court – before you contacts DoS and they open an expatriation file on you, you should know what DoS’ policies/practices are].
I agree with you as well that “there’s more than one path out of Hell” and only some relinquishers will opt to apply for a CLN. However, I was writing in the context of a CLN application, not in the context of establishing non-citizenship for banking and other purposes.
Not everyone who is considering applying for a relinquishment-based CLN wants to go the whole nine yards into a court challenge or even an administrative appeal.
For example, if met with resistance at a consulate, some may choose to renounce on the spot; some will decide not to do anything; some may choose to have their application forwarded with a negative recommendation and wait for the results; some may proactively choose to contact their Division office in DC directly during the approval process; some upon receiving a rejection may decide to fight it through administrative review and even right up through the US court system.
So, I think it’s a good thing if people are aware of what roadblocks they might run into, as they, based on their own fact-set, risk tolerance and research, evaluate which path (eg., CLN or not) is best for them.
@Briggs
Re:DIY – it is doable, my financial situation is basically uncomplicated. I also used the IRS international advice line last year. Always received courteous treatment. They suggested that I filed myself and there was no mention of Streamlined from them.I heard about that after I had filed. I have not heard back from IRS or Treasury. You can file the Fbars (if you need to) online, also backfile Fbars with an explanation=mine was that honestly I had never heard of an Fbar before 2013.
Good luck – keep calm 🙂
@allou
Thanks for info and will keep calm.
Have you heard how long it takes them to assess a straight forward backdated file?
FYI to those who have multiple FBARS.
I got an alert today for t his
Streamlined Multiple year FBAR Summary – Taylor Leibow
http://www.docstoc.com/docs/168802208/Streamlined-Multiple-year-FBAR-Summary—Taylor-Leibow
Thanks, northernstar.
It looks like it’s just a worksheet for you to pass on to a firm your information so they can put it in the proper places on the FINCEN 114 form, which must be filed electronically henceforth; http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Report-of-Foreign-Bank-and-Financial-Accounts-FBAR. I think most would be able to do that themselves rather than pay a firm to do it for them — you will have already done all the hard work in gathering the necessary information from your records.
If a person is gathering all of that information into this useful worksheet (which no one else can do but the person), then why not just go one more step and and input it into the actual online form? I believe others have reported here that the electronic filing for FINCEN 114 went pretty smoothly and there is an online receipt that your information was actually received.
(Before this year’s electronic method, I gathered and did all of my FBARs myself. I couldn’t do all of the other complex forms needed, but I found the FBARs were pretty straight-forward.)
Someone from this blog who has successfully filed theirs I’m sure would be able to help with any questions someone might have. What do you think?
@Briggs
RE:Have you heard how long it takes them to assess a straight forward backdated file?
No, and no news is good news. There is a way to find out if your returns have been processed by contacting IRS and some IBS persons have done this. I have not. I have the receipt for all the forms I sent in and copies of everything I sent, that is enough for me. I can only do my best and continue my life less burdened. The idea of having to file financial information to the IRS/Treasury for the rest of my life and to always take US tax regulations into account before making financial decisions even though I have lived most of my life in Europe, was just too complicated. Good luck on your journey, you will learn a lot 🙂
@allou and all,
Thanks for sharing and support from all. This site and all who contribute are just amazing. It would of been next to impossible to even consisder being compliant without all the research and experiences gained before me. Many many thanks to all of those before me who keep soildering on. When all is said and done I will share my experiences as well.
@Briggs – Thumbs Up! I was in your shoes this time last year. I received fantastic help here at IBS. Of course you will get through all this as many others have. As for the Fbars – filing online is no problem. Simply gather your information and fill in the form. You receive an immediate acknowledgement plus a few days later another notice that your Fbar has been processed. If only the IRS information could be submitted so easily…
@monalisa1776,
Thanks so much for your feedback about how your accountant filled the 1040/1040nr. Like, Allou and
others here, I’m also a DIY with the expatriation related paperwork and find the forms and instructions
confusing, so it really helps to have feedback from someone who had a professional file the forms!
Just a few more points that I still need clarification about to help me fill in my 1040/1040nr:
1. 1040 filled as a statement: Did your accountant fill in the entire 1040 but just not check the standard
deduction because its a dual status year and you not sign the 1040 because its a statement?
2. 1040nr filled for the whole year: I’m still not clear where to put the info from the 1040 onto the 1040nr.
Does all the income info from the 1040 go onto the corresponding lines of the section called “income
effectively connected with U.S. trade/business” found on page 1 of 1040nr? I ask because I don’t
see how else you can ever get to the tax and credits section. If I put all the income info from the
1040 onto schedule NEC it only provides for TAX on that U.S, income and no way to claim the tax
credits I’m entitled to for the portion of the year that I was still a U.S. citizen. I don’t have any
wages to report and I’m not running a business so I find this very confusing from the 1040nr
instructions and publication 519.
3. Did your accountant put dates at the top of either the 1040 or the 1040nr?
4. 1040nr and exemptions: I am assuming that you can claim the full amount for yourself as an
exemption (and also for any other applicable dependents) and thus deduct the full amount for
exemption(s) on line 40 of the 1040nr. Is this what your accountant did?
I don’t think your are being a “push-over” in your response to the IRS refusing the FEIE. I think I would be inclined to do the same as you. We all just want to get this nightmare over with!! I am sure that
your accountant will send you a bill, so I wouldn’t chase after her.
@allou, @notamused,
I appreciate your comments as DIYers too. My understanding is that after renunciation we are from the
IRS viewpoint non-resident aliens. That is how they have always viewed my non U.S. citizen spouse. I think that publication 519 is not that helpful for dealing with the case of expatriation, but like some other IRS docs/forms it has been “bastardized” to also apply to that situation without being clearly written to address that specific case. They certainly could have made section 6 clearer.
As for filing only 1040 for the expatriating year, it is my understanding from reading the Serbinski forum
that it is possible to go this route, but if you do, you are agreeing to be treated as a U.S. citizen for the
entire tax year and as such you must report ALL of your worldwide income for the entire year on that
1040. For some this may not be a big deal, but for others it may not be an attractive option.
Moonstruck. I believe you are overthinking this. If you do not have US source income you do not have to file 1040NR. Just file 1040 and prorate the standard deductions for the time you were still a citizen. You still get to deduct for any taxes paid to Canada.
‘Dual status alien’ Does not refer to you.
tdott –
My now standard buzz kill blurb …
We blurble in harmony, albeit in different keys. Debbie Downer also just put out a worthy melody.
Every magic bullet is prone to swerve.