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.
@DMichael
Just for starters-
– if you have a Canadian bank and it gets wind of your place of birth, depending on thresholds, your “private” personal information and information on any family member you share accounts with is off to the IRS (and then god knows where else, with unknown security risk).
– you would be toxic as a signing authority on any community bank accounts (e.g., on a condo board, service club, or interest group).
– if you were somehow spurred to move abroad, and it wasn’t to the U.S., there are many countries where you would find it difficult, if not impossible, to obtain banking services.
– the TC in FATCA stands for Tax Compliance. We’re moving through stage one in an extended U.S. tax compliance campaign. It’s not impossible that the U.S., having proved what a pushover the Canada’s government is, will enact another tax treaty override, and by more extortion, force the CRA into becoming a collection agency for the IRS. There’s where there really could be something for you in this fight.
Perhaps others can be more articulate and comprehensive.
Meanwhile, please donate to ADCS.
@ DMichael Shovel makes some good points
Most Financial Institutions are asking people opening new accounts for place of birth or citizenships held in order to determine “US Person” status. Maybe you don’t require any new accounts. If identified as such your detailed account information (thesholds may or may not be used depending on the institution) will end up in the hands of the CRA (in Canada) and the IRS. It is only a matter of time before existing account holders are also asked these same questions. These questions violate the Charter of Rights in Canada, one cannot be discriminated against because of nationality or place of origin. As Shovel points out many Financial Institutions in other countries have chosen not to deal with “US Persons”, imagine trying to live without banking services. The lawsuit is an attempt to stop FATCA, in its present form, in Canada. Our government has violated our Charter of Rights, this should concern everyone. Our Financial Institutions are spending millions of dollars in order to comply with FATCA, these costs will impact all account holders in the form of larger fees paid or lower interest earned. Our government admits being forced into passing this law, they decided the Financial Institutions were more important than our rights. This is not the first law this government has passed that has violated our Charter. They have lost other lawsuits. Please consider donating to ADCS.
What can they do to you? Our government claims it will not collect taxes and penalties if you are a Canadian citizen resident in Canada at the time the taxes were incurred. We do not know if the US could somehow force this to change. It may not be wise to enter the US as they can arrest you in their country if you are not tax compliant. If they get really ridiculous, they could force a plane down if you happen to be flying in their airspace. No one has a crystal ball. I too came to Canada as a young child with my Canadian parents, have never worked in the US, do not have US assets, no US passport, no SSN, no ties to the US. I will no longer travel to the US for vacations. I am donating to the lawsuit because it is important to protect my rights as a Canadian living in Canada, I do not deserve to be treated as a second class citizen because of my birthplace.
@DMichael, I’ll add one more possibility, though I don’t think the Canadian banks will go that far. But here in Switzerland American citizens have had their bank accounts closed with little warning and told to transfer the funds elsewhere – which is rather difficult as most Swiss banks won’t accept American clients anymore.
This may belong on a different thread.
I have just received a response from IRS regarding my final dual status return for last year. It was done by a tax accountant, not by me alone. Despite that, they have decided to disallow my 2555 exemption on earned income because I filed a 1040NR, and they have said that the tax treaty exemptions I claimed are not valid treaty claims, despite citing the articles in the treaty that apply. I haven’t seen anyone fight through this final step in expatriation on this blog, but perhaps there is someone who has? Any comments would be helpful.
@RevSusi, I had the same exact thing happen to me. It meant I had to pay approximately $230 in tax which I wasn’t expecting. Of course it’s not fair but my accountant and I decided to not bother contesting it because her fees would have been higher than the tax; I also didn’t want to risk opening a tin if worms with the IRS. I just wanted to be done with it all.
It seems they’re almost being deliberately awkward to nip us on the way out…:(
When I explained to my accountant that she would have probably avoided this taxation on my earned income by having just used Foreign Tax Credits via form 1116 vs the FEIE via 2555, she decided to not charge me for her final tax return and legal paperwork which I thought was gracious of her.
Thanks, @Monalisa, I thought of tax credits to cover the earned income, and I’d guess I paid about twice what the IRS wants, so I’m not too concerned about that. I am curious about the treaty exemptions, though, because that income will continue and I have to file yearly if I want the income. My thought is that the person who got this file was overworked and inexperienced in the intricacies of expat files, so took an easy way out. (Say no and wait to see what they do. My ex- used to work for the govt, and that’s what he did I to get his quota in.). Unfortunately, my tax man will charge me for his time to sort them out. But less than the IRS, I bet.
@Rev Susi & monalisa
I don’t understand. The partial (up until date of relinquishment/renunciation processing at the embassy or consulate) 2555 should be applicable to the partial 1040, and then the partial (from that date until the end of the year) 1040NR is separate. The 2555 has nothing to do with 1040NR, only with that partial 1040, so if the 1040 is for 200 days, the 2555 is for 200 days and the 1040NR is for the remaining 165 days.
Yes, @Tokyo Rose, that’s the way we filed, and that’s what was disallowed. It must not have been clear to the IRS (to put a positive spin on it) that the earned income was only for the half of the year that I was still a citizen and for which I filed the 1040.
@Rev Susi
Well, that’s how I plan on doing it, but it won’t be until sometime between April and June of next year. My 1040 and 2555 up until the date of my consulate appointment and then a 1040NR (with all zeros since I will have no US earned income) for the remainder of the year.
I’m also surprised that you got noticed. For most posters here their final tax forms have seemed to disappear into a black hole (i.e.., have attracted zero attention, even with some very sloppy filings).
@Tokyorose and @Rev Susi, I agree but it could be because my accountant did the unusual albeit technically correct decision to file a full-year 1040NR return with a partial-year 1040 attached as a statement. The IRS agent thus may have disallowed the 2555 to be used at all.
I don’t understand all the technicalities but believe my preparer knows what she’s doing. I still have some earlier amended years with open statutes of limitation that involved complex PFIC calculations which could be contested if the IRS chooses to audit those years. So I am loathe to start nit-picking with them, especially as they could probably easily beat me at ping pong.
I am just so relieved that it appears that my case is finally closed and that I will no longer be having to deal with all these compliance burdens. Of course I could have dug my heals on principle but at least $230 is a small sum at the end of the day.
I no longer have any US -sourced earnings or passive income so should be through unless perhaps I come into a substantial inheritance over there. I might have to file another 1040-NR if I inherent lots of investments or sell off a share of an inherited beach property, etc.. it must be more troublesome if one has US -sourced earnings or social security, etc.
Well, good luck with that! It’s supposed to be what we do, but clearly the IRS person thought otherwise. I will post the results here so people can see what to expect, unless like Monalisa you just decide to pay and be done with them. But since I have ongoing US public pension income
I need to make sure it’s done correctly or it will come back to bite me.
I’m surprised they noticed me too. But it started last summer with a request for original signatures on my return, which you can’t do if you file electronically as my tax person did. Then they didn’t like that and asked again. We signed the returns again and posted a copy of all the originals to them. Now this. Once a problem file, always a problem file…
@Rev Susi
I wish you luck. If they do happen to hit me with a bill, if it’s under $300 I’m imagine I’ll just pay it, since my time in disputing it would be worth more than that, and as a silver lining, if they bill something like that and you pay it, it gives it a sense of finality, rather than never hearing anything at all.
Again, good luck.
@Rev Susi, I did in fact actually ring them to ask why I was being denied the FEIE 2555 but they verbally stated the same reasons as why yours was denied. They seemed adamant so I just backed down. Maybe I’m weak but sometimes it just doesn’t seem worth the hassle, especially when so much was at stake when I made my quiet disclosure.
At the time only the OVDI was officially endorsed which I felt was way too harsh for my situation which would have been unintentional neglectfulness at worst. Streamlined hadn’t been available yet; had the current version been available, I imagine my accountant would have put me through that rather than via a riskier QD; but OVDI and all the legal costs, and the then 25% misc penalty would have ruined me. So I am certainly not about to quibble over a few hundred dollars…
@Monalisa, I remember your story from last year when you posted it. I was just in the process of preparing my last returns then. But it doesn’t say that the 2555 exemption is not available for the part of the year when we are still USP. And they didn’t say that to my tax man. But I’m squeaky clean as far as filing and info returns are concerned, so I’m willing to fight this. And anyway, they won’t disallow the tax credits, I don’t think.
@Rev Susi, if your situation is straightforward, I don’t blame you. I’d imagine that you could resubmit an amended dual status return using Foreign Tax credits via Form 1116 and reduce the tax to zero. I probably could have done the same but it would have been more hassle to for me than just forfeiting a portion of a refund due to me.
I could have attempted it via software but was frightened that any mistake could cause the IRS to challenge and possibly deny my certification of five years’ tax compliance on 8854, thus rendering me a covered Expat!!
I wouldn’t put it past them to closely scrutinize the final couple of years tax returns in efforts to drag more people into ‘covered’ status and thus liable for various exit taxes. It’s such a minefield to my mind.
As for being squeaky clean, I had those earlier years amended to the best of my ability. I paid back a five figure sum promptly. If I were a cheat, I could have lied by just treating the dividends and gains as ordinary Schedule D but paid the expensive accountant fees and had hundreds of 8621 PFIC forms submitted for those years; the total number of pages for the PFIC years came to over 800 pages!!!
This is why I say I have no idea if the IRS might have disagreed with her computations, given the complexity. They might also disagree with whether we should have used default vs mark-to-market methods, etc. They might even want to treat some PFICs gifted to my spouse as deemed disposals, so it’s a very very area, hence the continued nail-biting till all the open statutes of limitations have finally closed, even though I have that CLN in my hand!!!
@Monalisa, yes, I’d say my situation is a lot more straightforward, and although I wouldn’t welcome an audit, for $8500 I feel a need to argue. I’ve handed over it to my tax man, and I think he’ll get some sensible solution, more than I’d get if I tried to do it myself. I worried myself sick last year before I expatriated, fearful of what they’d do and the financial ruin I faced, and I refuse to do that now. So it’s just unpleasant, and probably a costly exercise. I’d rather pay my tax man than the IRS, though. And I hope I don’t have to pay both!
DMichael
I hope that you have carefully considered the excellent points that Shovel and Heartsick have made in responding to your “why should I care?” post. My situation is similar to yours except I’m younger than you and have never had a US passport (and never will). Every US born Canadian should be enraged and disgusted that our Conservative government has made us 2nd class citizens in our own country. Why should anyone’s place of birth be a dangerous secret that one must conceal? And yet that is our new reality.
Our Charter rights are being violated, whether we actually get hurt financially or not (only time will tell, but it is outrageous that we are even in this position in the first place). This principle alone is worthy of donating to the ADCS – please do and please spread the word to all “US Persons” that you know.
We need all the donors that we can find – this should not have to be funded by a relatively small group of people. There are supposedly up to a million “US Persons” in Canada.
Is there anyone else that has filed a 2555 and 1040 for the partial year and then a 1040NR for the remainder? Or who can comment on whether that should be allowed, and if not why not? I sure would like to hear more. It is rather discouraging to hear it having been disallowed twice.
@Rev Susi, I would also have strongly contested it if I were being denied $8500. Even if your accounting fees were high, I doubt they’d be more than $2000 and probably far far less. It makes sense in your situation, especially as it’s more straightforward. $8500, while not a fortune, is still a lot of money to unfairly lose, whereas a couple hundred is not to my mind worth getting into a potentially ugly game of ping pong over.
I wish I could speak out more but believe the IRS already know of my case since it was quite anomalous; if I got bolshy, they could turn me into a poster child, including trying to claim that I renounced primarily to avoid future tax and thus trying to still tax me. If I were deemed a covered expat, my understanding is that I would owe a special tax on the value of my pension fund, plus could in future face difficulties visiting the US. So many potential problems if I make waves….
@Tokyo Rose, I believe most people expatriating just file a 1040 for up to when they expatriate then a 1040-NR for the rest of the year, so effectively two tax returns in that final year. I believe that the IRS accepts this though my accountant did the more unusual but technically correct filing a dual-status 1040-NR for the whole year with the 1040 section attached as a statement for the portion I was still a US citizen. This might be why my 2555 was denied, who knows.
@TokyoRose
In my final year I filed 1040 (but no 2555) up to the date of my renunciation. Since I had no US source income after that, I did not file 1040-NR thereafter. After expatriation and without US source income, one is non-existent from a US tax perspective. I really don’t understand why anyone would voluntarily file 1040-NR in that situation.
@notamused, why didn’t you file the 2555? Did you generally use tax credits instead? Or?
I wasn’t aware that people filed separate returns rather than the dual. My understanding is that the dual return is required, and I’m amazed to discover that more people choose an alternative route. I’m not sure I’d have been considered tax compliant if I’d done that, and since I still have US source income and ongoing tax filing requirements, I don’t think I’d take that risk, even if I knew about it.
@Rev Susi
I didn’t have any earned income (freelance) during the partial year in which I was still a US citizen, so 2555 wasn’t an issue for me. As of my renunciation, I am no longer a US citizen, nor a US resident, nor a US non-resident alien abroad, nor do I have any US source income. There are simply no grounds for filing a 1040-NR (and in fact there is no IRS documentation which states otherwise for persons in my situation). Having said that, I’m so sorry to hear about your situation, and I agree that if you have US source income after renouncing then not filing 1040-NR is not a wise option.
@notamused, well, they might not have any documentation _yet_, but I bet the IRS is just salivating at the vision of requiring taxpayers the world over to file in their own countries and in the US. With massive fines for those who don’t. Any maybe fines for their counties of residence! Imagine! A huge database of potential income sources for the US! If only all the G20 countries would share their info. Wait… Aren’t they already doing that?
@Notamused, though I believe you’ll be fine, it does concern me that the IRS could use technical errors in the final tax return to argue covered status.
@monalisa1776
What “technical errors” are you referring to?