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.
@Not Amused, my understanding is that someone expatriating is meant to file a full-year 1040NR with zeros if there’s no US-sourced income, with an attached 1040 statement listing one’s worldwide income during part of the year one was still a US citizen. So to my understanding, to only have filed a 1040 would have been technically incorrect and thus not compliant. I do, however, doubt if the IRS will bother you unless you were closer to the two million. But it worries me how mere technicalities could be used against people trying to get out, to deter others.
My accountant explained that had I not been able to certify five years tax compliance on 8854 that I would have been deemed a covered Expat and faced punitive taxation on my pension fund, even though I am way below the $2 million.
@monalisa1776
“my understanding is that someone expatriating is meant to file a full-year 1040NR with zeros if there’s no US-sourced income, with an attached 1040 statement listing one’s worldwide income during part of the year one was still a US citizen.”
If one is not a US citizen/resident/person and has no US source income, there are no filing requirements. Full stop. There is also nothing in the IRS regulations which suggests otherwise. All else is hearsay – sorry.
Phil Hodgen dealt with this issue. If I’m understanding correctly, his position is that of monalisa1776’s. FWIW, an acquaintance who renounced last year also took the full-year 1040NR with attached 1040 route – this person used a tax lawyer and accountant.
For PH’s take, see: http://hodgen.com/your-expatriation-tax-return-when-u-s-income-is-zero/
Phil Hodgen’s blog post only deals with the case of people who have no US sources of income. But my understanding is the same for people who do: file a dual status return with the US income shown on the 1040NR for the year, and a 1040 attached for the part of the year you were a USP. That’s what @Monalisa and I both did. He didn’t comment on the 2555, or I can’t find it, at any rate. He also didn’t comment on the difficulties of making a treaty claim that will be accepted by IRS, despite using their forms. He gave other alternatives (filing on or the other, but not both) for people with no US income. I filed a dual return after reading info on his blog suggesting that it was the safest way to go, if not an out-and-out requirement.
I’ve seen that blog post too, but I maintain that the IRS has neither valid claims nor even expectations pertaining to non-US persons with no US income. The IRS forms and instructions reflect this.
@Rev Susi
Good luck in your fight with the IRS. I’ll be looking forward to hearing the outcome.
I’ve read that Hodgen blog post several times in the past and re-read it now, and still can’t quite understand exactly the dual status year should be recorded, but unless I learn differently by the time I file next year, here is how I plan to do it:
1040 & 2555 dated Jan 1 thru Sep 8, excluding all of my foreign income for that period and listing only a few $ in US unearned income
1040NR dated Spe 9 thru Dec 31, with all zeros, since I will have no US source income at all for that period
That seems like the most logical to me, as it matches my citizenship status. I have no idea how it is possible, or why it would be correct, to file 1040NR for the entire year.
@TokyoRose
I agree – to me the logical thing would be 1040 for the part of the year you’re a USC and 1040NR for the part that you’re a former USC. However, I believe the idea behind doing a 1040NR for the entire year is that what predominates is your status on the last day of the year – which also has some logic.
This would be *somewhat* analogous to how I believe provincial tax residency is done in Canada. If I move from Ontario to BC, I would only be subject to provincial taxes in BC that year, because that was my residence for the last day of the year.
I have a question regarding FBAR and renunciation.
For your renunciation year,
did you fill out an FBAR:up to the date of your renunciation; up to the day before your renunciation; or up to 31 December of renunciation year?I know someone who has recently renounced and requested guidance from the IRS as to whether a renunciation-year submission is required. The IRS was unable to give a straight answer, so we’re wondering what people have been doing.
Thanks.
UPDATE: Please see my revised question below. Thanks!
@Pacifica, I asked my accountant this same question; she advised me to just file my final FBAR up to the day of my renunciation rather than for the full calendar year. But to be on the safe side, I didn’t open any new accounts during the rest of that year.
@ tdott
I have to wonder if dating the 1040NR for the entire year may have something to do with the rejection of the 2555. Filing a 1040NR for the entire year would certainly not exempt anyone from paying any taxes due as a US person for the portion of the year up until the day before relinquishment, for which I have foreign earned income and will want to file a 2555.
It almost makes me wish that I had waited until the end of Dec to relinquish. I’m used to filing a 1040 & 2555, since I’ve been doing it for more than 30 years. Haven’t had any US earned income for the last 35 year and have never had any unearned income outside the US, so it has been relatively simple for me up until this dating 1040NR and the reported disallowing of a 2555.
Well, from my very imperfect understanding, the 1040NR is used as the main tax form, however, the 1040 is a supporting attachment for it. As such, yes, you’re liable for taxes for the part of the year that you’re a USC, and I would guess that would show up on the 1040 and then on to the 1040NR.
I can’t speak about the disallowing of 2555.
I probably shouldn’t have tried to use the analogy I did.
I renounced in January this year and had no income up to the date I renounced in 2014. On that basis, I am not filing a 1040 or a 1040NR for 2014 as I am below the filing limits for both. I shall be sending Form 8854 to the Philadelphia address only, as indicated in the instructions.
@Tokyo Rose, I suspect that having filed a full-year 1040-NR was why the IRS rejected my use of 2555. In hindsight, @TDott and @Tokyorose, I could have just used foreign tax credits via form 1116 rather than the FEIE via 2555 (at least in a higher-tax country such as Canada or the UK ).
I suspect that my accountant thought the IRS would accept 2555 and it’s less complicated to use than 1116, and she was trying to minimize her accountant fees for me. I lost about $270 from my refund as a result.
She explained that it would cost me more for her to amend and resubmit the return so I let it go, but at least she had the decency to cancel charging me for this final year (and 8854);Though no final bill had been agreed, I was expecting to owe between £2000-£3000 so it turned out to be a blessing in disguise.
Though she never admitted it, I suspect she hasn’t actually done that many expatriation returns and maybe didn’t want to have to accept liability if, say, my 8854 was also filed incorrectly.
@Pacifica777, I just filed up to my renunciation date. My accountant was happy with that as they did the actual filing for me and didn’t ask for any other figures other than those I provided. The way I see it, after that date you’re no longer American so what may or may not be in your accounts is none of the US/IRS’s business.
@ All,
I revised the question I asked yesterday because I didn’t understand it quite right (it’s a friend’s question), so I’m posting the revised question here.
For your renunciation year, did you:
1. fill out an FBAR form for that part of the year up to your renunciation date (and if in 2013 or 2014, how were you able to indicate the renunciation date on the form, since there doesn’t appear to be any way to do this now that submissions are done electronically)
OR
2. not fill out an FBAR form, on the grounds that on 31 December of your renunciation year you were no longer a “United States person” and hence not required to file ?
I know someone who has recently renounced and requested guidance from the IRS as to whether a renunciation-year submission is required. The IRS was unable to give a straight answer, so we’re wondering what people have been doing.
Thanks.
And thanks, Mona Lisa and Medea Fleecestealer, for your replies to my earlier question.
I can only relate what I did. My Canadian citizenship ceremony was so close to the end of the year (December 14) that I didn’t bother to try to make that distinction and I don’t think it really makes much difference. I simply filed a final year FBAR. The FBAR instructions say that one must file FBAR “if at ANY time during the year the aggregate value of your accounts exceeds $10,000”.
There is no instruction on what to do if you lose your US citizenship during the year. I do think that if one opened some new accounts after their expatriation date those new accounts should NOT be included on that final FBAR. I got in under the wire and never had to do the electronic submission.
Nobody reads the damn things anyway. The information is totally useless to the US government. (Unless you don’t file one in which case the IRS could use that omission as a club to beat you with.)
I didn’t bother to file a final 1040 because according to the treaty most of my income was US tax exempt and what was US taxable was therefore below the filing threshold. I have heard nothing from the IRS since that final FBAR several years ago. I never filed 8854 either, so I guess I’m a “covered expatriate”. Who cares?
Pay attention folks. This is priceless.
I just took the dog for a nice long walk and dreamed up a “thought experiment” while we were out on the trail:
Imagine Mr. Expat who loses his US citizenship on June 30, 2014. He is a US citizen for the first six months of 2014 and not a US citizen for the last six months of 2014. At some point during the period from January to June his accounts totaled more than $10,000 aggregate. He is therefore obligated to file a 2014 FBAR before the 2014 FBAR deadline which is June 30, 2015 even though he certainly was not a US citizen on December 31, 2014.
But what happens if the facts were different? If our Mr. Expat’s account aggregate does not exceed the $10,000 threshold during January-June 2014, he would not be obligated to file a 2014 FBAR because his account total never got high enough during the period of 2014 when he was a US citizen. Even if his account totals later exceed that $10,000 (during July-December 2014) he would have no obligation because by then he had lost his US citizenship. There is no such thing as a partial-year FBAR. One is either obligated to file FBAR or not obligated to file FBAR. If one is obligated, then the account information for the period that gives rise to the obligation is what should be reported. Anything that happens in those accounts after the loss of US citizenship is no longer the business of the US government.
Makes sense to me, anyway. Fortunately for the dog all he worried about was the next stick.
@Duke. What do you think? Am I a crash-test dummy? (LOL)
@ tdott & monalisa1776
Thanks for the comments. Yes, I can understand that the 1040NR is the main document, and for that reason I will place it on top, followed by the 1040 and then the 2555, and finally the copy of the 8854. I guess I will have to file 2555 and the the 2555-EZ that I always used in the past. It will be a real pain if they disallow the foreign earned income exclusion, since I have never used filed foreign tax credits and will undoubtedly have considerable difficulty understanding it, not to mention that I have no idea how to calculate the foreign taxes for a partial year.
I still have several months until I can file, and 6 months until I have to file, so I’ll take another look at things then, but I was just surprised and unnerved by these 2 reports of 2555 being disallowed.
In any case, I’m still waiting for my CLN. It has been 3 months now, even though the consulate said it would take “a month or maybe a bit longer”. It looks like the process is slowing down worldwide now and not just in the North American region. An acquaintance in Tokyo with identical circumstances for relinquishment (naturalisation to Japan after long-term residence) got his CLN in about one month after a Feb appointment, so it would appear that things have changed between Feb and Sep.
@monalisa1776, I’m with notamused on this one. If you’re no longer a US citizen there should be no need to file a 1040NR for the full year. After all, you’re not a non-resident, you’re a non-citizen and the US has no further claim on you or your money after your renunciation date. In the same way that you’d file only a partial FBAR you need to file a 1040 form covering the period up to your renunciation and that should be it as far as I can see.
@Pacifica777, my accountant just filed the electronic FBAR as normal with the figures I gave them up to my renunciation date. They didn’t bother to indicate any other date other than the 31st December ???? that the form gives. As it’s the highest total in your account for the year – whether full or partial – they don’t really need any indication of any other date as far as I can see. After all they get a copy of your CLN and can match up the date with your return that way.
@Medea Fleecestealer
According to Hogden, the only partial year filings are for persons who died during the year. I too have doubts about what filing 1040NR for the entire year is supposed to mean, since anyone relinquishing/renouncing during the year would have been considered a US person for the part of the year up until the date of the embassy/consulate appointment. The remainder of the year has to be covered someplace, even if it is with a 1040NR that only has zeros on it. Everyone who files a 1040NR is a “non-citizen”, and only non-citizens can file a 1040NR.
Of course, if only the 1040 is filed without indicating any dates on it, it would be assumed to be for the entire year, but then it would be necessary to list income for the entire year on it, not just up until the date of relinquishing/renouncing. And wouldn’t that contradict the date for the 8854.
What happens if this is not done correctly? It would seem like the IRS ignores most of these filings anyway, but they must be looking at some of them, since monalisa (with a small amount of tax charged) and Rev Susi (with a large amount of tax charged) both had their 2555 disallowed.
@TokyoRose, presumably those non-citizens hold Green Cards or some other residence status in the US though which makes them liable for tax. A US renunciant has no citizenship, no residence status, no need to file a 1040NR.
@Medea Fleecestealer
So you disagree with Hodgen that it is necessary to file for the entire year? Or are you saying file 1040 for the entire year?
@Medea and @Tokyorose, I don’t understand why exactly but my accountant (along with Phil Hodgen ) claim that the correct procedure when filing a final tax return is to file a dual-status return for the full year. This is perhaps to emphasize to the IRS when expatriating that one is a non-resident alien at the end of the year. The 1040NR only included my worldwide income up to my expatriation date (no US-sourced income at all) listed on the 1040 attached a ‘statement ‘. Apparently this is because partial year returns are only technically allowed in the event of a bereavement.
As for FBAR, again, they don’t accept partial years though one would arguably only need to list information on balances and accounts up to the expatriation date. I suppose if one wanted to be extremely cautious, they could just go ahead and declare everything for the entire calendar year, as it seems safer to over-report if in doubt.
I myself only reported information up to my March expatriation date though my accountant explained that as my maximum account balances were much higher at the end of 2013, there was a small but possible risk that I might face IRS/FINCEN enquiries concerning the discrepancy between what I listed as my maximum balances on my FBAR /8938 and what information might be relayed via FATCA reporting; at the time, she wasn’t sure if FATCA reporting will go back to account balances on 31 Dec 2013, 30 June 2014, or 31 Dec 2014.