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.
I never had to file either form, needing only to do FBARs to meet my filing requirements after I renounced. But if you file a FBAR up to your renunciation date and the 8854 is also only made up to your renunciation date, why would you need to bother to file a 1040NR full of zeros to cover a full year when you have no connection tax-wise to the US after your renunciation date? It’s a waste of your time to do so, costs you money to post the darn thing and is totally useless for the IRS too. They get enough paperwork without having thousands of zero returns landing in their laps. File the 1040 to cover the period up to your renunciation and that should be it is my logic.
Of course we all know the IRS doesn’t know the meaning of the word “logic” when it comes to filing returns.
@monalisa1776, again the IRS is not keeping up with the changing circumstances if partial returns are only allowed for berevements. Although, considering we are effectively “dead” to the US and IRS after giving up citizenship partial returns should be fine.
@Medea Fleecestealer
Yes, of course if you have no reportable income for the period that you are a US person, then you do not have to file a tax return. But monalisa, Rev Susi, and myself all had reportable income during the year. They were (and I will be) therefore required to file 1040NR for the final year as a US person. And once again, filing for a “partial year” is not allowed.
@tdott
You were right about the 1040NR being what has to be filed. After reading Hodgen again, I went to IRS publication 519, and although it does not help me with how to file 2555, it does say that for a dual-status year, if you are a non-resident (which would also refer to a non-citizen) at the end of the year, you must file 1040NR, with a statement on reportable income for the portion of the year when you were a “resident”, and that 1040 can be used as the “statement”. But I have no idea exactly how to do that, and of course it does not give specific instructions.
Publication 519 states:
“You have a dual-status tax year when you have been both a resident alien and a nonresident alien in the same year. Dual status does not refer to your citizenship; it refers only to your resident status in the United States.”
A former US citizen who does not reside in the USA and has no US source income is neither a resident alien nor a nonresident alien for tax purposes. In other words, the whole issue of a dual-status tax year for former US citizens is moot.
Form 1040 states:
“For the year Jan. 1–Dec. 31, 20XX, or other tax year beginning _________20XX, ending ______ 20XX”
There is nothing in the instructions I’ve seen thus far which would indicate that a partial year is prohibited. The mere presence of that line raises the obvious question: if it were prohibited, why would this line be provided in the first place?
@NotAmused, I’m not arguing with you; I’m just going on what my accountant said was the technically correct procedure. I also recall reading this same information regarding dual-status returns on the Serbinski tax forum.
I agree that what you believe sounds far more logical but it seems that US tax law is designed to catch people out with its convoluted rules. What worries me is how the IRS could in theory try to argue covered status if one hasn’t filed the final tax return completely correctly. It seems designed almost to deliberately entrap people.
I’m cautious anyway but it seems dangerous to expatriate without relying on an expert tax preparer to file the final tax returns to endure being able to certify full tax compliance on 8854 to avoid covered status!
If I’d been considered covered, my understanding is that the full value of my personal pension fund would have been treated as though I’d received it all as income, so would have faced income tax on almost $70,000 when, in fact, my taxable income was under $9000; I would have thus been facing a tax bill of over $17,000 which very steep for me, and all for a pension fund I have no direct access to at the present time!!
I’m sure I’m not unique in this situation which is why it’s so important not to be lumbered with ‘covered status.
@Tdott has already explained this earlier in the thread back in early October. It thus means that many ordinary middle class people could be facing de fact exit taxes even when worth way below the two million; plus, I wouldn’t put it past the IRS to start auditing 8854 far more often to try and catch people up on mere technicalities to enforce covered status and thus, raise more revenue….
@monalisa1776
No worries. 😉 I just find it curious that people should have so much trust in their accountants that they are willing to act in direct contradiction to what the IRS’ own forms and instructions state.
By the way, account reporting for FATCA begins as of Jan. 1, 2014. (The three prospective dates from your accountant are incorrect…)
@Not Amused, I see what you’re saying but she apparently has inside contacts at the IRS offices at the Embassy in London and is in regular contact with their attache too. She also is in regular contact with other professionals so is ‘street smart’. She is aware of how the IRS is actually treating cases.
As for those dates, she wasn’t sure yet about when the reporting would start. I seem to recall reading that you’re correct about FATCA reporting only starting from 1 Jan 2014, which is a huge relief for me, having renounced during 2013!
I do, however, wonder if some former citizens will still have accounts mistakenly reported by their banks and could consequently face hassles from the IRS, especially if they haven’t properly logged out of the US tax system via 8854; the IRS might mistakenly assume they should still be filing and reporting otherwise….
Apparently the first FATCA records will be sent in March or April 2015 so would think the warning letters and audits will start probably sometime in 2016 or even 2017 because they will be overwhelmed with the mountains of data…
monalisa 1776 I believe you are making the mistake of thinking the IRS has the time and resources to bother you and not amused.
@notamused
“For the year Jan. 1–Dec. 31, 20XX, or other tax year beginning _________20XX, ending ______ 20XX”
So which other “tax year” (defined as 12 consecutive months) would you suggest filing for? I’ve already filed for Jan 1 – Dec 31, 2013. This line in no way indicates that it possible to file for a period shorter than a “year”. Publication 519 clearly states that if you are required to file for the calendar year (or other tax year) and are a NR at the end of that year, you must file 1040NR.
So your advice for someone with foreign earned income until the date of relinquishment/renunciation but not US source income after that date would be to file 1040 & 255 up until the date of relinquishment/renunciation and then ignore (meaning supply no info whatsoever for the remainder of the year? Believe me, that it was I would love to do, but I just don’t see either the logic to that or sufficient corroborating opinion/evidence.
@Duke of Devon
I think they already “bothered” monalisa with a fill for something like $230…
Which surprises the hell of me. It cost them more in manpower time to evaluate and disallow here 2555 than they got in return.
@TokyoRose
You can enter any dates on that 1040 line which are applicable.
Look at the instructions for 1040NR “Who must file” and ask yourself if it applies.
In any case, please do what you feel most comforable with.
I just remembered something I spotted on another forum (Serbinski?) a while back. Apparently, by treaty, Canadians are always allowed to just file a 1040. That would be a full year 1040 but one would logically only include income up to their expatriation date because income after that date is not US taxable (unless it’s US source).
This simplifies the 1040/1040NR question, at least for Canadians. Wouldn’t do that without a definite confirmation, of course.
@Duke of Devon, I hope you’re correct; however, given the current climate, who’s to say the IRS won’t use FATCA to go after recent renunciants, especially those who’ve renounced from 2014 onwards, as they will be more easily able to examine their data. I agree that they won’t have the resources to do mass audits on bona fide Expats but those renouncing could well be raising red flags!
If ine wanted to deter the surge in renunciations, given their current retalititory mindset, I could see them deliberately target people renouncing and have the IRS throw the book at them even for the slightest errors; if it became widely known that one would face draconian punishment for doing the unthinkable, it might deter people from even trying to exit.
@monalisa1776. Aside from the gross violation of privacy, that is one of the reasons I decided not to file a Form 8854.
It’s my belief that the filing of that form raises a red flag and says to the IRS “here I am and if you want to examine me with a magnifying glass, here is a complete list of all of my assets and I’ll leave it up to you to decide how severely you want to punish me for the crime of ditching my US citizenship”.
By my not filing 8854 they are going to have to figure it all out on their own. Playing by their rules is just volunteering to be a victim as you yourself know only too well. I was lucky to come a bit later and have the benefit of your experience to help me chart my own course through this morass. I thank you very much for that.
@Maz57, believe it or not, I count myself very fortunate not to have been caught up in OVDI or facing a nasty audit or FBAR fines. True, I’ve lost a substantial amount of money but the heaviest price for me has been all the fear and ongoing uncertainty. My statutes of limitations won’t have closed on my quiet disclosure till July 2016 and remainder of my tax returns not till June 2017 for the IRS and 30 June for my 2013 FBAR.
I’m assuming the 8854 also has a three year SOL though wonder if it might, in fact, have a six year SOL.
My accountant has tried to reassure me that it’s extremely unlikely that I’ll be hit with any FBAR fines or nasty audits for the PFICs. It’s been almost three and a half years since my QD so believe they would have interrogated me by now if they were going to come after me…however, I do share your fear that my renunciation may have raised red flags; it was why I originally didn’t even want to consider renouncing until all my returns with PFIC statutes of limitation had closed.
However, given what Phil Hodgens has said about ‘getting out while the getting out is still semi-good’, I concluded that I wanted to go ahead and expatriate, especially as my accountant was of the opinion that they’d have to start filing the 3520/3520a foreign trust forms for both my personal pension plan and ISA account. These would have doubled my annual accounting bill which was already quite high.
I just didn’t want the hassle, expense, and uncertainty any longer. I could have personally lived with a few hundred dollars per year in double tax as a form of tribute but not the annual accounting costs of +20% of my earnings!! What struck me as unfair is that investing in mutual funds and/or personal pensions is very normal and vanilla financial planning, at least here in the UK. It’s not as though I was trying to invest in some shell company or hiding money offshore, etc. This is why I felt threatened and wanted out.
To be honest, I don’t think it’s going to be a worst case scenario by any means but feel it’s important to get it out there that these are still a hypothetical possibility so not to take anything for granted…
@Maz57, what I mean to say is that I don’t think they’re actually going to aggressively pursue people who’ve filed 8854, especially those well below the two million mark. But it does make me wonder if they might be able to query into expatriates’ pension funds, etc. One huge relief is that pensions are deemed FATCA compliant at least at the present time so won’t be reported via third parties.
But what’s intriguing is that from 2016, I understand that from 55 (to be raised to 57 or 58), people will be allowed to fully withdraw their entire pension fund with the first 25% tax free. These could thus in future be increasingly used for tax evasion so might become increasingly of interest to the IRS!
@notamused
“You have a dual-status tax year when you have been both a resident alien and a nonresident alien in the same year. Dual status does not refer to your citizenship; it refers only to your resident status in the United States.”
Thanks for pointing that out from Publication 519. It has given me a thought more to think about.
I am canadian – was born in the US but only lived there for 2 years, became a cdn citizen in 1971. I am considering re-establishing my us citizenship so I can work there on a seasonal basis. I understand that if I apply for an SSN and my passport I would have to get caught up on my tax returns. Has anyone had experience with this, done it themselves to save money? I make a modest income so do not come close to the income where I would be required to pay taxes in the US. Thanks!
Jeannette,
Best consider your options based on a lot of research, much of which you can find here. What do you mean by working there *on a seasonal basis* — like that of a Canadian *snowbird* type of existence? The safest way for you to CONTINUE to be a US citizen, a citizenship that you will NOT have lost unless you renounced or were able to relinquish at a US Consulate Abroad by having worked for a Canadian government agency of some kind, is to plan a permanent stay in the USA. There is a Berlin Wall being built around it and it is less and less possible to have a foot in two countries. And, yes, you will likely have to get caught up on back US tax returns and Foreign Bank Account Report reporting, FBAR or FINCEN114. You have an opportunity to be forewarned. Take the opportunity in making such an important decision, which might be good — it’s ONLY your decision.
Jeannette Most people are renouncing US citizenship, if they can, if they live outside the US borders. It is too difficult to comply with all the reporting required of your financial accounts in addition to tax compliance. Holding RESPs, RDSPs, RRSPs, TFSAs and especially Cdn Mutual funds, require expensive US reporting requirements and some are double taxed. In the case of Cdn Mutual funds the US tax and interest can be as high as 100%, that’s in addition to paying Cdn taxes. The sale of your Cdn principal residence may incur US taxation. If one wants to live overseas while holding US citizenship, investments should be restricted to only those paying interest and home ownership should be avoided. There is lots of information on this site. Read John Richardson’s post, “It’s time to Seize the Day” Only you can decide if seasonal employment is worth the year round intrusion of the US into the rest of your life.
@heartsick
I’ve never heard anybody recommend avoiding home ownership before. There is a US$250,000 capital gain exemption when selling a house, and this can be claimed again and again as long as 2 years pass between sales.
Please explain why a US person should avoid home ownership. I would say just to avoid more than a $250K gain. If the house is owned jointly with a spouse, I believe you just worry about your half of the gain.
@ WhatAmI From what I have read it is a concern if you plan long time home ownership, or possibly live in an area experiencing high inflation, you can easily exceed the $250k gain. There is also the currency rate exchange that can cause issues. Long term residents in Vancouver and Toronto could easily have such gains. It is not as much of a concern for those who move frequently. Like investing in RESPs and TFSAs if you don’t mind paying US tax it is not a big concern, just something to be aware of. I was just trying to point out that you must live a very simple life if you want to reduce the US taxation exposure. I should have made myself more clear.
Has anyone had any experience with Swiss banks closing accounts because the account holders have not agreed to provide FBARS and waive their bank secrecy rights?
The bank I’m dealing with threatens to withhold 30 percent on “American source income transiting through their banking relationships,” if account holders don’t comply. What does this mean? Swiss banks already withhold 35 percent of earned interest. Does this mean they will withhold an additional 30 percent on earned interest on accounts of recalcitrant account-holders?
Clients are also told that, if they don’t comply, the bank has the right “to terminate the banking relationship with immediate effect.” That seems to be worded in a self-serving manner. FATCA actually requires that banks close such accounts. This is what I want. Yet the bank is refusing to do that. I object to being denied access to my funds until I provide the bank with personal information and documents that will help reduce the penalties it agreed to pay under the program it voluntarily entered into with the U.S. government. This is not my problem.
Any ideas how to get the bank to follow my instructions to close the account and send the money to a U.S.-based account?