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.
@Paintbrush, yes it has happened. PostFinance has frozen several accounts that I know of.
http://www.englishforum.ch/finance-banking-taxation/200706-postfinace-demands-past-fbars.html
The 35% withheld is for Swiss tax purposes and yes, they’ll withhold another 30% of any US soure income coming in/out of your account/s unless you provide with them a W-9 form as required under the IGA.
The Swiss-US IGA doesn’t require banks to close accounts. The banks themselves have decided to terminate future banking relationships. This has been happening for some years, even before the IGA was signed.
Unfortunately, if you don’t comply your account is unlikely to be closed as PostFinance will need to report it to the IRS regardless of your wishes as being wilfully non-compliant. Trying to move it now will seem like you’re trying to hide it again and PostFinance won’t want to be a party to that.
You could try a threatening letter from a lawyer as was suggested elsewhere, but whether it will work or not I don’t know.
I don’t think we should assume that Paintbrush is not tax compliant, s/he may just not want his/her private banking information turned over to the IRS without cause. After all, if you’ve done nothing wrong why should you be treated like a criminal?
The ‘cleansing by fire’ of US persons in Switzerland has begun. Here is one prediction made over a year ago:
bubblebustin says
December 14, 2013 at 2:19 pm
I might be completely off the mark here, but I can see how Swiss banks might fare ok if they enter Category 2. Please correct me if I am:
According to Phil Hodgen, the banks are now starting to freeze the accounts of US persons in Switzerland. At the same time, they’ve begun informing their US customers that they must prove tax compliancy or enter OVDP. It’s my understanding that the bank will get a discount on the penalties levied against them by DOJ if the bank actively encouraged the customer to enter OVDP (I can only assume Streamlined also). Once in OVDP, the taxpayer will either opt-out and be exonerated – along with the bank for their particular case, or, the taxpayer will be found guilty of tax evasion. In the latter case, the bank could apply the appropriate portion of the frozen assets to whatever the balance remains of the penalty after it’s been discounted, or they and DOJ can share in the spoils.
What do Swiss banks care about minnows turning to grist if it get them off the hook, so to speak? Let’s face it, the bad guys have left the scene already.
http://isaacbrocksociety.ca/2013/12/14/most-swiss-banks-considering-ovdp-should-not-consider-wegelin-in-their-decision/comment-page-1/#comment-806853
@Paintbrush:
This NZZ article discusses the attempt by some Swiss banks to transfer the DOJ fines/ voluntary payments to their customers. See the paragraph under “Freiwillige Zahlungen?”:
http://www.nzz.ch/wirtschaft/koennen-banken-us-bussen-auf-kunden-abwaelzen-1.18449661
@Paintbrush: In Belgium, most banks will give you a choice. Show proof of compliance, or proof of loss of citizenship. If you do neither they will close your accounts and ask you where to send the money. Note that this last solution is not that bad, if you can send the money somewhere. It saves an FBAR form for that closed account (I know, it doesn’t really, … but you could see it that way).
Any thoughts on quiet disclosure, i.e. jumping on the bandwagon with current returns and FBAR, vs. streamlined, i.e. 3 years of delinquent returns + 6 years of delinquent FBARs?
One accountant I contacted said “quiet disclosure” was frowned upon by IRS. When pressed he didn’t object to trying quiet disclosure. Of course it’s not his problem.
@Fred, read these and then decide which will be best for your circumstances.
http://www.irs.gov/uac/Voluntary-Disclosure:-Questions-and-Answers
http://www.irs.gov/Individuals/International-Taxpayers/Streamlined-Filing-Compliance-Procedures
However, note question/answer 10 from the first link:
“Q10. What if the taxpayer has already filed amended returns reporting the additional unreported income, without making a voluntary disclosure (i.e., quiet disclosure)?
A10. The IRS is aware that some taxpayers have attempted so-called “quiet” disclosures by filing amended returns and paying any related tax and interest for previously unreported offshore income without otherwise notifying the IRS. Taxpayers who have already made “quiet” disclosures may take advantage of the penalty framework applicable to voluntary disclosure requests regarding unreported offshore accounts and entities. Those taxpayers must send previously submitted documents, including copies of amended returns, to their local CI office by September 23, 2009. (See Q&A 5).
Taxpayers are strongly encouraged to come forward under the Voluntary Disclosure Practice to make timely, accurate, and complete disclosures. Those taxpayers making “quiet” disclosures should be aware of the risk of being examined and potentially criminally prosecuted for all applicable years.
The IRS has identified, and will continue to identify, amended tax returns reporting increases in income. The IRS will be closely reviewing these returns to determine whether enforcement action is appropriate.”
As far as I know nothing good has come from the OVDP for people who’ve entered it and advice here is to avoid it. Streamlined is still too new to say for certain, but it’s what I used to become tax compliant after I renounced. But I only needed to file FBARs to do so, so I’m not a typical Streamlined case.
There have been no known reports of bad outcomes for people who became compliant using either Streamlined or QD.
I used Streamlined as that’s the “official” way for us overseas types to become compliant, and it’s what the people who did my taxes are doing for their clients. Other people here at IBS have used QD.
However, I’m not sure if my use of QD means the same thing as was meant with “Any thoughts on quiet disclosure, i.e. jumping on the bandwagon with current returns and FBAR, vs. streamlined …”, as the use of the word “current” make this sounds like going forward filing – i.e., start filing from the current tax year. I don’t know if anyone here has just done GF.
Note that if the ultimate goal is to renounce, you will want to consider doing more tax year returns than the 3 required by Streamlined.
@tdott
With the time it takes to get an appointment to renounce, you could almost do the three under Streamlined and end up doing five before you’re out the door 🙁
Thanks to all for the information. Yes, what I meant by Quiet Disclosure was “going forward”. What I meant by Streamlined was filed 3 delinquent returns and 6 delinquent FBARs in addition to, of course, the current year. Is there a difference between my definition of QD and GF? I.e. is there an additional letter to include saying “I realize that I have not filed required forms — here they are”?
‘Should Martians Pay U.S. Taxes?
What the IRS might have to say about American colonists on the Red Planet.’
By Adam Chodorow
http://www.slate.com/articles/technology/future_tense/2015/01/should_american_colonists_on_mars_pay_u_s_income_taxes.html
Has the Bank of Mars signed up to turn Martians over to the IRS and US Treasury?
@Fred
Usually when people discuss QD at IBS it’s w.r.t. filing multiple years (usually 5) of tax returns and not using Streamlined or any other “amnesty” program to do so. The “disclosure” part of QD implies, at least to me, that one is bringing some secret information to light – i.e. past income and past returns. GF, OTOH, does not involve past returns. So that’s how QD differs from GF in my view.
Re an additional letter for QD saying “I realize that I have not filed required forms — here they are”: I don’t know what the accepted practice is, perhaps others can chime in. FWIW, I think that an additional letter would turn a QD into a “noisy disclosure” (just to muddy the waters even more).
@Fred
Are you getting compliant in order to renounce, or are you getting compliant and planning to remain a USC? It makes a difference w.r.t. how many past years you may want to file.
@tdott – Thanks. I don’t know. USC is not something to throw away lightly, I actually feel American too. But I need to plan for my retirement and be very careful; I’m near 50 and have no plans to move back, all my assets are in Europe, and I am at (future) risk of double taxation on non-earned income. However if I can comply with not too much pain, I could try and see how things work out, and decide later.
My current alternatives are:
1 – (attempt to) renounce now, without filing, given I most probably owe no tax.
2 – file in order to renounce – probably just as well try option 1
3 – file in order to become compliant and keep options open.
3a – file 3 delinquent returns and 6 delinquent FBARS
3b – file in 2015 for 2014 income, and file FBAR for 2014.
@tdott
OK, I think I’m getting clearer on definitions re getting compliant:
– Quiet disclosure: not an official name. file 3 past due tax returns and 6 past due FBARS. The closest thing I found on the IRS site is “Delinquent International Information Return Submission Procedures”. Which includes “Describe your situation in the reasonable cause statement”
– Streamlined: same + argue that your non filing was non wilful (sort of depends what words mean, right? Yeah, I vaguely knew I should file returns, but it was not practical and I owed no tax anyway; no I had never heard of FBAR, FATCA or such until I was thrown out by a bank).
– OVDP: you are considered a tax cheat and may be able to negotiate reduced penalties; you waive certain rights. This seems to be something to AVOID.
– Going forward: start filing current returns and FBARs only.
In my situation, dual citizen living in Europe, entire financial life outside the US, my main interest is becoming compliant because if I don’t at some points I won’t be able to bank anymore (my banks will throw me out). I owe no income tax (due to tax credit) but my owe some minor sum on ridiculously low bank interest.
My initial gut feeling was to just do Going Forward, and see what happens. Ideally my returns are uninteresting and they don’t ask for more.
Thoughts? Thanks!!!!
@Fred
This is my standard blurb on renouncing without being compliant. It is geared to Canadians, but at least some will apply to non-Canadians.
You are, of course, free to heed or ignore.
===========================================
If you are considering renouncing without getting compliant, note that 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 (or not submitting 8854), 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 $663K (2013) 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.
There have been no known reports of people who have renounced without filing being hassled about their non-compliance when attempting to enter the US. However, given increasing inter-agency and inter-country data sharing, it does seem possible that at some point in the future US border people will be aware of all former USC’s tax status. Should that come to pass, 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.
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 and 8854. 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 worst 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).
@tdott: thanks for that. Quite frightening, but I would say realistic. I did read in a FOIA document referenced somewhere here, an internal IRS powerpoint, that FBARs did have a 6-year statute of limitations, EVEN IF NOT FILED. Yet I do believe that there is no SOL for unfiled returns.
Re the “best you can DIY” approach: interesting concept. Definately worth consideration.
Renunciation, in a non compliant situation like mine, is probably best put off a few years while becoming fully compliant. It also allows some legal planning and untangling (for instance severing joint accounts). This would also allow time to see if something changes with the GOP in power (am not holding my breath). Things could also get worse, such as a $10k renunciation fee, why not?
@ Fred
You do not have to be compliant at the time of renouncing. You will not be asked about taxes at the consulate. You have until the following June after renunciation to file the 5 years of delinquent returns, 6 yrs of Fbars and the 8854 , ( where you have to state that you have filed) many have done this. ie you could renounce post June 2015, then you would have until June 2016 to get those filings sorted.
@Medea Fleecestealer @Bubblebustin @Innocente @Fred
Thanks for the feedback. You’re right, @Bubblebustin — better not to assume that I’m not compliant. Did a QD almost a year ago and owed no tax on three years of amended returns. In fact, I got small refunds all three years. Six years of FBARs also filed. I just resent being forced to help the bank mitigate its penalty while it is holding my account hostage.
@Medea Fleecestealer: You mentioned that the Swiss-US IGA doesn’t require banks to close accounts. I’m not so sure about that. Section 1471(b) (1) (F) of the U.S. IRS code says that if foreign banks can’t obtain a waiver of bank secrecy laws from a client within a reasonable time, they must close the account. My bank hasn’t been able to obtain a waiver from me within “a reasonable time,” so I think it should close the account, as required by the IRS. The bank is completely non-responsive. It can hardly argue that there is any effort to “hide” the account, as @Medea Fleecestealer suggested might be its concern, as I asked for the proceeds to be sent to an account in the U.S.
I was interested in your comment about maybe getting a lawyer to write a threatening letter, “as has been suggested elsewhere.” Do you remember where that was suggested? Has anyone had experience using a threatening letter under these circumstances?
Here’s a partial excerpt from Section 1471: the bank must “attempt to obtain a valid and effective waiver of such law from each holder of such account, and (ii) if a waiver described in clause (i) is not obtained from each such holder within a reasonable period of time, to close such account.” If you want to read the whole thing, just google “Section 1471.”
@Paintbrush, Heidi mentioned it in her post over on the FATCA blog.
“Heidi says
January 4, 2015 at 3:18 am
@paintbrush
The Swiss banks have sold their soul to the Devil (and are only now beginning to realise it) when they signed the ‘Joint Statement’ absolving them from prosecution if they agreed that they had all been naughty boys and hidden American accounts knowingly or unknowingly. Most signed ‘category 2′even though they had not courted American money unlike UBS who were )category 1). and did not have the option of the non prosecution agreement.
Cat 2 required them to report all present and past American accounts back to 2008 and to also certify if these accounts were compliant or non compliant. They were required to pay a large fine (approx 30% of the value of the account) on any non compliant accounts, hence their need to get you to sign the secrecy waiver and provide proof of Fbars. I suspect this freezing of accounts is a form of blackmail and illegal under Swiss law. The banks now are now working for the IRS and Swiss law seems to have been thrown out of the window. You could try threatening them with a lawyer’s letter and legal action if they don’t close your account and transfer your funds back to the US.”
I don’t know if it would work or not though as I haven’t heard of it being tried.
@Paintbrush, here is (I think) the relevant section of the Swiss/US IGA regarding withholding tax/closure of accounts:
“Article 7
Suspension of Rules Relating to Non-Consenting U.S. Accounts
1. Subject to paragraph 2 of this Article, the United States shall not require a Reporting Swiss Financial Institution to withhold tax under section 1471 or 1472 of the U.S. Internal Revenue Code with respect to an account held by a recalcitrant account holder (as defined in Section 1471 of the U.S. Internal Revenue Code), or to close such account, if:
a) the Reporting Swiss Financial Institution complies with the directives in Article 3 with respect to the account; and
b) the Swiss Competent Authority exchanges with the IRS the requested information described in paragraph 1 of Article 5 within 8 months from the date of the receipt of such request.
2. If the condition of subparagraph b) of paragraph 1 of this Article is not fulfilled, the Reporting Swiss Financial Institution shall be required to treat the account as held by a recalcitrant account holder as defined in relevant U.S. Treasury Regulations, including by withholding tax where required by those U.S. Treasury Regulations, beginning on the date that is 8 months after the date of the receipt of the request described in paragraph 1 of Article 5 and ending on the date on which the Swiss Competent Authority exchanges the requested information with the IRS. For purposes of Swiss law, the amount of tax withheld on payments to a Financial Account, including a Cash Value Insurance Contract and an Annuity Contract, shall be borne by the Account Holder.”
http://www.swissbanking.org/29633.pdf
Thursday, January 15, 2015
‘IRS Closes International Tax Offices
From Bloomberg: IRS Will Shut Last Overseas Taxpayer-Assistance Center’
http://www.bloomberg.com/news/2015-01-14/irs-will-shut-last-overseas-taxpayer-assistance-centers.html
Article noted by Victoria, who commented on it at her blog:
http://thefranco-americanflophouse.blogspot.ca/2015/01/irs-closes-international-tax-offices.html
“Washington, D.C. (January 14, 2015)
By David Kocieniewski
(Bloomberg) “The Internal Revenue Service is closing the last of its overseas taxpayer-assistance centers, saying that years of budget cuts have forced it to end a popular program designed to help U.S. citizens living or traveling abroad.
The closing of IRS offices attached to U.S. Embassies in London and Paris, as well as the consulate in Frankfurt, will allow the agency to reassign about a dozen employees to its domestic offices and save about $4 million a year, the IRS said in a statement.”…………
“………….For decades, the IRS has stationed employees in embassies and consulates around the globe to assist American expatriates with their tax issues and help inspect the foreign operations of U.S. companies in cases involving possible civil violations of tax code. In 1993, the IRS had staff members attached to more than a dozen embassies around the world, from Riyadh and Ottawa to Singapore and Caracas. By last year, that number was reduced to four, and in November the IRS closed its Beijing office.
………“………… these closures have relatively little impact on taxpayers and treaty partners,” said Julianne Breitbeil, an IRS spokeswoman.”…………..
Now we’ve got the compliance industry advising us on alternatives to renouncing:
http://www.hrblock.com/expat-tax-preparation/canada/us-citizenship.html
And get a good rueful laugh over the list of ordinary legal local things those the US claims as “taxable persons” CANNOT do where they live outside the US if they want to remain a US citizen.
@badger
This H&R Block advice is completely sickening. The only suggestion that makes any sense is to *maximize one’s RRSP. This has limits though and depends upon one’s situation.
The rest of the advice is simply ridiculous. And prefaced as if “double taxation” is the only issue.
*Consolidate your foreign accounts. Having multiple checking and savings accounts only increases your foreign account reporting obligations and the cost of your U.S. tax return.
Totally wrong; pointless exercise. Should be challenged by anyone using H&RB
*Avoid mutual funds, unit trusts, and similar investments set up in Canada at all costs.
*Consider closing any TFSAs or RESPs .
*Make sure any independent business activities are structured with U.S. tax in mind.
IOW, plan your life only around possible US tax liabilities; forget about trying to get a decent return on any money invested (where would that be?); forget about taking advantage of government help toward the cost of educating your kids (and presumably trying to provide for any disabled children in later life). Just roll over and let the US control your life. For what?
Glad to see ‘protecting your information’ is important to H&R Block. That’s more than we can say for our own governments.