Liberty and justice for all United States persons abroad

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Tag Archives: Form 3520

Obama signs temporary highway bill: FBAR & 3520 due date changed, no passport revocation (for now)

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Highway-Sign

The Hill reports that President Obama signed a three-month highway funding extension (H.R. 3236, Pub.L. 114-41), while expressing irritation at Congress for their failure to pass a longer-term highway bill. The short-term bill passed the House on Wednesday by a vote of 385–34 and the Senate on Thursday by 91–4. Among the revenue offsets, there are changes to the due dates of various tax forms, including three which are relevant to the diaspora: Form 3520, Form 3520-A, and FBAR. (Hat tip to Socrates, who alerted us to the bill before it passed in a comment on Wednesday.)

Fortunately, the short-term law does not include Orrin Hatch’s persistent proposal to deny new U.S. passports to, and revoke existing passports of, people who do not provide SSNs. (It is not clear whether his proposal would affect passport applicants who never had SSNs in the first place.) That provision remains, however, in a longer-term highway funding bill which passed the Senate on Thursday. Brad Plumer at Vox summed up the situation: “Congress keeps finding increasingly absurd ways to avoid raising the gas tax”.

Also, just because Congress keeps trying to pick the pockets of the diaspora to pay for highways, it doesn’t mean that any of those highways are actually for the diaspora. My plans for a Christmas road trip from Seoul to Honolulu have been shattered once again.

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Non-American spouse of American abroad narrowly avoids becoming a U.S. person

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Via Andrew Mitchel as well as The Tax Times blog, we learn that the IRS has published Chief Counsel Advice regarding a U.S. citizen wife who tried to file a joint U.S. income tax return with her “nonresident alien” husband. Most likely this means the wife lives in her husband’s country, or the two together as expats in a third country (though they might also be living in the U.S. with the husband on a student visa). I reproduce the entire text of the advice (CCA 201325013) after the jump. If you’re thirsty for more, you can see all of the latest & greatest hits from the IRS at their Written Determinations page, which is updated about once per week.

Anyway, in February 2013, an IRS examiner combing over the couple’s return — probably in hopes of assessing penalties, since now the tax law rather than the nationality law must bear the burden of punishing Americans for the traitorous act of sleeping with foreigners — wanted to know whether the wife’s act of submitting a “married filing jointly” Form 1040 had accidentally turned the husband into a U.S. person, even if they had not explicitly made a § 6013(g) election for a nonresident alien spouse to be treated as a resident alien for tax purposes. Such treatment would saddle him with an obligation to file Form 3520 on what the IRS hilariously calls “foreign trusts” and what the husband probably thinks of as “my local & fully-tax-compliant retirement account” — and since the would-be joint return apparently didn’t include any 3520s for him, the couple would have been subject to penalties.

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Form 3520, “foreign trusts”, and the Streamlined Filing Compliance Procedures

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Thinking of taking the IRS up on their offer of “simplified” compliance procedures for U.S. Persons abroad? Well if you have a “foreign” retirement or purpose savings account, you should be warned that the paperwork is so complicated that even the IRS doesn’t understand it — and thanks to how the U.S. taxes “foreign trusts”, you may end up classified as a “high risk” taxpayer simply for having a retirement account like every one of your neighbours, especially if the U.S. dollar has fallen against your country’s currency during the recent financial crisis.

From a blog post by Brian Dooley as well as a comment by badger, we learn of a recent letter by the American Institute of CPAs to the IRS complaining of grossly inappropriate automated penalty letters being sent out to multiple taxpayers, Canadians among them, in response to accurate, complete, and timely Form 3520 filings — filings which the IRS erroneously classified as incorrect, incomplete, or late because the taxpayers left some blank spots on the form for items which the instructions correctly told them not to fill out.

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It’s all Congress’ fault?

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Defenders of the executive branch claim that U.S. Persons abroad should direct their anger at Congress, and not the IRS, for the current holy crusade against people who dare to live and save outside of the United States. But over at Tax, Society & Culture, tax prof Adam Rosenzweig makes an interesting argument which points to the hole in that logic:

Conventional wisdom seems to hold that Congress must act for there to be any reform of the taxation of “carried interest” (the type of fees earned by investment fund managers such as Mitt Romney) But if the goal is to tax carried interest at the same rate as, say, salary earned by auto workers, Congress need not act at all. Rather, the Treasury Department could accomplish this on its own today.

This somewhat surprising conclusion comes from the fact that the Code already authorizes the Treasury Department to prevent taxpayers from using partnerships to convert certain types of income that would have been taxed at the ordinary 35% rate into income taxed at the preferential 15% tax rate. For somewhat technical reasons, carried interest requires a partnership to be used for tax purposes. Thus, Treasury could simply issue a regulation disallowing the 15% rate for carried interest. Voila! Carried interest fixed.

So what other ridiculous aspects of the U.S. tax system might Treasury be able to fix through its power to issue regulations? Perhaps something related to U.S. Persons abroad?
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Almost no U.S. Persons abroad properly report their foreign retirement accounts on Form 3520

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Through a recent post at TaxProf Blog, I learned about the IRS’ Statistics of Income Bulletin. This finally gave me the lead on a figure in which I’d been interested for a long time: the number of Form 3520 filers. Unfortunately, the statistics are only released once every few years, and the next set aren’t scheduled for publication until December 2012. But you can see the figures for 1998, 2002, and 2006 here on the IRS website. The latest number: U.S. Persons filed a grand total of 1,952 Form 3520s and 3,819 Form 3520-As in 2006.

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Knocked flat by "horizontal equity"

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One of the most common justifications among DC tax professors and policy wonks for taxing US homelanders and US Persons abroad in the exact same way is “horizontal equity”: the idea that “similarly-situated” taxpayers should pay similar amounts to the US government. Naturally, these people see the current situation, in which U.S. Persons Abroad get all these “great tax breaks”, as horribly unfair. So here’s a handy table comparing the paperwork which U.S. homelanders and U.S. Persons Abroad must complete in order to conduct similarly-situated kinds of financial activities. All estimates are courtesy of the Paperwork Reduction Act.

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