IRS IS BECOMING INTRUSIVE

When you renew your passport, you are now required to list your social security number which is sent to the IRS. It is not known at this time what the IRS is going to do with this data, but there is a good chance they will be checking for Citizens and residents living abroad who have failed to file there yearly income tax return with the IRS.

Also, now when applying for citizenship or bringing a new nonresident spouse or children back to the U.S. after living abroad, the immigration people are asking for proof that the past years tax returns have been filed.

Remember if you are required to file tax returns, you must file the return for each, or the statute of limitations for the IRS to assess taxes, etc. never runs out.

David Connell an American Licensed As Mexican Real Estate Attorney

David Connell is a US Citizen licensed as a Mexican Attorney which substantial expertise in Mexican real estate and business law. Talk with him when you are doing business in Mexico or consider purchasing real estate.

Corporate Tax Equilization Policies for Executives Working Abroad

Corporate tax equilization policies are not always fair to corporate executives working abroad. If you participate in such a program and suspect it is not fair, you can have it reviewed by an expert to determine if you are actually benefiting. If you live in a low tax country, in most instances no tax equilization is better than equiliztion. That will often leave you with much more money in your pocket.

Filing Past Years Tax Returns for US Income Taxes Can be Painless

Two many US citizens and green card holders are afraid to file all of the past year tax returns they have not filed. Most expats did not know they were required to file a tax return each year while living abroad even though they filed a return in their resident country. They want to catch up but are afraid of the huge amount of taxes, interest and penalties which may have accrued over the years.

In most situations, after filing 5-10 or even 15 years of past returns not tax is due and the entire process is painless. Why? Because the foreign earned income exclusion ($70.000 in the earlier years and now $80,000) offset their earnings abroad and the foreign tax allowed against US taxes offsets the rest.

Remember, the statute of limitations on tax assessments does not start to run until you actually file a tax return. After you file a return, absent fraud, the statute for any assessments from the IRS expires in 3 years. It is good to file returns to make this time run out and avoid future surprises from the IRS.

1031 Tax Free Exchanges Outside of US

1031 Tax Free Real Estate Exchanges are not allowed out of or into the US to or from a foreign country. Therefore, taxes must be paid if you sell your US property and want to reinvest it abroad. However, 1031 exchanges are allowed between one foreign property and another (so long as both are located outside of the US).

Voting While Living Abroad in US Presidential Elections

Even though you no longer have a residence in any US state, you can still vote in any US presidential election by following certain procedures mandated by the federal government. It can all be done by mail and you will vote by mail with an absentee ballot. Just click the title to this piece and you will be brought to a page that tells you how.

Status of Forces Agreements May Cause Problems

If you are living in a foreign country and do not have to pay income taxes in that country due to a status of forces agreement because you work for a civilian contractor hired by the US military or government, it may adversely affect you ability to claim the Section 911 foreign earned income exclusion. Revenue Rulings have held that for Vietnam and Japan such an agreement will not allow you to use the bonafide residence test to qualify for the exclusion. One ruling does hold that due to the facts and circumstances and wording of the status of forces agreement with the UK, a residence can still claim the exclusion.

All About Taxation of US Citizens Living Abroad

US TAXATION OF AMERICANS LIVING ABROAD


As a U.S. expatriate residing in abroad, you still owe U.S. taxes each year on your worldwide income! The stories you hear from the fellow American expatriate sitting next to you at the bar that once you leave the U.S., you no longer owe any taxes or have to file tax returns , are about as true as most bar room tales. Its against the law to give up your U.S. citizenship in order to avoid U.S. taxes! Therefore, if you aren't filing your U.S. tax return, the statute of limitations on tax collections will not run out and your tax return obligation only grows greater as each year passes.


US Tax Treaties with over 35 Countries and Mexico




The US has income tax treaties with over 35 other countries. Now, both the IRS and the foreign taxing authorities can exchange information on their citizens living in the other country. Both the Internal Revenue Service and taxing authorities in foreign countries use these treaties regularly to exchange information on their residents living in the other's country. The IRS usually has several agents attached to the U.S. Embassy in each country to assist U.S. Citizens and to search out and report to the IRS citizens who may not be filing their U.S. tax returns.


A Tax Treaty is quite complex, but includes many special provisions which will benefit any American It attempts to reduce or eliminate any double taxation of your income by both countries by allowing credits for foreign income taxes you pay while living in outside the U.S. against your U.S. income taxes. This credit more often than not will totally offset any U.S. tax you might owe on your worldwide income in the U.S. - but to claim the credit you must file your U.S. tax return.


Statute of Limitations



If you fail to file that return for any tax year (whether a return is required or not), the statute of limitations on tax assessments for that year will never run out. Therefore, if you live abroad for 10 years, and then return to the United States, the IRS may question your failure to file returns for those ten years and later make assessments based on their best estimate you're your income. The interest and penalties on any old tax amounts owed grows faster than you can imagine and after 4-5 years may exceed the amount of the original taxes owed.


If you do file your tax return each tax year while living abroad, the statute of limitations in most situations for IRS audits will expire three years after you file those returns. That means the IRS cannot go back (absent fraud) and try to audit or change those returns later. Therefore, you should file your return even if you have no income or don't owe taxes in order to force the statute of limitations to run and eliminate future problems when you decide to return to the U.S.


Foreign Earned Income Exclusion


If you have your full time residence abroad for a full calendar year, or live there for 330 days out of any consecutive 12 month period, you can exclude up to $80,000 of earned income from U.S. Income Taxation for 2002 and $78,000 in 2001. If you are married, and both of you earn income and reside and work abroad, you can also exclude up to another $80,000 of your spouses income from taxation. These exclusions can only be claimed on a filed tax return and is not automatic if you fail to file your Form 1040 for the year it applies as well as the appropriate forms claiming this exclusion. This is a fantastic advantage for people who live and work outside of the U.S. Earned income is that paid you for your work or services and does not apply to rental income, dividend or interest income, or other types of income that is not paid for your own personal efforts.


You can also claim an additional exclusion from your U.S. taxes in excess of the $80,000, if the rent, utilities, etc. you pay on your residence abroad and other living expenses exceed a standard amount (which is currently approx $10,500 per year) established by the IRS. This exclusion only comes into play when your earnings are in excess of the $80,000 foreign income exclusion.


U.S. Self Employment Tax


If you are a bonafide employee of your foreign employer (which can mean your own foreign corporation) and have foreign social security and other payroll taxes withheld from your wages, you do not have to worry about paying any social security taxes to the U.S. However, if you are self employed, and no foreign social security is being withheld from your earnings ( in other words an independent contractor) you must file a Schedule C with your U.S. tax return and pay U.S. self employment tax (social security taxes by the self employed) on your net earnings ( after deducting your expenses). The self employment tax rate is 15.3% and is not reduced by the previously mentioned foreign earned income exclusion or foreign tax credits..


Forms Which Must be Filed With IRS to Avoid Severe Penalties


If you own more than a 10% ownership interest in a foreign corporation you are required to file a special form with the IRS reporting that interest. In many cases, if that foreign corporation is making profits, it will be a "controlled foreign corporation" and you may also owe U.S. tax on its earnings. If you are the beneficiary or trustee of a foreign trust (such as a Fideicomiso which holds title to your residence in Mexico) you must file a special form with the IRS. Another a special form must be filed with the U.S. Treasury if you have ownership or signature authority over a Mexican bank account which anytime during the year has a balance of more than $10,000 US or more. If you fail to file any of these forms as required by law, you will be subject to penalties up to $10,000 or more. These penalties might be assessed many years from now when the U.S. IRS and the Mexican Hacienda finally start sharing information on a regular basis. If you do not file these forms when required, it will be very difficult to later avoid those penalties.


Taxes on World Wide Income

U.S. Permanent Residents (green card holders) as well as U.S. Citizens must report each year their income earned anywhere in the world. That means your U.S. income tax return must include:

Foreign dividends

Rental Income Earned Abroad

Foreign pension income

Foreign capital gains or losses on stocks, bonds, real estate

Foreign royalties

All other foreign income

Due Date of Tax Return


If you have your personal permanent residence is abroad on April 15th of any year, you get an automatic extension to file your tax return for the previous calendar year until June 15th. If you need more time, you can file several further extension requests which can extend the due date of your tax return until October 15th. If you owe taxes, and fail to pay the estimated taxes in by April 15th, you will be subject to interest and penalties for that underpayment. However, those penalties are not as severe as those imposed for failing to file your tax return in a timely manner. It is therefore wise to always file an extension if you are going to file your return later than April 15th, even though you do not have the money to pay your estimated taxes at that time.


Avoiding U.S. State Taxes


Do not assume just because you moved out of the U.S. that your previous state of residence has no claim on taxing your income. Many states such as California, Virginia and South Carolina make it very difficult to give up your "tax domicile" in the state and require that you file state income tax returns (and pay the tax) even if you do not move back until years later. Some of the criteria that a state looks at to determine if you are a resident for state income tax purposes includes your driver license, if you register to vote there, if you maintain an address there, the location of your bank accounts, if you own or rent real property there, the license plates on your cars, and if you still receive utility bills in that state. There are many other factors used by state taxing agencies to determine if you are a resident, but they are too numerous to mention here. You must be careful to reduce or eliminate all indices of residency or your previous state of residency in the U.S. will come after you for state income taxes. You must carefully plan your departure from your previous home state both reviewing the laws and taking the actual steps necessary to prove to that state you no longer have a "tax domicile" there after you move abroad. If you do not, the taxes, penalties and interest later assessed by that state can be huge.


You do have to continue to pay taxes in a state if you receive rental income there or receive income from a trade or business located there, even if you are no longer a resident. Investment income such as from stock sales, dividends, and interest are not subject to state tax unless you live there. Pensions are no longer taxable in the state in which you earned the pension if you permanently leave that state.


What About Returns Which Were not Filed for Years You Lived Abroad?

Though not required to by law, the IRS currently allows an expatriate to file past tax returns which were erroneously not previously filed and claim the foreign earned income exclusion and foreign tax credits as if the returns had been filed on a timely basis. That usually means most delinquent expatriates who file past returns owe little taxes or interest after claiming those benefits. It can easily be determined if returns are owed for past years by ordering a transcript from the IRS. This can be done by a tax professional without triggering any inquiry from the IRS concerning the taxpayer.



Offers in Compromises and Payment Plans


If one of the reasons you are living abroad is that you owe the IRS or state taxing agencies Offer in Compromise programs which may allow you to settle the balance owed for pennies on the dollar. When you do owe back taxes, the amount owed increases at a fast pace due to interest and penalties and therefore can get very large compared with the original amount of tax owed. In order to make an offer in compromise you must file returns for all of your past tax years


Many delinquent taxpayers have through the use of an offer in compromise settled with payments of anywhere from 10% to 50% of the total amount owed. The IRS statistics show that in the past 25 percent of the Offers in Compromise have been accepted and that the average compromise was 18 percent of the total amount due. The entire process usually takes three to six months and requires filing financial information with the IRS and the required forms. You can make an offer which allows you to pay off the amount agreed over a period of time. The IRS very recently released new regulations which will increase the number of offers in compromise its accepts and allows taxpayers to claim hardship as a reason for the Offer.