IRS Announces Efforts to Help U.S. Citizens Overseas, Including Dual Citizens and Those with Foreign Retirement Plans

The Internal Revenue Service today announced a plan to help U.S. citizens residing overseas, including dual citizens, catch up with tax filing obligations and provide assistance for people with foreign retirement plan issues.

"Today we are announcing a series of common-sense steps to help U.S. citizens abroad get current with their tax obligations and resolve pension issues," said IRS Commissioner Doug Shulman.

Shulman announced the IRS will provide a new option to help some U.S. citizens and others residing abroad who haven’t been filing tax returns and provide them a chance to catch up with their tax filing obligations if they owe little or no back taxes. The new procedure will go into effect on Sept. 1, 2012. (Click the previous link to go to the current information on the new procedure)

The IRS is aware that some U.S. taxpayers living abroad have failed to timely file U.S. federal income tax returns or Reports of Foreign Bank and Financial Accounts (FBARs).  Some of these taxpayers have recently become aware of their filing requirements and want to comply with the law.

To help these taxpayers, the IRS offered the new procedures that will allow taxpayers who are low compliance risks to get current with their tax requirements without facing penalties or additional enforcement action. These people generally will have simple tax returns and owe $1,500 or less in tax for any of the covered years.

The IRS also announced that the new procedures will allow resolution of certain issues related to certain foreign retirement plans (such as Canadian Registered Retirement Savings Plans).  In some circumstances, tax treaties allow for income deferral under U.S. tax law, but only if an election is made on a timely basis.  The streamlined procedures will be made available to resolve low compliance risk situations even though this election was not made on a timely basis.

Taxpayers using the new procedures announced today will be required to file delinquent tax returns along with appropriate related information returns for the past three years, and to file delinquent FBARs for the past six years. Submissions from taxpayers that present higher compliance risk will be subject to a more thorough review and potentially subject to an audit, which could cover more than three tax years.

The IRS also announced its offshore voluntary disclosure programs have exceeded the $5 billion mark, released new details regarding the voluntary disclosure program announced in January and closed a loophole used by some U.S. citizens.  See IR-2012-64 for more details.

IRS Adds 9 More Questions and Answers on Form 8938 - Reporting Foreign Financial Assets

Basic Questions and Answers on Form 8938 (rev 6/7/12)
Q&A   1-14, posted 02-29-12 Q&A 15-23, posted 06-07-12 1. What are the specified foreign financial assets that I need to report on Form 8938? If you are required to file Form 8938, you must report your financial accounts maintained by a foreign financial institution.  Examples of financial accounts include: Savings, deposit, checking, and brokerage accounts held with a bank or broker-dealer. And, to the extent held for investment and not held in a financial account, you must report stock or securities issued by someone who is not a U.S. person, any other interest in a foreign entity, and any financial instrument or contract held for investment with an issuer or counterparty that is not a U.S. person.  Examples of these assets that must be reported if not held in an account include: Stock or securities issued by a foreign corporation; A note, bond or debenture issued by a foreign person; An interest rate swap, currency swap, basis swap, interest rate cap, interest rate floor, commodity swap, equity swap, equity index swap, credit default swap or similar agreement with a foreign counterparty; An option or other derivative instrument with respect to any of these examples or with respect to any currency or commodity that is entered into with a foreign counterparty or issuer; A partnership interest in a foreign partnership; An interest in a foreign retirement plan or deferred compensation plan; An interest in a foreign estate; Any interest in a foreign-issued insurance contract or annuity with a cash-surrender value.  The examples listed above do not comprise an exclusive list of assets required to be reported. 2. I am a U.S. taxpayer but am not required to file an income tax return.  Do I need to file Form 8938? Taxpayers who are not required to file an income tax return are not required to file Form 8938. 3. Does foreign real estate need to be reported on Form 8938? Foreign real estate is not a specified foreign financial asset required to be reported on Form 8938.  For example, a personal residence or a rental property does not have to be reported. If the real estate is held through a foreign entity, such as a corporation, partnership, trust or estate, then the interest in the entity is a specified foreign financial asset that is reported on Form 8938, if the total value of all your specified foreign financial assets is greater than the reporting threshold that applies to you.  The value of the real estate held by the entity is taken into account in determining the value of the interest in the entity to be reported on Form 8938, but the real estate itself is not separately reported on Form 8938.  4. I directly hold foreign currency (that is, the currency isn’t in a financial account).  Do I need to report this on Form 8938? Foreign currency is not a specified foreign financial asset and is not reportable on Form 8938. 5.  I am a beneficiary of a foreign estate.  Do I need to report my  interest in a foreign estate on Form 8938? Generally, an interest in a foreign estate is a specified foreign financial asset that is reportable on Form 8938 if the total value of all of your specified foreign financial assets is greater than the reporting threshold that applies to you. 6. I acquired or inherited foreign stock or securities, such as bonds.  Do I need to report these on Form 8938? Foreign stock or securities, if you hold them outside of a financial account, must be reported on Form 8938, provided the value of your specified foreign financial assets is greater than the reporting threshold that applies to you.  If you hold foreign stock or securities inside of a financial account, you do not report the stock or securities on Form 8938.  For more information regarding the reporting of the holdings of financial accounts, see FAQs 8 and 9. 7. I directly hold shares of a U.S. mutual fund that owns foreign stocks and securities.  Do I need to report the shares of the U.S. mutual fund or the stocks and securities held by the mutual fund on Form 8938?  If you directly hold shares of a U.S. mutual fund you do not need to report the mutual fund or the holdings of the mutual fund. 8.  I have a financial account maintained by a U.S. financial institution that holds foreign stocks and securities.  Do I need to report the financial account or its holdings?  You do not need to report a financial account maintained by a U.S. financial institution or its holdings.  Examples of financial accounts maintained by U.S. financial institutions include: U.S. Mutual fund accounts IRAs (traditional or Roth) 401 (k) retirement plans Qualified U.S. retirement plans Brokerage accounts maintained by U.S. financial institutions 9.  I have a financial account maintained by a foreign financial institution that holds investment assets.  Do I need to report the financial account if all or any of the investment assets in the account are stock, securities, or mutual funds issued by a U.S. person? If you have a financial account maintained by a foreign financial institution and the value of your specified foreign financial assets is greater than the reporting threshold that applies to you, you need to report the account on Form 8938.  A foreign account is a specified foreign financial asset even if its contents include, in whole or in part, investment assets issued by a U.S. person.  You do not need to separately report the assets of a financial account on Form 8938, whether or not the assets are issued by a U.S. person or non-U.S. person.     10.  I have a financial account with a U.S. branch of a foreign financial institution.  Do I need to report this account on Form 8938? A financial account, such as a depository, custodial or retirement account, at a U.S. branch of a foreign financial institution is an exception to the general rule that a financial account maintained by a foreign financial institution is specified foreign financial asset.  A financial account maintained by a U.S. branch or U.S. affiliate of a foreign financial institution does not have to be reported on Form 8938 and any specified foreign financial assets in that account also do not have to be reported. 11. I own foreign stocks and securities through a foreign branch of a U.S.-based financial institution.  Do I need to report these on Form 8938? If a financial account, such as a depository, custodial or retirement account, is held through a foreign branch or foreign affiliate of a U.S.-based financial institution, the foreign account is not a specified foreign financial asset and is not required to be reported on Form 8938 12. I have an interest in a foreign pension or deferred compensation plan. Do I need to report it on Form 8938? If you have an interest in a foreign pension or deferred compensation plan, you have to report this interest on Form 8938 if the value of your specified foreign financial assets is greater than the reporting threshold that applies to you. 13. How do I value my interest in a foreign pension or deferred compensation plan for purposes of reporting this on Form 8938? In general, the value of your interest in the foreign pension plan or deferred compensation plan is the fair market value of your beneficial interest in the plan on the last day of the year.   However, if you do not know or have reason to know based on readily accessible information the fair market value of your beneficial interest in the pension or deferred compensation plan on the last day of the year, the maximum value is the value of the cash and/or other property distributed to you during the year.  This same value is used in determining whether you have met your reporting threshold. If you do not know or have reason to know based on readily accessible information the fair market value of your beneficial interest in the pension plan or deferred compensation plan on the last day of the year and you did not receive any distributions from the plan, the value of your interest in the plan is zero.  In this circumstance, you should also use a value of zero for the plan in determining whether you have met your reporting threshold.  If you have met the reporting threshold and are required to file Form 8938, you should report the plan and indicate that its maximum is zero. 14. I am a U.S. taxpayer and have earned a right to foreign social security.  Do I need to report this on Form 8938? Payments or the rights to receive the foreign equivalent of social security, social insurance benefits or another similar program of a foreign government are not specified foreign financial assets and are not reportable. 15. If I have to file Form 8938, am I required to report all of my specified foreign financial assets regardless of whether the assets have a de miminis maximum value during the tax year? If you meet the applicable reporting threshold, you must report all of your specified foreign financial assets, including the specified foreign financial assets that have a de minimis maximum value during the tax year.  For exceptions to reporting, see Exceptions to Reporting on page 6 of the instructions for Form 8938. 16.  I filed my income tax return but now realize that I should have filed Form 8938 with my return, what should I do? If you omitted Form 8938 when you filed your income tax return, you should file Form 1040X, Amended U.S. Individual Income Tax Return, with your Form 8938 attached. 17.  Do I have to file both Form 8938 and Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR)? The filing of Form 8938 does not relieve you of the separate requirement to file the FBAR if you are otherwise required to do so, and vice-versa.  Depending on your situation, you may be required to file Form 8938 or the FBAR or both forms, and certain foreign accounts may be required to be reported on both forms. 18.  I have numerous specified foreign financial assets to report on Form 8938.  Is there a continuation sheet for the Form 8938?  If you have more than one account or asset to report in Part I or Part II of Form 8938, or more than one issuer or counterparty to report in Part II of Form 8938, copy as many blank Parts I and/or II as you need to complete, and attach them to Form 8938.  Check the “If you have attached additional sheets, check here” box at the top of Form 8938. 19.  I directly hold tangible assets for investment, such as art, antiques, jewelry, cars and other collectibles, in a foreign country.  Do I need to report these assets on Form 8938? No.  Directly held tangible assets, such as art, antiques, jewelry, cars and other collectibles, are not specified foreign financial assets. 20.  I directly hold precious metals for investment, such as gold, in a foreign country.  Do I need to report these assets on Form 8938? No.  Directly held precious metals, such as gold, are not specified foreign financial assets.  Note, however, that gold certificates issued by a foreign person may be a specified foreign financial asset that you would have to report on Form 8938, if the total value of all your specified foreign financial assets is greater than the reporting threshold that applies to you. 21.  This tax year I sold precious metals that I held for investment to a foreign person.  Do I have to report the sales contract on Form 8938?  The contract with the foreign person to sell assets held for investment is a specified foreign financial asset investment asset that you have to report on Form 8938, if the total value of all your specified foreign financial assets is greater than the reporting threshold that applies to you. 22.  I have a safe deposit box at a foreign financial institution.  Is the safe deposit box itself considered to a financial account?    No, a safe deposit box is not a financial account. 23.  Am I required to hire a certified appraiser or actuary to determine the fair market value of a specified foreign financial asset?  For example, if I have a foreign defined benefit plan, am I required to obtain the services of an actuary? You may determine the fair market value of a foreign financial account for the purpose of reporting its maximum value based on periodic account statements unless you have reason to know that the statements do not reflect a reasonable estimate of the maximum value of the account during the tax year.  For a specified foreign financial asset not held in a financial account, you may determine the fair market value of the asset for the purpose of reporting its maximum value based on information publicly available from reliable financial information sources or from other verifiable sources.  Even if there is no information from a reliable financial information source or other verifiable source, you do not need to obtain an appraisal by a third party in order to reasonably estimate the asset’s maximum value during the tax year.

Reporting Foreign Financial Accounts Due Date for Form TDF 90-22.1 (FBAR) is 6/29/12 or 6/30/12

Your TDF 90-22.1  (FBAR form) where you must report to the IRS your foreign bank and financial accounts must arrive at the designated address by 6/29/12 or be filed on line no later than 6/30/12.  No extensions are allowed. You must report accounts owned by you or that you have signature authority or control over.

This form must be filed for your 2011 foreign financial accounts highest balances during 2011 exceed $10,000 US. Therefore, you need to combine these highest balances to determine if you need to file this form. Foreign financial accounts (but not limited to these) which must be on the form include:

• Bank and savings accounts
• Stock Brokerage Accounts
• Pension plans
• Cash surrender value in foreign life insurance and annuities
• Gold held by another company or person for safe keeping.

Best to file the form Certified mail with return receipt so you have proof of filing or by DHL, UPS, or Fed Exp.

If you are required to file this form, you may also be obligated to file Form 8938 with your personal US tax return.

Link to download  paperTDF 90.22.1(FBAR): http://www.irs.gov/pub/irs-pdf/f90221.pdf

Link to file TDF 90-22.1 on line: http://bsaefiling.fincen.treas.gov/Enroll_Individual.html

Potential Penalties for Not Filing or Filing Late:

The following chart highlights the civil and criminal penalties that may be asserted for not complying with the FBAR reporting and recordkeeping requirements.

Violation	Civil Penalties	Criminal Penalties	Comments
Negligent Violation	Up to $500	N/A	31 U.S.C. § 5321(a)(6)(A) 31 C.F.R. 103.57(h)
Non-Willful Violation	Up to $10,000 for each negligent violation	N/A	31 U.S.C. § 5321(a)(5)(B)
Pattern of Negligent Activity	In addition to penalty under § 5321(a)(6)(A) with respect to any such violation, not more than $50,000	N/A	31 U.S.C. 5321(a)(6)(B)
Willful - Failure to File FBAR or retain records of account	Up to the greater of $100,000, or 50 percent of the amount in the account at the time of the violation.	Up to $250,000 or 5 years or both	31 U.S.C. § 5321(a)(5)(C) 31 U.S.C. § 5322(a) and 31 C.F.R. § 103.59(b) for criminal. The penalty applies to all U.S. persons.
Willful - Failure to File FBAR or retain records of account while violating certain other laws	Up to the greater of $100,000, or 50 percent of the amount in the account at the time of the violation.	Up to $500,000 or 10 years or both	31 U.S.C. § 5322(b) and 31 C.F.R. § 103.59(c) for criminal The penalty applies to all U.S. persons.
Knowingly and Willfully Filing False FBAR	Up to the greater of $100,000, or 50 percent of the amount in the account at the time of the violation.	$10,000 or 5 years or both	18 U.S.C. § 1001, 31 C.F.R. § 103.59(d) for criminal.  The penalty applies to all U.S. persons.
Civil and Criminal Penalties may be imposed together.  31 U.S.C. § 5321(d).

IMPORTANT US INTERNATIONAL TAX FORM DUE DATES

• Form TDF 90-22.1 (FBAR FORM) where you report details of your foreign financial accounts, including bank accounts, stock brokerage accounts, pension plans, etc. is must be received by the IRS by 6/30/12. No extension can be granted. Penalty for filing late can be $10,000 or more.
• Expat tax returns (if you lived abroad on 4/17/12) are due on 6/15/12 for 2011. You can obtain a further extension by filing form 4868 prior to that date. This does not extend the due date of any taxes you owe which must have been paid by 4/17/12 to avoid late payment penalties and interest.
• Forms 5471 (foreign corporations), 8865 (foreign partnerships),  8858 (Disregarded Entity), and 8621 (Passive Foreign Investment Company- usually foreign mutual funds) are all due on the due date including extensions thereof of your personal tax return. Most of these forms provide for a possible $10,000 penalty for filing late.
• If you have not filed these forms for many years (and were required to file) now may be a good time to file all those past years forms because the 2012 Voluntary Offshore Disclosure Program is still in effect and sometimes under that program you may be able to file these forms late and secure reduced or no penalties at all!

If you have prepared these forms yourself and are not sure if you have done so correctly, we do offer a service where we review your self prepared forms and provide you with written comments and suggested corrections.  These forms can all be downloaded at www.irs.gov.

IRS Chart Comparing What to Include on Form 8938 and on FBAR Form (TDF 90-22.1)

The link below leads to the IRS Comparison Chart showing what  types of assets to include on Form 8938 and the FBAR form (TDF 90-22.1) or on both.  Both of these forms must be filed for 2011 if applicable or you risk a $10,000 penalty for each for failing to report foreign financial assets and foreign financial accounts.  If you need us to fill of these forms for you or review the form you self prepared for completeness and correctness, we do provide that service.

LINK TO IRS CHART

Email US for help

US Expatriates Can Avoid Paying State Income Taxes with Proper Planning

Many US expats wish to maintain a US mailing address or home in the US , or US state drivers license, etc. but do not want to risk having to pay any state income taxes (there is no Federal requirement that you maintain a state tax domicile if you live and work outside of the US).   You should check the tax laws in your state of residency to see what difficulties you may encounter trying to stop paying state income taxes when you do chose to live and work abroad. Many states have laws which  attempt to keep their residents paying state income taxes (even though an ex resident may have moved their residence abroad) while other states make it easy to stop paying state tax.   California, Virginia, New Mexico and a few other states are those that make it difficult  to stop paying state income tax when you change your domicile to one outside of the US.

One easy solution you can use to attempt to avoid paying state income taxes when living and working abroad, is to move your US address, tax domicile, voter registration, drivers licenses, etc.  a state with no personal income taxes. The US states which do not have personal individual income taxes. Those include:

Alaska New Hampshire Tennessee Florida South Dakota Washington Nevada Texas Wyoming

 

IRS Announces More Flexible Offer-in-Compromise Terms to Help a Greater Number of Struggling Taxpayers Make a Fresh Start

The Internal Revenue Service today announced another expansion of its "Fresh Start" initiative by offering more flexible terms to its Offer in Compromise (OIC) program that will enable some of the most financially distressed taxpayers to clear up their tax problems and in many cases more quickly than in the past. The  announcement focuses on the financial analysis used to determine which taxpayers qualify for an OIC. This announcement also enables some taxpayers to resolve their tax problems in as little as two years compared to four or five years in the past. In certain circumstances, the changes announced today include: Revising the calculation for the taxpayer’s future income. Allowing taxpayers to repay their student loans. Allowing taxpayers to pay state and local delinquent taxes. Expanding the Allowable Living Expense allowance category and amount. In general, an OIC is an agreement between a taxpayer and the IRS that settles the taxpayer’s tax liabilities for less than the full amount owed. An OIC is generally not accepted if the IRS believes the liability can be paid in full as a lump sum or a through payment agreement. The IRS looks at the taxpayer’s income and assets to make a determination of the taxpayer’s reasonable collection potential. OICs are subject to acceptance on legal requirements. The IRS recognizes that many taxpayers are still struggling to pay their bills so the agency has been working to put in place common-sense changes to the OIC program to more closely reflect real-world situations. When the IRS calculates a taxpayer’s reasonable collection potential, it will now look at only one year of future income for offers paid in five or fewer months, down from four years, and two years of future income for offers paid in six to 24 months, down from five years. All offers must be fully paid within 24 months of the date the offer is accepted. The Form 656-B, Offer in Compromise Booklet, and Form 656, Offer in Compromise, has been revised to reflect the changes. Other changes to the program include narrowed parameters and clarification of when a dissipated asset will be included in the calculation of reasonable collection potential. In addition, equity in income producing assets generally will not be included in the calculation of reasonable collection potential for on-going businesses. Allowable Living Expenses The Allowable Living Expense standards are used in cases requiring financial analysis to determine a taxpayer’s ability to pay. The standard allowances provide consistency and fairness in collection determinations by incorporating average expenditures for basic necessities for citizens in similar geographic areas. These standards are used when evaluating installment agreement and offer in compromise requests. The National Standard miscellaneous allowance has been expanded to include additional items. Taxpayers can use the miscellaneous allowance for expenses such as credit card payments and bank fees and charges. Guidance has also been clarified to allow payments for loans guaranteed by the federal government for the taxpayer's post-high school education. In addition, payments for delinquent state and local taxes may be allowed based on percentage basis of tax owed to the state and IRS. This is another in a series of steps to help struggling taxpayers under the Fresh Start initiative. In 2008, IRS announced lien relief for taxpayers trying to refinance or sell a home. The IRS added new flexibility for taxpayers facing payment or collection problems in 2009. The IRS made changes to lien policies in 2011 and expanded the threshold for small businesses to resolve tax issues through installment agreements. And, earlier this year, the IRS increased the threshold for a streamlined installment agreement allowing individual taxpayers to set up an installment agreement without providing a significant amount of financial information. Interim Guidance Memorandum for Offer in Compromise Internal Revenue Manual 5.8.5.5.1, Income-Producing Assets

10 IRS Rules for Stress-Free Foreign Financial Accounts

See the article HERE from Forbes Magazine for these ten rules: Remember financial accounts also  include foreign pension accounts, gold held in another's  vault, foreign contracts you are collecting payments and interest on, cash surrender value of foreign life insurance, positive balances (you are owed the money) in foreign credit cards,  foreign stock broker accounts, and any other manner of foreign financial asset.  Interesting enough it does not include real estate if held in your own name.  All of these items must also be included in Form 8938 if you are required to file.

Interestingly enough foreign real estate only has to be reported as a foreign assets if you hold it in a foreign corporation, partnership, LLC, or trust.  If you hold it in your own name and do not rent it out, you do not have to tell the government anything about it.  This also holds true with respect to gold, cash, diamonds, etc. located abroad and kept in your matters or personal foreign safe.

Number of Expats Filing FBAR Forms More than Doubles Per New York Times

The increased pressure from the IRS has produced big results. The numbers of Americans filing the Report of Foreign Bank and Financial Accounts, or FBAR, soared from 276,386 in 2009 to 618,134 in 2011 (failure to file, the IRS warns, “subjects a person to a prison term of up to 10 years and criminal penalties of up to $500,000”).

Due to the increase IRS pressures, a  growing number of Americans living abroad are renouncing once-valued U.S. passports and Citizenship. Some 1,780 people gave up U.S. nationality last year, eight times the 2008 level and the largest number in more than a decade.  

In 2001, the IRS had only 13 agents in its international operations unit, and none specifically targeting what it calls “global high wealth.” By 2011, there were 71 for global high wealth — and 856 for international operations, up from 259 just a year before.  The IRS in March announced it was going to hire 300 more international agents.

Read more about the IRS and the pressures it is putting on expats IN THIS ARTICLE FROM THE NEW YORK TIMES.

YOUR US INCOME and TAXES MAY GO UP ON 1/1/13

Unless Congress takes action and passes new tax law (and that will not happen until after the Presidential election , a tax Bomb will go off on January 1, 2013 which could cause you adverse consequences.

• The Lowest income tax rate jumps from 10% to 15%
• The top tax rate climbs from 35% to 39.6%
• Long-term capital gains tax rate climbs from 15% to 20%
• Dividends will be taxed at substantially higher rates
• The 2% payroll tax credit expires, and much more...
• The lifetime estate and gift tax exemption will decrease from $5 million to $1 million

Now is the time to do  your  income and estate tax planning in the event Congress does not take any action to stop these increases.  We can help.  www.TaxMeLess.com 

2012 Foreign Earned Income Exclusion Increased By IRS

The IRS for 2012 has increased the Expatriate Foreign Earned Income Tax Exclusion to $95,900.  This could save single person (without any available tax credits)  up to an additional.$616 in US taxes on their 2012 return over what they might pay on the same foreign earned income on their 2011 return.

Remember an an expatriate living abroad on 4/17/12 you got an automatic extension to file your return until 6/15/12.  You can get a further extension to file the return until 10/15/12 by filing form 4868 prior to 6/15. If you owe any taxes at that time  interest and penalties will continue to accrue (at a rather low rate) until those taxes are paid. Remember form TDF 90-22.1 (FBAR) must be filed to report your foreign financial accounts by 6/30/12 for 2011. It cannot be extended for any reason.

This combined with the fact the IRS increases the foreign housing exclusion or deduction each year for expats will provide additional benefits to those who live and work abroad for 2012.  It just keeps getting better for expatriates so long as all of the special reporting forms (with high penalties for not filing) such as TDF 90-22.1, 8938, 3520, 8865, 5471, etc. are all filed in a timely manner. It is noteworthy that none of these forms are actual forms that produced more taxes, they are strictly informational and if filed, will result in no adverse consequences to the expat taxpayer.  Read more on our website at www.TaxMeLess.com 

Wealthy Americans Line Up to Forfeit Passports in Zurich - Businessweek

Excellent article from  Business Week about all of the US Taxpayers surrendering their US Citizenship. It does not include in the total  tally all of the US Green Card holders who have surrendered there permanent residency under a similar program for those individuals  READ BUSINESSWEEK ARTICLE HERE.

Our firm has advised or assisted in excess of one hundred Citizens or Green Card holders with the tax requirements of surrendering their US Tax Status over the past few years and we get inquiries daily.  It is a two STEP  process. The first  STEP is easy. You must have citizenship in another country, pay the US State Department $450, and fill out forms and go through an exit interview.

The second STEP requires that you file a final "Dual Status" us tax return, and Form 8854 which gives the IRS information on your worldwide asset value on the date your surrendered your status.  If the value of your worldwide assets exceed a certain amount, you may owe taxes on the gain you may have in those assets.  Visit our website if you need more information on the process and tax aspects at www.TaxMeLess.com  or www.expatattorneycpa.com.  We can advise you on the process and your situation with the protection of  the  attorney-client privilege privacy rules.

Tax Planning for Acquiring US Citizenship or a Green Card (Permanent Residency)

Those who acquire US permanent residency and/or  US Citizenship often are caught by surprise when it comes time to sell assets (property or stocks or ?) owned before they became US taxpayers.  They  often erroneously assumed the assets they owned before becoming US taxpayers will have a tax basis equal to the value of those assets on the date they became US taxpayers. THIS IS NOT CORRECT.

Under US tax law including Court Decisions, even though an asset was acquired many years before becoming a US taxpayer (Citizen or tax resident) the tax basis for determining gain or loss is the original cost basis of the property (or if inherited the fair market value of the property when it was inherited).  That means when the asset does not get a revised basis on the date of becoming a US taxpayer and US taxes will be paid on appreciation of the asset prior to the date the individual became a US taxpayer.

What to do?  Before becoming a US taxpayer, consider selling your highly appreciated assets to avoid paying US taxes on the gain that occurred prior to that date.

The one exception to the rule stated above, is when you  Surrender your Citizenship or Long Term Tax Residency, for the purposes of determining if you have to pay an exit tax on form 8854, your tax basis IS the fair market value of the property or asset on the date you first became a Long Term Resident or Citizen.

Mitt Romney - 10 Ways to Stiff the IRS and Pay Less than the Average US Taxpayer

Here are the ten ways Mitt Romney avoids paying high taxes. Unfortunately these methods are not available to the average taxpayer and most are reserved exclusively for the Upper One Percent of taxpayers. Mother Jones has done an outstanding job of analyzing Mitt's tax return and the loopholes he uses to avoid paying US taxes.

SOME AMERICANS ARE SURRENDERING THEIR CITIZENSHIP TO AVOID FILING US TAX RETURNS

Read the Reuters article here on the large number of Americans surrendering their US Citizenship to avoid having to file tax returns etc.  Their actions are not necessarily to avoid US income taxes since many will then be Citizens of  countries with much higher tax rates than the USA.  Many feel that it is not the high tax burden, but what you get for it that is the true measure of a good tax system.  We have helped or advised hundreds of US Citizens and Green Card holders with respect to the surrender of their US tax status.   If you are interested go to our website at www.taxmeless.com to learn more of the details.

Latest IRS Guidance on When to File Forms 8938 and TDF 90-22.1 (FBAR)

The IRS has just published further information on when to file forms 8938 (to report foreign financial assets) and TDF 90-22.1 (FBAR) to report foreign financial accounts. Their guidance clarifies when foreign currency and precious metals located in foreign countries must be reported. The Chart is easy to understand and can be read HERE.

If you wish assistance in preparing these forms or wish to have your own self prepared forms reviewed by an expert contact us.

TIPS FOR US EXPATRIATES ON PAYING QUARTERLY ESTIMATED TAXES

You may need to pay estimated taxes to the IRS during the year if you have income that is not subject to withholding and will not be completely  offset by foreign tax credits or the foreign earned income exclusion. Your first quarterly estimated is due on 4/17/12 for 2012. 

These six tips explain estimated taxes and how to pay them.

1. If you have income from sources such as self-employment, interest, dividends, alimony, rent, gains from the sales of assets, prizes or awards, then you may have to pay estimated tax.

2. As a general rule, you must pay estimated taxes in 2012 if both of these statements apply: 1) You expect to owe at least $1,000 in tax after subtracting your tax withholding (if you have any) and tax credits, and 2) You expect your withholding and credits to be less than the smaller of 90 percent of your 2012 taxes or 100 percent of the tax on your 2011 return. Special rules apply for farmers, fishermen, certain household employers and certain higher income taxpayers.

3. For Sole Proprietors, Partners and S Corporation shareholders, you generally have to make estimated tax payments if you expect to owe $1,000 or more in tax when you file your return.

4. To figure your estimated tax, include your expected gross income, taxable income, taxes, deductions and credits for the year. Use the worksheet in Form 1040-ES, Estimated Tax for Individuals, for this. You want to be as accurate as possible to avoid penalties. Also, consider changes in your situation and recent tax law changes.

5. The year is divided into four payment periods, or due dates, for estimated tax purposes. Those dates generally are April 15, June 15, Sept. 15 and Jan. 15 of the next or following year.

6. Form 1040-ES, Estimated Tax for Individuals, has everything you need to pay estimated taxes. It includes instructions, worksheets, schedules and payment vouchers. However, the easiest way to pay estimated taxes is electronically through the Electronic Federal Tax Payment System, or EFTPS, at www.irs.gov. You can also pay estimated taxes by check or money order using the Estimated Tax Payment Voucher or by credit or debit card.

For more information on estimated taxes, refer to Form 1040-ES and its instructions and Publication 505, Tax Withholding and Estimated Tax. We can help you compute your 2012 estimated taxes and send you the necessary forms to make the payments.

NOTE: Remember that expats living abroad on 4/17/12 get an automatic extension of time to file their US tax returns until 6/15/12, but if they will owe taxes they must pay in the tax by 4/17/12 in order to avoid penalties and interest.

WHAT ARE YOUR CHANCES OF BEING AUDITED BY THE IRS?

IRS has issued its annual data book, which provides statistical data on its fiscal year (FY) 2011 activities. The data book provides valuable information about how many tax returns IRS examines (audits) and what categories of returns IRS is focusing resources on, as well as data on other enforcement activities such as collections. The figures and percentages in this article compare returns filed in calendar year 2010 and audited in FY 2011 to returns filed in calendar year 2009 and audited in FY 2010. 

What are the chances of being audited? Of the 140,837,499 total individual income tax returns with a filing requirement, 1,564,690 were audited. This works out to roughly 1.1%, the same as the rate for the previous year. 

Only 25% of the individual audits were conducted by revenue agents, tax compliance officers, tax examiners and revenue officer examiners. That's higher than the 21.7% figure for the previous year. The 75% balance of the audits were correspondence audits, down from 77.1% for the previous year.

Following are selected audit rates for individuals.

• For business returns other than farm returns showing total gross receipts of $100,000 to $200,000, 4.3% of returns were audited in FY 2011, down from 4.7% in FY 2010.
• For business returns other than farm returns showing total gross receipts of $200,000 or more, 3.8% of returns were audited in FY 2011, an increase from 3.3% in FY 2010.0.
• For returns showing total positive income of $200,000 to $1 million, 3.2% of returns not showing business activity were audited, and 3.6% of returns showing business activity were audited. The audit rate for such returns was higher than the 2.5% and 2.9% respective rates for the previous year.
• For FY 2011, the audit rate for returns with total positive income of $1 million or more was 12.5%, close to forty nine percent higher than the 8.4% rate for FY 2010.

Not surprisingly, examination coverage increased for higher income earners. For example, the percentage was 1% for those returns with adjusted gross income (AGI) between $100,000 and $200,000 (up from .71% for FY 2010), and 2.66% for those with $200,000 to $500,000 of AGI (up from 1.92% for FY 2009). Exam coverage jumped to 11.8% for those with at least $1 million but less than $5 million of AGI (up from 6.67% for FY 2010). Similarly, coverage increased for those with at least $5 million but less than $10 million of AGI, as well as for those with AGI of $10 million or more.

Select audit rates for business returns were as follows:

• For all corporate returns other than Form 1120S, 1.5%, versus 1.4% for the year before.
• For small corporations with balance sheet returns showing total assets of: $250,000 to $1 million, 1.6%; $1–$5 million, 1.9%; and $5–10 million, 2.6%. For FY 2010, the percentages were, respectively, 1.4%, 1.7%; and 3%.
• For partnership and S corporation returns, the audit rate was .4%, the same as for the year before.  This would seem to make filing Sub S returns and LLC's which file partnership returns a good strategy to avoid audits.

Math errors on individual returns. Of the roughly 6.6 million math error notices that IRS sent out relating to the 2010 return, 49.5% were attributable to the making work pay credit (MWPC), which was a refundable tax credit based on earned income and was available to taxpayers in 2009 and 2010.

Of the total math error notices, 14.1% were for tax calculation/other taxes (which includes errors related to self-employment tax, alternative minimum tax, and household employment tax), 7.2% related to exemption number/amount, 6.1% related to the EITC, 6.2% related to the standard/itemized deduction(s), and 2.2% related to the child tax credit.

Penalties. In FY 2011, IRS assessed 28.75 million civil penalties against individual taxpayers, up from 27.1 million civil penalties assessed in the previous year. Of the FY 2011 assessments, the “top three” penalties in percentage terms were 58.6% for failure to pay, 25.6% for underpayment of estimated tax, and 13% for delinquency. On the business side, there were a total of 1,080,027 civil penalty assessments (down from 1,145,931 for the year before), and the “top three” penalties in percentage terms were 55% for delinquency, 24% for failure to pay, and 18.4% for estimated tax.

Offers-in-compromise. In FY 2011, 59,000 offers-in-compromise were received by IRS (versus 57,000 for FY 2010), and 20,000 were accepted (14,000 for the year before).

Criminal cases. IRS initiated 4,720 criminal investigations in FY 2011. There were 3,410 referrals for prosecution and 2,350 convictions. Of those sentenced, 81.7% were incarcerated (a term that includes imprisonment, home confinement, electronic monitoring, or a combination thereof). By way of comparison, in FY 2010, IRS initiated 4,706 criminal investigations, there were 3,034 referrals for prosecution, and there were 2,184 convictions. Of those sentenced, 81.5% were incarcerated.

The IRS Data Book can be viewed at http://www.irs.gov/pub/irs-soi/11databk.pdf.  IR-2012-36 can be viewed athttp://www.irs.gov/newsroom/article/0,,id=255853,00.html.

US Tax Return Foreign Currency Conversion Methods Approved by IRS

You must express the amounts you report on your U.S. tax return in U.S. dollars. If you receive all or part of your income or pay some or all of your expenses in foreign currency, you must translate the foreign currency into U.S. dollars. How you do this depends on your functional currency. Your functional currency generally is the U.S. dollar unless you are required to use the currency of a foreign country. You must make all federal income tax determinations in your functional currency. The U.S. dollar is the functional currency for all taxpayers except some qualified business units (QBUs). A QBU is a separate and clearly identified unit of a trade or business that maintains separate books and records. Even if you have a QBU, your functional currency is the dollar if any of the following apply. You conduct the business in dollars. The principal place of business is located in the United States. You choose to or are required to use the dollar as your functional currency. The business books and records are not kept in the currency of the economic environment in which a significant part of the business activities is conducted. Make all income tax determinations in your functional currency. If your functional currency is the U.S. dollar, you must immediately translate into dollars all items of income, expense, etc. (including taxes), that you receive, pay, or accrue in a foreign currency and that will affect computation of your income tax. Use the exchange rate prevailing when you receive, pay, or accrue the item. If there is more than one exchange rate, use the one that most properly reflects your income. You can generally get exchange rates from banks and U.S. Embassies. If your functional currency is not the U.S. dollar, make all income tax determinations in your functional currency. At the end of the year, translate the results, such as income or loss, into U.S. dollars to report on your income tax return. Currency Exchange Rates An exchange rate is the rate at which one currency may be converted into another, also called rate of exchange of foreign exchange rate or currency exchange rate. Below are government and external resources that provide currency exchange rates. Governmental Resources Treasury Department's Currency Exchange Rate Federal Reserve Bank U.S. Department of Agriculture External Resources Oanda.com xe.com x-rates.com References/Related Topics Miscellaneous International Tax Issues Yearly Average Currency Exchange Rates

IRS Putting Together "SWAT" Team To Go After Transfer Pricing Cheats

Transfer pricing is a booming field of global tax law strategies. It involves multinational corporations that are constantly moving goods, services and assets from one subsidiary to another in different countries, and how they account for these "transfers." By carefully manipulating the pricing of such moves, companies can effectively shift profits to low-tax countries from high-tax ones, lowering their overall tax costs.

Small US Entrepreneurs with operations abroad and foreign corporations also take advantage of this procedure as well as the giant corporations.  The IRS is forming a task force in order to be certain reasonable profits are taxed in the US rather than transferred to  low tax or no tax countries and thus escape US taxation. A good  example is Apple which has accumulated Sixty Billion Dollars in Cash abroad  (in low tax or no tax countries) and will not remit it to the US which would subject it to US taxes,  though they would get a credit for any taxes it did pay (if any) on those funds in other countries.

READ MORE in the ACCOUNTING TODAY ARTICLE HERE