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

Tax Tips for US Expatriates Living Abroad

Seven tax tips for US Expatriates for their 2011 taxes.

1. Filing deadline U.S. citizens and resident aliens residing overseas or those serving in the military outside the U.S. on the regular due date of their tax return have until June 15, 2012 to file their federal income tax return. To use this automatic two-month extension beyond the regular April 17, 2012 deadline, taxpayers must attach a statement to their return explaining which of the two situations above qualifies them for the extension.

2. World-wide income Federal law requires U.S. citizens and resident aliens to report any worldwide income, including income from foreign trusts and foreign bank and securities accounts.

3. Tax forms In most cases, affected taxpayers need to fill out and attach Schedule B, Interest and Ordinary Dividends, to their tax return. Certain taxpayers may also have to fill out and attach to their tax return the new Form 8938, Statement of Foreign Financial Assets. Some taxpayers may also have to file Form TD F 90-22.1 with the Treasury Department by June 30, 2012.

4. Foreign earned income exclusion Many Americans who live and work abroad qualify for the foreign earned income exclusion. If you qualify for tax year 2011, this exclusion enables you to exempt up to $92,900 of wages and other foreign earned income from U.S. tax.  This exclusion does not apply to interest, dividends, social security, capital gains, etc.

5. Credits and deductions You may be able to take either a credit or a deduction for income taxes paid to a foreign country or a U.S. possession. This benefit is designed to lessen the tax burden that results when both the U.S. and another country tax income from that country.

6. Other Forms Required  If you own a foreign corporation, a foreign trust, a foreign LLC, or are a member of a foreign partnership you have to file special forms or you may incur huge penalties for failing to file those forms. If you own a foreign mutual fund, you must file as an owner of a Passive Foreign Investment Company or suffer adverse tax consequences on your US taxes.

7. Failure to File Returns  Many expatriates file returns in their resident country,and then believe they do not have to file in the US. This IS NOTcorrect.  If you are a green card holder or US Citizen you must always file a US tax return each year if you earn above a minimum amount (which varies per year).  Until you file a return the statute of limitations for failing to file (and assessments by the IRS) never runs out.

Read more of the rules and filing requirements at www.TaxMeLess.com. 

Senate Expected to Pass Bill that would Revoke Passports of Seriously Delinquent US Taxpayers

Pay the IRS or Lose Your Passport

The Senate has unanimously approved a provision to a highway transportation bill that would revoke the passports of people with seriously delinquent tax debts.  This addition to the bill would allow the State Department to deny, revoke or limit a passport for any individual whom the Internal Revenue Service has certified as having a “seriously delinquent tax debt” in excess of $50,000. 

A seriously delinquent tax debt would be one for which a notice of a federal tax lien or a notice of a levy has been filed. An exception is allowed when the debt is being paid in a timely manner under an agreement with the IRS, or if collection on the debt has been suspended because of a collection due process hearing or other relief has been requested or is pending.

The Senate is expect to vote on the overall bill and pass it later this week.The House is will take up the bill in the coming weeks

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Expats Protest Tax Treatment of US Taxpayers Abroad

Accounting Today reports a  group of U.S. expatriates has written a letter to IRS Commissioner Doug Shulman to complain he has not responded to a directive from the National Taxpayer Advocate objecting to the way taxpayers who came forward under the 2009 Offshore Voluntary Disclosure Program were treated by IRS examiners.
Last December, National Taxpayer Advocate Nina Olson described her concerns in her annual report to Congress and later sent a rarely used Taxpayer Advocate Directive to Shulman (see Taxpayer Uncertainty Prompts Citizenship Renunciations). Olson, who heads the Taxpayer Advocacy Service, argued that IRS examiners treated some taxpayers unfairly who had come forward under the 2009 program to voluntarily declare previously undisclosed bank accounts to the IRS. She said the IRS had subjected them to a “one size fits all” regime and rescinded some of the claims midstream that would have qualified for reduced penalties by way of “reasonable cause” (see Groundhog Day for IRS Voluntary Disclosure Do-over). READ MORE HERE

Form 8938 - Report of Foreign Financial Assets - Read when to file and what to file for here.

Do I need to file Form 8938, “Statement of Specified Foreign Financial Assets”?

Certain U.S. taxpayers holding specified foreign financial assets with an aggregate value exceeding $50,000 will report information about those assets on new Form 8938, which must be attached to the taxpayer’s annual income tax return.  Higher asset thresholds apply to U.S. taxpayers who file a joint tax return or who reside abroad (see below). Form 8938 reporting applies for specified foreign financial assets in which the taxpayer has an interest in taxable years starting after March 18, 2010.  For most individual taxpayers, this means they will start filing Form 8938 with their 2011 income tax return to be filed this coming tax filing season. Upon issuance of regulations, FATCA may require reporting by specified domestic entities.  For now, only specified individuals are required to file Form 8938. If you do not have to file an income tax return for the tax year, you do not need to file Form 8938, even if the value of your specified foreign assets is more than the appropriate reporting threshold. If you are required to file Form 8938, you do not have to report financial accounts maintained by: a U.S. payer (such as a U.S. domestic financial institution),  the foreign branch of a U.S. financial institution, or  the U.S. branch of a foreign financial institution. Refer to Form 8938 instructions for more information on assets that do not have to be reported. You must file Form 8938 if: 1. You are a specified individual.  A specified individual is: A U.S. citizen A resident alien of the United States for any part of the tax year (see Pub. 519 for more information) A nonresident alien who makes an election to be treated as resident alien for purposes of filing a joint income tax return  A nonresident alien who is a bona fide resident of American Samoa or Puerto Rico (See Pub. 570 for definition of a bona fide resident) AND 2. You have an interest in specified foreign financial assets required to be reported.  A specified foreign financial asset is: Any financial account maintained by a foreign financial institution, except as indicated above  Other foreign financial assets held for investment that are not in an account maintained by a US or foreign financial institution, namely: Stock or securities issued by someone other than a U.S. person Any interest in a foreign entity, and  Any financial instrument or contract that has as an issuer or counterparty that is other than a U.S. person. Refer to the Form 8938 instructions for more information on the definition of a specified foreign financial assets and when you have an interest in such an asset. AND 3. The aggregate value of your specified foreign financial assets is more than the reporting thresholds that applies to you: Unmarried taxpayers living in the US: The total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year Married taxpayers filing a joint income tax return and living in the US: The total value of your specified foreign financial assets is more than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year Married taxpayers filing separate income tax returns and living in the US: The total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year. Taxpayers living abroad.  You are a taxpayer living abroad if: You are a U.S. citizen whose tax home is in a foreign country and you are either a bona fide resident of a foreign country or countries for an uninterrupted period that includes the entire tax year, or You are a US citizen or resident, who during a period of 12 consecutive months ending in the tax year is physically present in a foreign country or countries at least 330 days. If you are a taxpayer living abroad you must file if: You are filing a return other than a joint return and the total value of your specified foreign assets is more than $200,000 on the last day of the tax year or more than $300,000 at any time during the year; or You are filing a joint return and the value of your specified foreign asset is more than $400,000 on the last day of the tax year or more than $600,000 at any time during the year. Refer to the Form 8938 instructions for information on how to determine the total value of your specified foreign financial assets. Reporting specified foreign financial assets on other forms filed with the IRS. If you are required to file a Form 8938 and you have a specified foreign financial asset reported on Form 3520, Form 3520-A, Form 5471, Form 8621, Form 8865, or Form 8891, you do not need to report the asset on Form 8938.  However, you must identify on Part IV of your Form 8938 which and how many of these form(s) report the specified foreign financial assets.  Even if a specified foreign financial asset is reported on a form listed above, you must still include the value of the asset in determining whether the aggregate value of your specified foreign financial assets is more than the reporting threshold that applies to you. Basic Questions and Answers on Form 8938 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.

IRS Crackdown on Canadian US Expatriates Described

The 2011 tax year may be a pivotal one for many U.S. citizens living abroad, including the roughly one million living in Canada, as the Internal Revenue Service moves towards enforcing reporting guidelines and compliance rules for its expatriates.

The United States requires all of its citizens file a tax return on global income regardless of where they live or for how long, even if no money is owed to the IRS. That applies to dual U.S.-Canadian citizens living here — even those who might have moved to Canada as a baby and never returned to their country of birth, let alone ever earned any income in the U.S.  READ MORE HERE IN CBC NEWS.

US EXPATRIATE TAX RETURN DUE DATES FOR 2011

Expatriates who live and work abroad on April 16th, 2012, receive an automatic extension of time to file their US income tax returns until June 15th, 2012.  They do not need to even file an extension request. If additional time is required after that date they can obtain a further extension by filing form 4868 by June 15th, which will extend their return until 10/15/12.  Therefore, it may be be possible to get a further extension until 12/15/12 by filing a letter request with the IRS.  

Regardless of any extensions you receive or apply for as an expat, any taxes that are due for 2011 must be paid by 4/16/12 in order to avoid interest and penalty assessments for paying any taxes due at a later date. It is important (if you return is not completed yet) to file your expat extension by 6/15/12 since that will stop the IRS of assessing the largest penalty which is 5% (of the tax due with the return) per month up to a maximum of 25%  (of the tax due with the return) for filing your return late.

Your FBAR form TDF 90-22.1 (filed to report foreign bank and financial accounts) must be filed no later than June 30, 2012 for the 2011 Calendar year.  That form is filed separately from your tax return and cannot be extended beyond that date.

Most of the other special forms filed to report your offshore activities such as 8938, 5471, 3520, 8865, etc., due on the extended due date of your personal tax return.  The one exception is Form 3520A( filed for foreign trusts and Mexican Fideicomisos) is due 3/15/12 for 2011, but can be extended with Form 7004 to September 15, 2012.

Green Card Holders Can Now Be Deported for Tax Fraud says Supreme Court

Last week the US Supreme Court in a 6 to 3 decision stated that Green Card Holders (Permanent Residents) can now be deported and their Green Card Revoked if convicted of Criminal Tax Fraud.  In the case a Japanese restaurant holder  and his wife in Thousand Oaks, California were found to have cheated on their corporate tax return. Even though he subsequently repaid the $244,000 taxes he owed, and served 4 months in jail, and had lived in the US since 1984 with his family and children, the Court upheld the decision of  lower Court cases where ICE sought and prevailed in their request to deport him for aggravated fraud.  This decision does not apply when the IRS imposes civil penalties and does not seek criminal prosecution.

The Supreme Court and statutes state that aggravated fraud is any fraudulent act that involves $10,000 or more. It should be noted that the IRS, if almost all circumstances, can proceed with criminal tax fraud charges for almost any violation of the IRS tax code.  This decision could have consequences for all Green Card holders who fail to report their foreign bank accounts, foreign income, foreign corporations, foreign partnerships, foreign trusts, etc.


READ THE SUPREME COURTS DECISION IN KAWASHIMA ET UX. v. HOLDER, ATTORNEY 
GENERAL HERE.

Be Careful Who You Trust - They May Decide to be an IRS Informant for a Big Reward

The IRS has a Whistle Blower program which often makes those who participate wealthy.  The reward paid by the IRS can be up to 30% of the tax collected.   It is much like the Cold War Russia where they wanted everyone to inform on their friends and family. Rewards have been paid to foreign bankers who have turned in their own clients......so much for secret bank accounts.

In 2010 7,577 Cases were submitted and the IRS paid out over $18 million in rewards. The information received from Whistle blowers results in collection of more than $464 million in taxes.  Often it is wise to have an attorney represent you if you decide to inform on another taxpayer to protect your interests. Read more about the program HERE.

Expats Press Capitol Hill for Tax Reforms

A nonprofit group American Citizens Abroad representing the interests of U.S. citizens living overseas met with congressional staffers to push for a residence-based taxation system.  READ MORE HERE IN ACCOUNTING TODAY NEWS RELEASE

Quick US Tax Facts for Expatriate Business Entrepreneurs Abroad

QUICK TAX FACTS FOR US EXPATRIATES WITH BUSINESSES ABROADBy Don D. Nelson, CPA, Attorney, International Tax Expert

Your earnings from Self employment or Wages (paid by a US employer or one abroad) may be eligible for the $92,900 Foreign Earned Income Exclusion if you qualify. The same is true for wages earned by your spouse. You can be paid a salary from your own US Corporation to work abroad and if you satisfy the requirements still use this exclusion on your personal tax return.

• You can take a credit for foreign taxes you pay on your personal income to your foreign residence country which will in most situations offset your US tax on that income taxed on your US form 1040.
• If you foreign financial assets exceed , you must file form 8938 each year with your US tax return or be subject to a large penalty.
• 
  You must file a US tax return each year on your worldwide income.
• If you operate your business through a foreign corporation, LLC, partnership, etc. you are required to file special forms with you US tax return (5471,8865, )
• If you are an independent contractor under the laws of the foreign country in which you work, you will have to pay US self employment tax (social security) on your net profit unless you live in one of the few countries that have a Social Security agreement with the US.
• If the combined balances in your foreign bank accounts, financial accounts, pension plans (including cash surrender value to foreign life insurance) ever during the year exceed $10,000US you must file the FBAR form by 6/30 following the end of the calendar year or may be liable for a $10,000 penalty for late filing or non filing.
• If you purchase a foreign mutual fund (or have substantial investments in a foreign corporation) you own a Passive Foreign Investment Company and must file a special form each year to report your income or risk adverse US tax consequences when you finally sell out.
• Generally contributions by you or your employer to foreign pension plans (similar to US 401Ks) are taxable on your US return (unless there is a treaty exemption) and you must report the earnings each year. Also, you may have to file form 3520 and 3520A to report that pension fund to the IRS.
• You can open a US IRA or 401k (if self employed) if your taxable earnings from employment exceed the foreign earned income exclusion amount (not to exceed your earnings that exceed that amount.
• If you claim the foreign earned income exclusion you can deduct your housing expenses in excess of up to . This maximum ceiling amount varies by country and can go as high in Hong Kong. Housing expenses include rent, utilities, repairs, maintenance, taxes and house cleaning.
• You can elect with respect to certain legal business entities in most countries to have that entity treated for US tax purposes as a flow through. That means the net income (or loss) of the foreign entity will flow through to your personal US tax return. This allows you to benefit from losses and avoid paying taxes twice on that income. Such an election also allows you to claim any foreign taxes paid by the foreign entity as tax credits on your personal tax return offsetting the US taxes on that income.
• Most allowances for education, housing, transportation, etc. that are not taxable to you in many foreign countries are taxable to you on your US tax return.
• There are no restrictions on taking money abroad, opening a business, buying real estate or bringing money back to the US so long as you file the proper reporting forms with the IRS.
• If you are a US Citizen, per manent resident, or green card holder you assets abroad are still subject to US gift and estate taxes if applicable.
• If you are married to a US nonresident spouse, and live outside of the USA, you do not have to include their earnings, assets, etc., on your IRS tax filings.
  · Download your 2011 US tax return questionnaire prepared expressly for Americans living in Abroad HERE.
  
  

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 Don  D. Nelson, CPA, Attorney (Kauffman Nelson LLP) has been assisting US Citizens , Permanent Residents and nonresidents in over 40 countries around the world with their US tax planning, tax return preparation, and other tax / legal matters for 20 plus years. He offers his clients attorney-client privilege which is not available from other tax accountants. He has helped hundreds of US expatriates around the world “catch up” filing their past late returns most often with little or no tax cost to you the delinquent taxpayer. His main office is at 34145 Pacific Coast Highway #401, Dana Point, California 92629 USA.

• Visit our websites at www.TaxMeLess.com  or  www.expatattorneycpa.com .
• Email Don at ddnelson@gmail.com.
• US Phone 949-481-4094 or US fax 949-218-6483.
• Don's skype name is: dondnelson.

Our Tax Services Include

• US Expatriate and International Tax Return Preparation.
• US Nonresident return preparation.
• Review of IRS International Tax Forms Prepared by you or your tax preparer.
• Preparing and filing tax returns for past years – Our “Catch Up” tax service.
• Surrender of US Citizenship or Green Card Tax Planning and Assistance.
• International Business Tax Planning and compliance.
• IRS Offshore Voluntary Disclosure Reprsentation and filing.
• IRS Audit Representation with respect to Expatriate and International Tax Issues

Mini Tax Consultations are available for you to discuss your situation with Don your personally and secure his counsel resolving your tax problems and future tax planning by phone or email. No personal visit is required. All consultations are subject to the absolut privacy and confidentiality of Attorney-client privilege. LEARN MORE HERE.