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Tax Planning

Overseas assets, FBARs, and FATCA

Last month while I was in Switzerland, I had the “opportunity” of visiting the US Embassy in Bern so that I could obtain a replacement for my stolen U.S. passport.

While I was there, I met several interesting people. One was attempting to obtain a U.S. Social Security Number so that she could file the U.S. income tax returns that the IRS was demanding that she file, since she was born in America, although technically German and Swiss. She had never been to the U.S. since she was 5 years old, and was now in her 50’s and the IRS wanted her returns.

Another lady was there to renounce her U.S. citizenship, under very similar circumstances. She had also been born on U.S. soil, technically making her a U.S. citizen. She had no family or other ties to the U.S., and not visited the U.S. since her teens, but had dutifully filed a U.S. tax return for the past dozen years. She was in her mid-30’s, had no intention of ever living in the U.S., and was very happily Swiss. She was renouncing her U.S. citizenship and turning in her U.S. passport for no other reason than to get away from the hassle of filing a U.S. tax return.

For those two individuals, it made absolutely no sense for them to being filing an American tax return.

But what if you do live in America, or intend to keep your U.S. citizenship, but spend time overseas? If you have overseas assets, especially banking and investment accounts, the IRS has you right in their crosshairs, and they are increasing the pressure.

The recently enacted Foreign Account Tax Compliance Act is the latest in a series of measures by the U.S. government to track down overseas assets and make sure that they are getting their cut. This legislation created a new form for us all to fill out, Form 8938, for certain overseas accounts. This is on top of the old Form TD F 90-22.1 Report of Foreign Bank and Financial Accounts (FBAR).

Now keep in mind, there is absolutely nothing wrong, immoral, or illegal about having overseas assets or investments. Holding overseas assets can be a perfectly valid component of your financial planning strategy.

But what the IRS doesn’t like is when you are earning returns on that money, and not paying U.S. income tax on it. You see, America is one of the few countries in the world that taxes it’s citizens on their global income, even if it wasn’t generated here. If you have overseas bond income, for example, then that is unearned income and subject to income tax, without the benefit of the Foreign Earned Income Exclusion (which allows you to exclude a certain amount of earned income each year that you earn overseas).

The IRS even wants to know how much money you have sitting in foreign bank accounts, even if that money has no tax impact, and has already been taxed as earnings here in the States. If you have more than $10,000 in a foreign bank or investment account at any time during the year, you have traditionally been required to file an FBAR report by June 30th of each year.

In addition, you must now file Form 8938 with your annual personal income tax return (Form 1040) if you have a foreign bank accounts, foreign stocks or other securities, or any other foreign financial interest if the total value of all your foreign stuff exceeds $50,000. The failure to report a foreign holding can result in a fine of up to $10,000.

Here’s the biggest part of the new FATCA legislation: The U.S. government is now imposing a reporting requirement on foreign banks. That’s right: The U.S. government is forcing sovereign nations and their financial institutions to report information about American account holders to the U.S. government. Failure to make these reports will result in the U.S. government seizing 30% of any transaction coming into or out of the U.S. to or from that bank.

Some countries, such as Switzerland, that have traditionally had very strict bank secrecy protections, have been capitulating to the U.S. government and forcing their banks to send this information to the IRS, because American banking business is so important to the Swiss economy. However, many foreign financial institutions are simply choosing to no longer do business with American customers. There are nearly 6 million American citizens that legitimately live and work abroad that this could impact.

If you require assistance with FBAR compliance, taking advantage of the voluntary disclosure initiative open right now that waives criminal prosecution and some penalties, need help filling out Form 8938 or TD F 90-22.1, or have any questions regarding U.S. tax treaties with other countries or how to minimize your tax burden to the U.S., you need to retain professional representation from a CPA, Enrolled Agent, or tax attorney that has specific experience working with these situations. Be sure to search our directory to find such a tax professional near you.

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Are you ready for IRS collections season?

June is an interesting month at the IRS. It’s the month that marks the transition every year for the IRS from tax return processing season to tax collecting season. If you filed your 2011 tax return on time and had a balance due that you didn’t pay, then you’re now entering (or re-entering) the collections process.

If you had a 2011 tax balance, then you’ve probably already received a bill, and it’s about time that a lien gets filed if you haven’t paid the balance yet. If this is your first rodeo with the IRS, then you’re in for a not-so-fun ride. To learn what to expect, I suggest you read my article on How the IRS Works Collections Cases.

If 2011 brought you an increased balance on top of an existing tax debt, then you’ve already been through the drill. With return processing season finishing up, IRS personnel that were removed from other functions are now starting to be cycled back into their normal job functions. Many of these personnel are cycled from ACS, the IRS’ centralized collections agency. Now that they are going back to their normal jobs, the collections process will pick up.

I would encourage you to learn about your rights as a taxpayer (yes, you have rights), and to look at your options as soon as possible. Do not just ignore your tax debt, it doesn’t just go away. It is best to deal with it at the ACS level, and long before the IRS starts to consider enforced collections action against you, which could include levies and wage garnishments.

Here on TaxFirms.com, we have many resources to help you resolve your tax debt situation. Be sure to look at the articles covering your specific situation, and take a look at our directory of tax firms to locate a tax professional near you that can help you with this difficult matter