Monthly Archives: December 2014

Statute of limitations on an IRS tax audit demonstrates U.S. dislike of all things #Offshore

The above tweet references an excellent summary of the various IRS statutes of limitation by Robert Wood of the various statute of limitations.

In true U.S. tax style:

1. The U.S. is very suspicious of anything that is foreign; and

2. They will have a longer time to audit it.

The article includes:

With foreign accounts, six years is typical, and in some cases, the IRS has no limit. An FBAR (also called FinCEN Form 114), is a disclosure form for reporting foreign accounts. FBARs have a separate audit period, generally six years. For unfiled tax returns, criminal violations or fraud, the limits can be longer. In most cases, the practical limit is six years, but for some information returns the IRS can audit forever.

You might think that if you fix your tax returns or FBARs, you would reduce your audit time. However, the answer varies with IRS disclosure options. The main IRS program for offshore accounts is the OVDP, and in that program, once your closing agreement is signed, you are truly done, with no audits thereafter. But with the IRS Streamlined programs, there is no closing agreement.

(Please note that I added the hyperlinks in the above quote. Mr. Wood’s original post did NOT include these links.)

In an earlier post I referenced Mr. Wood’s article on America’s deadliest form – the “5471”. This is the information return for a “Controlled Foreign Corporation” (non-U.S. corporation). A failure to file the “5471” (which is a separate tax return) means that the statute of limitations never starts running. In general, U.S. citizens abroad should avoid carrying on business through a non-U.S. corporation – including the Canadian Controlled Private Corporation.


How to optimize capital gains for #Americansabroad on the sale of a principal residence abroad

The above tweet references an article by Jonathan Lachowitz of White Lighthouse Investment Management. Mr. Lachowitz is also a member of the Professional Tax Advisory Council of American Citizens Abroad.

Q: Reader Suzanne Herman, who says she’s Canadian with U.S. citizenship, submitted this question: “What clever way could one avoid paying U.S. capital gains on the sale of a real estate, and still retain the capital gains exemption on the sale of a principal residence in the country where one lives?

A: Jonathan Lachowitz of White Lighthouse Investment Management responds:

There are a number of ways to optimize one’s tax situation with respect to capital gains on the sale of a residence overseas, though individual circumstances will dictate whether any of these methods can be used, and many are applicable to domestic residences as well. From a U.S. tax standpoint, all of the following will apply:

I refer you to the article directly for a nice analysis.

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“Married filing separately” – The hidden tax on #Americansabroad who marry a non-U.S. citizen


Just when you thought it couldn’t get worse …

Marriage between a U.S. citizen spouse and a non-U.S. citizen spouse will have tax complications. That said, one of the most insidious is the virtual certainty that that U.S. spouse will NOT bring the non-citizen spouse into the U.S. tax system. This will be achieved with the non-U.S. citizen spouse using the “married filing separately” category. “Married filing separately” is an extremely punitive filing category.

To put it simply:

Those who file “married filing separately” will almost always pay more tax.

Your tax filing category will impact:

– the amount of tax you pay in terms of your specific tax bracket – “married filing separately” is the most punitive tax rate; and

– the threshold for when certain taxes (example the Alternative Minimum Tax) (and the 3.8% Obamacare surtax)* kick in. Almost all taxes kick in at a lower monetary threshold;

– the thresholds for reporting requirements (example the level of foreign assets for FATCA 8938 reporting). On December 7, 2014 the information from the IRS stated:

Reporting thresholds vary based on whether you file a joint income tax return or live abroad. If you are single or file separately from your spouse, you must submit a Form 8938 if you have more than $200,000 of specified foreign financial assets at the end of the year and you live abroad; or more than $50,000, if you live in the United States. If you file jointly with your spouse, these thresholds double. You are considered to live abroad if you are a U.S. citizen whose tax home is in a foreign country and you have been present in a foreign country or countries for at least 330 days out of a consecutive 12-month period.

Married filing separately is the worst possible filing category. It is also the default filing category for U.S. citizens abroad who marry non-U.S. spouses (AKA “Aliens”). I wonder what Boris Johnson would think of this.

It’s as though the U.S. government regards your marriage to a foreign spouse as a form of tax evasion.

*Of those subject to the new New Investment Income Tax (3.8% Obamacare surtax) Americans abroad will certainly be (assuming it applies to them) the most severely affected. Why? Because it impacts those who file “married filing separately” the most!

To put it simply: The Obamacare surtax is to fund Obamacare which is health insurance for Homelanders. Yet, the primary victim of the tax will be Americans abroad! Oh well, that’s more “change we can believe in”.



FINCEN Form 114 – The #FBAR Basics – Part 1 – Good summary by @RachelMillios

The FBAR (“Foreign Bank Account Report”) has been in existence since 1970. In general, any “U.S. Person” with a total of more than $10,000 USD in non-U.S. bank or brokerage accounts must report the existence of the account and the maximum balance annually to the U.S. Treasury. The penalties for failure to report are absolutely draconian. The law of FBAR is difficult to understand and is a combination of the Statute, the Regulations made pursuant to the statute (which do allow for the exemption of Americans abroad) and the Form itself. (Incredibly this information is required to be disclosed electronically which raises many issues of privacy and potential theft).

The above tweet references a good FBAR summary by Rachel Millios. I suggest that you read it in its entirety.

Highlights include:

Who Must File the FBAR?

A United States person must file an FBAR if that person has a financial interest in or signature authority over any financial account(s) outside of the United States and the aggregate maximum value of the account(s) exceeds $10,000 at any time during the calendar year. …

I recommend the rest of the post to you …