Category Archives: Uncategorized

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.

Continue reading

“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 …

To fly to the USA or not to fly to the USA – the question for Canadian #Snowbirds

The article referenced in the above tweet details why Canadian Snowbirds are not eligible for the IRS Streamlined Compliance Program. The article will put “the fear of God” in Snowbirds and may cause them to rethink spending their winters in and and spending their money in the United States.

In any event …

The reasoning, which is explained in the article is simple.

Since June 18, 2014 there have been two versions of Streamlined Compliance.

1. Streamlined Compliance for Non-Residents: In order to qualify for “non-residence” one must not have spent more than 35 days in the United States in any of the previous three years. The whole point of being a Snowbird is that you will spend more than 35 days a year in the United States.

2. Streamlined Compliance for U.S. Residents: In order to qualify you must have filed a 1040 (U.S. tax return) the three previous years. Canadian snowbirds do NOT file U.S. tax returns and are therefore not eligible.

Therefore – QED – Canadian Snowbirds are NOT eligible for Streamlined Compliance.

The article the points out that the only compliance options for Canadian Snowbirds are the Offshore Voluntary Disclosure Program (which no sane Snowbird would do) or just filing the past due returns (clearly the better option for those didn’t know they were in violation of the laws of the USA).

Obviously this dilemma would apply only to Canadian snowbirds who have met the “substantial presence test” (which is a complicated test) and have NOT filed the Form 8840 “Closer connection form”.

It would also apply only to a Snowbird who was aware of this dilemma.

Frankly, I think it’s unlikely that:

1. A snowbird would enter any kind of IRS compliance program; and

2. Still want to be a Snowbird.

What does all this mean?

It’s hard to believe that the IRS would want to put Canadian Snowbirds who just happened to meet the “substantial presence test” in a worse position than Americans abroad (after all the U.S. does want Canadian money doesn’t it?).

Hence, I am inclined to regard this as the result of trying to construct overly-precise rules – an “unintended consequence”.

What the IRS really should do is:

Simply have a general amnesty for those U.S. taxpayers who were unaware of their filing obligations! This is NOT a new idea. It has worked in other countries, why not the USA?

Advice for Canadian Snowbirds:

My advice to a Canadian Snowbird would be to fly somewhere other than the USA for the winter. You won’t need a lawyer to advise on your every move.

Taxation abroad of US Social Security – Are you are US person or non resident alien?

The above tweet references a great post on Social Security benefits. As always, the question is whether you are ot are not a “U.S. person”. The article includes:

A portion of your Social Security retirement, survivors, or disability benefits may be subject to Federal Income tax. Supplemental Security Income (SSI) or Special Veterans Benefits (SVB) are not taxed. Generally, SSI makes monthly payments to people who have low income and few resources and are age 65 or older; blind or disabled. Disabled or blind children also can receive SSI. SVB can include a monthly compensation paid to veterans who are hurt or who acquire a medical condition during military service.

Under current law, no federal income tax is paid by any person (whether US or non-US) on more than 85 percent of his or her Social Security benefits. The federal income tax rules and filing requirements are different for US persons and non-US persons.

Read the complete post here.

#PFIC and Canadian mutual funds revisted – Are they or aren’t they?

The purpose of this post is to highlight four articles on PFICs and how they may apply to the lives of Americans Abroad.

1. A post written by a CPA – Good practical advice on how to deal with them

The above tweet references a nice post by Tax Samurai. It’s a “no nonsense” post that discusses:

– the December 2013 8621 requirements (or not)

– whether a Canadian mutual fund is a PFIC or not (noting that the IRS has not ruled that a Canadian mutual fund is a PFIC)

Of particular interest is:

The remaining of this article is written under the assumption that Canadian mutual funds (treated as trusts under Canadian law) are PFICs. It is however noteworthy to note that while Canadian mutual funds definitively meet the “passive” part of the PFIC definition (income test & asset test discussed below), it is debatable that it is a corporation.

The IRS says that it is a corporation if it is not a trust (Section 301.7701-2(a))1

A Canadian mutual fund might or might not be an investment trust as described in 26 CFR 301.7701-4 (c)(1) – in which case the mutual fund will not be a PFIC2.

The IRS has not ruled on whether Canadian mutual funds are trusts or corporations in the context of PFIC (and the ruling found was a private ruling letter, hence even in exact same context, would not set precedent to other taxpayers) – so no precedent exists.

In 2 instances, the IRS ruled that Canadian mutual funds were corporations:

– Private Letter Ruling 200024024:

– Memo (UILC: 2103.00-00):

The IRS has not issued a revenue ruling on the subject so in theory it would still be possible to roll the dice on that but the above should show strong indication that the IRS sees most Canadian mutual funds as corporations.

Also, if unsure if you have a PFIC, you can make a protective statement (described under “Protective statement regime” on page 5 of the instructions – if it later turn out to be a PFIC, the protective statement allows the taxpayer to make a late election)

2. A post written by a CPA – how to deal with the basic 1291 PFIC fund

3. Richardson submission to the Senate Finance Committee – Attempt to explain the punitive nature of PFIC Taxation/Confiscation

4. Stephanie Ray (a law student) writes on the policy aspects of treating Canadian mutual funds as PFICs



For permission to file U.S. taxes you need a TIN which is either a SSN or an ITIN

Many Americans abroad have not aware of their obligation to file U.S. taxes. Some categories of people who are NOT “U.S. persons” are also obligated to file U.S. taxes. Basically without some kind of TIN (“Taxpayer Identification Number”) you can’t file a U.S. tax return period.

The Acronyms:

TIN – Taxpayer Identification Number

SSN – Social Security Number

ITIN – Individual Taxpayer Identification Number

The question becomes:

Which kind of TIN should you have? Should you have a SSN or should you have an ITIN?

U.S. tax lawyer Virginia La Torre Jeker explains explains this very well in her post:

Help I’m Trying To Become Tax Compliant But Have No SSN – IRS Provides A Solution

Her answer includes:

The Taxpayer Identification Number (TIN) for U.S. citizens is their Social Security Number (SSN). An alternative Taxpayer Identification Number is the Individual Taxpayer Identification Number (ITIN), which is often issued to so-called resident aliens or nonresident alien individuals who may have a US tax reporting obligation. U.S. citizens are not eligible for this type of identification number and should not apply for an ITIN. In order for US persons to fill out a tax return, they must have a SSN. Many US citizens living abroad did not receive a SSN as a child, and after the age of twelve it is particularly difficult to get one. This causes big problems when trying to file US tax returns or pay taxes later on in life.

The necessity of having a SSN to fill out tax returns also leads to problems for people who wish to renounce their US citizenship since doing so requires five years of tax compliance prior to expatriation. The number of people who are renouncing their American citizenship is rising, in part, due to the implementation of the Foreign Account Tax Compliance Act (FATCA), a law which puts greater scrutiny on foreign accounts held by U.S. persons. With more people renouncing their American citizenship, there is a greater number of people without SSNs who are scrambling to get one, in order to fulfill their tax duties. If you wish to read more about the US tax consequences of expatriation or the latest legislative proposals heaping additional sanctions on certain expatriates, read my blog postings here, here, here and here.

In any case, you can read the complete post here.

Update for those claiming “dependents”:

#Americansabroad and their non-U.S. pensions

The article referenced in the above tweet provides a good introduction to the complexities of non-U.S. pensions for Americans abroad. The reality is that many Americans abroad have them. Pensions are one more example of difficult it is for Americans abroad to both be U.S. tax compliant and do normal financial and retirement planning. It can’t be done.

Excerpts from this necessarily general but good overview include:


Expatriates working abroad often participate in a funded foreign pension plan of a foreign company. In order to avoid double taxation, these individuals should beware of the tax treatment of both contributions to, and distributions from, these foreign plans.  To select the most tax effective approaches, one needs to know the general rules, the availability of foreign tax credits, and treaty provisions which may exist between the US and a foreign government.

While a foreign pension plan usually provides favorable tax treatment within its national jurisdiction, the general rule is that it is not a qualified retirement plan (“QRP”) under the Internal Revenue Code (“IRC”) for US income tax purposes and thus, any contributions are not deductible by the employer or employee on their US tax returns.  In contrast, the IRC provides numerous tax benefits for participants in US QRPs, including an exclusion or deduction from gross income for contributions, investment in a tax-exempt trust, and favorable distribution rules, such as a tax free rollover.

The moral of the story is that as a U.S. citizen you can either:

1. Live abroad; or

2. Have a pension

But, its very difficult to achieve   both.