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Filing Requirements of Americans Abroad

U.S. Expats Filing Requirements | Income Tax Returns | Reporting Foreign Bank Accounts & Other Foreign Assets

 

U.S. Expats Filing Requirements | Income Tax Returns | Reporting Foreign Bank Accounts & Other Foreign Assets



Nicholas Hartney, Licensed to Represent Taxpayer's Before the Internal Revenue Service, is a senior tax consultant at Genesis Tax Consultants, LLC, a boutique international tax advisory firm specializing in U.S. Expat Income Tax, Audit Representation, and Representation Before the Internal Revenue Service & State Taxing Authorities for Individuals and Businesses with back tax liabilities. 


If you are a U.S. citizen or a resident alien, you are subject to U.S. income tax on your income, regardless of where you are living or where you received the income. While foreign income is not subject to U.S. tax if you meet certain specific time requirements outside the U.S., you still need to report the income on your personal income tax return. 

The only method to exclude any foreign income from U.S. tax is to file a tax return and claim the foreign earned income exclusion.  It is possible to pay no tax on foreign earned income for as many years as you choose to live out of the U.S. by meeting certain time requirements for being outside the U.S. and filing the correct IRS forms. 

It is also possible to offset U.S. income tax by applying the The Foreign Tax Credit for any taxes paid to a foreign country. 

It is estimated that over nine million U.S. citizens are living outside of the United States.   Most of us haven't seen that the back of our passports say, "All U.S. citizens working and residing abroad are required to file and report on their worldwide income". 

The penalties for not reporting foreign bank accounts and income are scary.  Therefore, its important that you hire an educated, preferably someone who also has lived abroad and has personally dealt with foreign taxation of their own.  Some of the key elements are as follows: 

Residency

The U.S. tax system is unique in that it applies to individuals through citizenship and residency, while most other countries only use place of residence to determine taxable income. The U.S. is one of only two countries that have a citizenship based taxation system rather than the more common residency-based system. This means that the taxpayer does not need to live in the U.S. or have U.S.-sourced income to be subject to U.S. taxation. 

For tax purposes, a U.S. citizen is considered to be a "U.S. resident" for tax purposes even if he or she does not spend time in the U.S. or have an abode in the U.S. An individual cannot be a U.S. citizen and be classified as a nonresident alien for tax purposes.  A taxpayer's status is generally determined on a year-by-year basis when determining residency; however, a taxpayer may be considered a dual-status resident if his or her status changed during the year; for example, he expatriated. 

There are three general ways to become a U.S. resident for tax purposes: being a U.S. citizen, being a permanent resident (Green Card holder), or passing the substantial presence test. The first two are the simplest, as there are no calculations required; U.S. citizens and permanent residents are tax residents of the U.S. by default, regardless of the number of days spent in the U.S. A person does not need to hold a valid U.S. passport to be considered a U.S. citizen; they could have obtained it through a variety of methods (born on U.S. soil, birth to a U.S. parent, or naturalized). The substantial presence test is is the most difficult to determine because it relies on a complex formula rather than a simple yes or no question.  The substantial presence test formula is calculated by determining the total number of days spent in the U.S. during the current tax year in addition to the prior two tax years.  If a person meets the substantial presence test, he or she is considered a resident alien for the tax year and has the same tax obligations as a U.S. citizen or permanent resident.  Someone who is not a resident is considered a non-resident alien. Nonresident aliens may still have reporting requirements if they have U.S.-sourced income. 

Tax and reporting obligations

Income Tax

The filing requirements of Americans living abroad are the same as if they resided in the U.S., except for some minor differences such as the applicability of the foreign earned income exclusion or the filing thresholds of Form 8938 (Statement of Specified Foreign Financial Assets).  All U.S. tax residents must report their worldwide income.  In some cases, and individual may be below the filing threshold and not have a filing requirement.  Even if someone does not have a filing requirement, I advise someone in this situation to file anyway. This is often referred to as a protective return: as it can help protect the taxpayer from future audits or IRS disputes by showing no liability. 

There are some special considerations for taxpayers abroad that can be used o offset their tax liability. The two most common methods are the foreign earned income exclusion (Form 2555) and the foreign tax credit (Form 1116). 

Foreign Earned Income Exclusion

The foreign earned income exclusion (FEIE) allows an individual to exclude foreign-earned income up to the exclusion amount, which is set annually by the IRS and is generally increased each year to adjust for inflation. The FEIE amount has increased the past several years from $99,200 in 2014, $100,800 in 2015, $101,300 in 2016,  $102,100 for 2017, and $104,100 in 2018.  This FEIE can only be applied to "earned" income, such as wages or self-employment income (meaning you are not allowed to contribute to an IRA unless you have income over this threshold which is not excluded from income.  It cannot be applied toward any sort of passive income, such as dividends, interest, or royalties.  The location of where the services were performed-not the source of payments-determines the "foreign" component of the FEIE; i.e. the services performed must have been performed in a foreign country.  It is not possible to carryforward or carryback any unused portion of the FEIE.  It should also be noted that the FEIE cannot be used to exclude income from self-employment tax; it can, however, be applied toward self-employment income.  The FEIE is claimed by filing Form 2555 with your tax return. 

A person's eligibility for the FEIE can be determined by passing one of two tests-the physical presence test or the bona fide residence test.  

Physical Presence Test

The physical presence test is based on the number of days a person was present in a foreign country during a 12-month period.  While the 12-month period does not have to be a calendar year, the person does need to spend at least 330 days in a foreign country or countries during a 12-month period to qualify.  A few nuances worth mentioning are that an individual cannot count time spent in international waters or airspace toward the 330 days because it is not considered presence in a foreign country.  A day that consists of time spent in a foreign country in combination with international waters or airspace does not count towards the 330 days.  I have seen many clients complicate their lives by miscalculating their travel dates; therefore, I always recommend having them keep a detailed travel calendar to record their physical location. 

Bona Fide Residence Test

The bona fide residence test is different than the physical presence test in that it does not involve a calculation, but rather looks at the specific facts of an individual's situation.  The taxpayer must be a resident of a foreign country for an uninterrupted period that includes an entire tax year in order to qualify.  It is generally not possible qualify for this the first year abroad because people don't usually move abroad on January 1; however, it is usually the preferred choice over the physical presence test because of less restriction on travel.  The bona fide residence test considers the intention or purpose of the trip, as well as the nature and length of the stay abroad.  When claiming the FEIE pursuant to the bona fide residence test, the taxpayer must disclose his or her type of living quarters, visa status, contractual terms, and tax status in the country of residence. The IRS uses the information reported on Form 2555 to determine bona fide resident status. These determinations are made on a case-by-case basis. Generally speaking, someone with a permanent place of work and permanent residence in a foreign country should be able to qualify for the bona fide residence test; provided they have been a resident for at least an entire tax year.  

Foreign Tax Credits

Foreign tax credit (FTC) is available to taxpayers when they pay foreign income tax.  The taxes must have been paid or accrued during the applicable tax year.  FTCs are used to offset a taxpayer's U.S. tax liability. FTCs often offset the entire U.S. tax liability when the taxpayer has a higher tax rate in his or her country of residence.  The FTC method is an alternative to the FEIE (for earned income) because the FTCs cannot be used for any amounts excluded under the FEIE.  FTCs can be used in addition to the FEIE when the taxpayer's income exceeds the FEIE. The FTC will only be applicable to the income in excess of the FEIE.  Unlike the FEIE, unused FTCs can be carried forward 10 years and back one year. 

FTCs exist in different categories, the most common being the general income and passive income categories. You can only apply FTCs within their respective baskets; for example, an individual cannot use FTCs for taxes paid on dividend income to offset self-employment income, because they are different categories.

An individual receives FTCs based on the amount of foreign taxes paid or accrued; therefore, the FTC method is more or less useless for individuals in tax-free jurisdictions unless they have FTC carryovers.  In my experience, I have found the FTC method to be the preferable option when the taxpayer's foreign income tax paid exceeds their U.S. income tax, as it does not require as much information as Form 2555. There are no travel dates to track or residency requirements to determine when claiming the FTC. 

In many cases, an individual can benefit from both the FTC and FEIE, but one option usually proves itself to be more beneficial than the other The taxpayer's long-term plan should be evaluated when choosing which method to use.  Once taxpayers begin using the FEIE method, they are considered to "revoke" their election once they switch to the FTC method.  Once the FEIE method has been revoked, a taxpayer needs to wait five years, or apply for IRS approval, to switch back to the exclusion.  There are no such provisions to switch back to the FTC method. 

Self-employment tax

The FEIE and FTC methods are powerful tools to help minimize a taxpayer's U.S. income tax liability, however neither may be used to offset the 15.3% self-employment tax.  This is often a surprise to taxpayers because far fewer are familiar with self-employment tax in comparison to income tax. The U.S. does have a wide network of "totalization agreements" with foreign governments, which allow taxpayers to avoid U.S. self-employment tax when they are covered by another country's social system.  In order to claim an exception from U.S. self-employment tax, a taxpayer must obtain a certificate of coverage from the foreign government under whose system they are covered.  A copy of the certificate is submitted with the tax return as proof that the taxpayer is not required to pay the tax.  Obtaining the certificate is not a quick process because it often takes some time for regulations have been put in place allowing certain individuals to be exempt.  Americans which are a considered bona fide residents of a foreign country or pass the physical presence test are permitted to file Form 8965 (Health Coverage Exemptions) claiming such an ACA exemption.  Taxpayers may be subject to ACA penalties if they do not have a qualified healthcare policy or qualify for one of the exemptions. 

Foreign Accounts and Assets

FBAR

The Report of Foreign Bank and Financial Accounts (FBAR) requires U.S. persons to report signatory authority or financial interest in foreign bank and financial accounts.  It is important to understand that the FBAR is not a tax return and does not involve reporting income or paying tax. The FBAR is not submitted to the IRS; it is submitted directly to the U.S. Department of the Treasury.  The FBAR reports the taxpayer's foreign financial accounts account number, institution details, and maximum account balance during the year. The reporting threshold is $10,000; this calculated by aggregating the values of all the taxpayer's foreign financial accounts. Some common examples of foreign financial accounts include, checking accounts, savings accounts, brokerage accounts, life insurance with cash value, and private pensions.  Two commonly missed account types include security deposits on rental property and children's savings accounts, which parents have signatory authority over. many practitioners struggle to understand the meaning of signatory authority since it can include accounts the taxpayer has no financial interest in; e.g. if a taxpayer has the power to sgn on their employer's company account, a club account, or even an elderly parent's account, it needs to be reported. I encourage all my clients to always file an FBAR regardless their balance due to the high penalties that can apply for failure to disclose accounts. Penalties are levied per account per year, and are quite harsh. For example, there can be a $10,000 per account per year penalty, a penalty of 50% of the balance of the unreported account s per year, as well as criminal charges. 

Form 8938

When the Foreign Account Tax Compliance Act became law in March 2010, it introduced a plethora of new reporting requirements for individuals, entities, and foreign financial institutions.  One of these new filing requirements for individuals, entities, and foreign financial institutions.  One of these new filing requirements for individuals was Form 8938.  This form overlaps with the FBAR in several ways, however, requires a wider range of asset to be reported. Not only do foreign financial accounts need to be reported, but also foreign stock and securities, ownership in foreign entities, financial instruments, and certain foreign insurance policies. There are different filing thresholds for Form 8938 depending on the taxpayer's filing status (single, married filing single, or married filing jointly) and place of residence (u.S. or foreign).  A higher filing threshold exists for foreign resident who meet the bona fide residence or physical presence test. When a taxpayer is close to the threshold, the asset values at different points in the the year must be carefully tracked to compare the end--foyear value against the maximum value during the year. It should also be noted that special rules for allocating asset ownership between joint owners, including spouses, need to be observed. Similar to the FBAR, failure to properly file the form can lead to extremely high penalties. In addition to penalties, failure to properly file Form 8938 can result in an unlimited extension of the statue of limitation; meaning the IRS may audit you 20 years down the road. 

Foreign Entities

There is a series of international information return forms that need to be filed to report foreign entities; such as, Form 5471 (Information Returns of U.S. Persons with Respect to Certain Foreign Corporations) for foreign corporations, Form 8865 (Return of U.S. Persons with Respect to Certain Foreign Partnership) for foreign partnerships, Form 8858 (Information Return of U.S. Persons with Respect to Foreign Disregarded Entities) for foreign disregarded entities, and Forms 3520 (Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts) and Form 3520-A (Annual Information Return of Foreign Trust with a U.S. Owner) for foreign trusts. Reporting requirements generally kick in once an individual or entity owns or acquires more than 10 percent of a foreign corporation or partnership. Do not forget that most foreign companies will maintain their financial statements according to international financial reporting standards (IFRS); however, this is not accepted for U.S. tax reporting purposes. Converting IFRS financials to U.S. generally accepted accounting principles (GAAP) can be a tedious and complex task for even the most experienced accountants.  

Dual-Status Taxpayers

In the unique situation that an individual's tax status changes during the tax year, he or she will need to complete and submit a dual-status tax return.  Common scenarios requiring a dual-status tax return include: a nonresident alien moving to the U.S. and becoming a tax resident, a U.S. citizen renouncing U.S. citizenship, or someone abandoning his or her U.S. Green Card.  The dual-status return consists of two component; the tax return and a dual-status statement. A person's status at the end of the tax year determines which form should be used as the tax return and which should be used for the dual-status statement.  The dual-status statement covers the period prior to the taxpayer's change of status. For example, Robert is a U.S. citizen who lives in Germany. he relinquished his U.S. citizenship on October 15, 2017. Since Robert is no longer a U.S. citizen and does not meet the substantial presence test, he is no longer considered to be a U.S. resident for tax purposes.   Robert needs to comply with his U.S. tax obligations, and report his worldwide income to the U.S. for the period he was a U.S. citizen.  After his renunciation, Robert does not have any U.S. -sourced income; therefore, he has no obligation to report his ost renunciation income to the U.S. In order to properly report his income to the U.S., Robert needs to file a dual-status tax return.  He would file Form 1040NR (U.S. Nonresident Alien Income Tax Return) as the tax return portion because he was classified as a non-resident alien at the end of the 2017 tax year.  Orebert would also need to prepare a dual-status statement, which should be attached to the 1040NR. The dual-status statement reports Robert's taxable income during the time period he was a U.S. citizen.  In Robert's case, he would also need to file Form 8854 (Initial and Annual Expatriation Statement) to inform the IRS of his relinquishment. 

Getting Compliant 

Amnesty Programs

 

*New* Offshore Voluntary Disclosure Program to Come to a Close on September 28, 2018 | Time to Report those Foreign Bank Accounts & Assets Now

March 13, 2018

The Internal Revenue Service today announced it will begin to ramp down the 2014 Offshore Voluntary Disclosure Program (OVDP) and close the program on Sept. 28, 2018. By alerting taxpayers now, the IRS intends that any U.S. taxpayers with undisclosed foreign financial assets have time to use the OVDP before the program closes. 

“Taxpayers have had several years to come into compliance with U.S. tax laws under this program,” said Acting IRS Commissioner David Kautter. “All along, we have been clear that we would close the program at the appropriate time, and we have reached that point. Those who still wish to come forward have time to do so.”

Since the OVDP’s initial launch in 2009, more than 56,000 taxpayers have used one of the programs to comply voluntarily. All told, those taxpayers paid a total of $11.1 billion in back taxes, interest and penalties. The planned end of the current OVDP also reflects advances in third-party reporting and increased awareness of U.S. taxpayers of their offshore tax and reporting obligations.

The number of taxpayer disclosures under the OVDP peaked in 2011, when about 18,000 people came forward. The number steadily declined through the years, falling to only 600 disclosures in 2017.

The current OVDP began in 2014 and is a modified version of the OVDP launched in 2012, which followed voluntary programs offered in 2011 and 2009. The programs have enabled U.S. taxpayers to voluntarily resolve past non-compliance related to unreported foreign financial assets and failure to file foreign information returns.

TAX ENFORCEMENT

The IRS notes that it will continue to use tools besides voluntary disclosure to combat offshore tax avoidance, including taxpayer education, Whistleblower leads, civil examination and criminal prosecution. Since 2009, IRS Criminal Investigation has indicted 1,545 taxpayers on criminal violations related to international activities, of which 671 taxpayers were indicted on international criminal tax violations.

“The IRS remains actively engaged in ferreting out the identities of those with undisclosed foreign accounts with the use of information resources and increased data analytics,” said Don Fort, Chief, IRS Criminal Investigation. “Stopping offshore tax noncompliance remains a top priority of the IRS.”

STREAMLINED PROCEDURES AND OTHER OPTIONS

A separate program, the Streamlined Filing Compliance Procedures, for taxpayers who might not have been aware of their filing obligations, has helped about 65,000 additional taxpayers come into compliance. The Streamlined Filing Compliance Procedures will remain in place and available to eligible taxpayers. As with OVDP, the IRS has said it may end the Streamlined Filing Compliance Procedures at some point.

The implementation of the Foreign Account Tax Compliance Act (FATCA) and the ongoing efforts of the IRS and the Department of Justice to ensure compliance by those with U.S. tax obligations have raised awareness of U.S. tax and information reporting obligations with respect to undisclosed foreign financial assets.  Because the circumstances of taxpayers with foreign financial assets vary widely, the IRS will continue offering the following options for addressing previous failures to comply with U.S. tax and information return obligations with respect to those assets:

  • IRS-Criminal Investigation Voluntary Disclosure Program;
  • Streamlined Filing Compliance Procedures;
  • Delinquent FBAR submission procedures; and
  • Delinquent international information return submission procedures.

The IRS currently has a variety of special amnesty programs that can be taken advantage of by taxpayers with unreported foreign income and/or assets who are looking for a path to compliance.  These include the offshore voluntary disclosure program, the streamlined filing procedures, the delinquent FBAR submission procedure, and delinquent international information return submission procedure.  Many of these programs allow taxpayers to come into compliance by filing or amending a few years of tax returns and/or FBARs.  They will often be able to take advantage of reduced penalties, no penalties and the protection from criminal prosecution.  It is important to first fully understand a client's situation and history before recommending any specific program.  Thesese amnesty programs are not permanent and may be changed or canceled at any time; therefore, it is wise to take advantage of them while they still exist.  

 

 

U.S. Taxpayers Residing Outside of the United States

The following streamlined procedures are referred to as the Streamlined Foreign Offshore Procedures:

Eligibility for the Streamlined Foreign Offshore Procedures


In addition to having to meet the general eligibility criteria, individual U.S. taxpayers, or estates of individual U.S. taxpayers, seeking to use the Streamlined Foreign Offshore Procedures described in this section must:  (1) meet the applicable non-residency requirement described below (for joint return filers, both spouses must meet the applicable non-residency requirement described below) and (2) have failed to report the income from a foreign financial asset and pay tax as required by U.S. law, and may have failed to file an FBAR (FinCEN Form 114, previously Form TD F 90-22.1) with respect to a foreign financial account, and such failures resulted from non-willful conduct.  Non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.

For information on the meaning of foreign financial asset, see the instructions for FinCEN Form 114, which may be found at FinCen and the instructions for Form 8938, which may be found at Instructions for Form 8938.

Non-residency requirement applicable to individuals who are U.S. citizens or lawful permanent residents (i.e., “green card holders”):  Individual U.S. citizens or lawful permanent residents, or estates of U.S. citizens or lawful permanent residents, meet the applicable non-residency requirement if, in any one or more of the most recent three years for which the U.S. tax return due date (or properly applied for extended due date) has passed, the individual did not have a U.S. abode and the individual was physically outside the United States for at least 330 full days.  Under IRC section 911 and its regulations, which apply for purposes of these procedures, neither temporary presence of the individual in the United States nor maintenance of a dwelling in the United States by an individual necessarily mean that the individual’s abode is in the United States.  For more information on the meaning of “abode,” see IRS Publication 54, which may be found at Publication 54.

Example 1:  Mr. W was born in the United States but moved to Germany with his parents when he was five years old, lived there ever since, and does not have a U.S. abode.  Mr. W meets the non-residency requirement applicable to individuals who are U.S. citizens or lawful permanent residents.

Example 2:  Assume the same facts as Example 1, except that Mr. W moved to the United States and acquired a U.S. abode in 2012.  The most recent 3 years for which Mr. W’s U.S. tax return due date (or properly applied for extended due date) has passed are 2013, 2012, and 2011.  Mr. W meets the non-residency requirement applicable to individuals who are U.S. citizens or lawful permanent residents.

Non-residency requirement applicable to individuals who are not U.S. citizens or lawful permanent residents:  Individuals who are not U.S. citizens or lawful permanent residents, or estates of individuals who were not U.S. citizens or lawful permanent residents, meet the applicable non-residency requirement if, in any one or more of the last three years for which the U.S. tax return due date (or properly applied for extended due date) has passed, the individual did not meet the substantial presence test of IRC section 7701(b)(3).  For more information on the substantial presence test, see IRS Publication 519, which may be found at IRS Publication 519.


Example 3:  Ms. X is not a U.S. citizen or lawful permanent resident, was born in France, and resided in France until May 1, 2012, when her employer transferred her to the United States.  Ms. X was physically present in the U.S. for more than 183 days in both 2012 and 2013.  The most recent 3 years for which Ms. X’s U.S. tax return due date (or properly applied for extended due date) has passed are 2013, 2012, and 2011.  While Ms. X met the substantial presence test for 2012 and 2013, she did not meet the substantial presence test for 2011.  Ms. X meets the non-residency requirement applicable to individuals who are not U.S. citizens or lawful permanent residents.

Description of Scope and Effect of Procedures
U.S. taxpayers (U.S. citizens, lawful permanent residents, and those meeting the substantial presence test of IRC section 7701(b)(3)) eligible to use the Streamlined Foreign Offshore Procedures must (1) for each of the most recent 3 years for which the U.S. tax return due date (or properly applied for extended due date) has passed, file delinquent or amended tax returns, together with all required information returns (e.g., Forms 3520, 5471, and 8938) and (2) for each of the most recent 6 years for which the FBAR due date has passed, file any delinquent FBARs (FinCEN Form 114, previously Form TD F 90-22.1).  The full amount of the tax and interest due in connection with these filings must be remitted with the delinquent or amended returns.

A taxpayer who is eligible to use these Streamlined Foreign Offshore Procedures and who complies with all of the instructions outlined below will not be subject to failure-to-file and failure-to-pay penalties, accuracy-related penalties, information return penalties, or FBAR penalties.  Even if returns properly filed under these procedures are subsequently selected for audit under existing audit selection processes, the taxpayer will not be subject to failure-to-file and failure-to-pay penalties or accuracy-related penalties with respect to amounts reported on those returns, or to information return penalties or FBAR penalties, unless the examination results in a determination that the original tax noncompliance was fraudulent and/or that the FBAR violation was willful.  Any previously assessed penalties with respect to those years, however, will not be abated.  Further, as with any U.S. tax return filed in the normal course, if the IRS determines an additional tax deficiency for a return submitted under these procedures, the IRS may assert applicable additions to tax and penalties relating to that additional deficiency.  

For returns filed under these procedures, retroactive relief will be provided for failure to timely elect income deferral on certain retirement and savings plans where deferral is permitted by the applicable treaty. The proper deferral elections with respect to such plans must be made with the submission.  See the instructions below for the information required to be submitted to make such elections.

Transition rules for taxpayers who made submissions under the 2012 Streamlined Filing Compliance Procedures for Non-Resident, Non-Filer U.S. Taxpayers:  The risk assessment process associated with the 2012 Streamlined Filing Compliance Procedures for Non-Resident, Non-Filer U.S. Taxpayers has been eliminated for all streamlined filers.  A taxpayer who has initiated participation in the 2012 Streamlined Filing Compliance Procedures prior to July 1, 2014, and has not already been notified of a high or low risk determination will not receive correspondence related to their risk determination and the returns will be processed without regard to that risk assessment.

Specific Instructions for the Streamlined Foreign Offshore Procedures
Failure to follow these instructions or to submit the items described below will result in returns being processed in the normal course without the benefit of the favorable terms of these procedures.

For each of the most recent 3 years for which the U.S. tax return due date (or properly applied for extended due date) has passed:

if a U.S. tax return has not been filed previously, submit a complete and accurate delinquent tax return using Form 1040, U.S. Individual Income Tax Return, together with the required information returns (e.g., Forms 3520, 5471, and 8938) even if these information returns would normally be filed separately from the Form 1040 had the taxpayer filed on time, or
if a U.S. tax return has been filed previously, submit a complete and accurate amended tax return using Form 1040X, Amended U.S. Individual Income Tax Return, together with the required information returns (e.g., Forms 3520, 5471, and 8938) even if these information returns would normally be filed separately from the Form 1040 had the taxpayer filed a complete and accurate original return.
Include at the top of the first page of each delinquent or amended tax return and at the top of each information return "Streamlined Foreign Offshore" written in red to indicate that the returns are being submitted under these procedures.  This is critical to ensure that your returns are processed through these special procedures.
Complete and sign a statement on the Certification by U.S. Person Residing Outside of the U.S. (Form 14653) certifying (1) that you are eligible for the Streamlined Foreign Offshore Procedures; (2) that all required FBARs have now been filed (see instruction 8 below); and (3) that the failure to file tax returns, report all income, pay all tax, and submit all required information returns, including FBARs, resulted from non-willful conduct.  You must submit the original signed statement and you must attach copies of the statement to each tax return and information return being submitted through these procedures.  You should not attach copies of the statement to FBARs.  Failure to submit this statement, or submission of an incomplete or otherwise deficient statement, will result in returns being processed in the normal course without the benefit of the favorable terms of these procedures.
Submit payment of all tax due as reflected on the tax returns and all applicable statutory interest with respect to each of the late payment amounts.  Your taxpayer identification number must be included on your check.  You may receive a balance due notice or a refund if the tax or interest is not calculated correctly.
If you are not eligible to have a Social Security Number and do not already have an ITIN, submit an application for an ITIN along with the required tax returns, information returns, and other documents filed under these streamlined procedures. See the ITIN page on www.irs.gov for more information.
If you seek relief for failure to timely elect deferral of income from certain retirement or savings plans where deferral is permitted by an applicable treaty, submit:

a statement requesting an extension of time to make an election to defer income tax and identifying the applicable treaty provision;
a dated statement signed by you under penalties of perjury describing:

the events that led to the failure to make the election,
the events that led to the discovery of the failure, and
if you relied on a professional advisor, the nature of the advisor’s engagement and responsibilities; and
for relevant Canadian plans, see SDO FAQ 8 for current information (Form 8891 is no longer required).
The documents listed above, together with the payments described above, must be sent in paper form (electronic submissions will not be accepted) to:

Internal Revenue Service
3651 South I-H 35
Stop 6063 AUSC
Attn:  Streamlined Foreign Offshore
Austin, TX 78741

This address may only be used for returns filed under these procedures.  For all future filings, you must file according to regular filing procedures.  
 
For each of the most recent 6 years for which the FBAR due date has passed, file delinquent FBARs according to the FBAR instructions and include a statement explaining that the FBARs are being filed as part of the Streamlined Filing Compliance Procedures.  You are required to file these delinquent FBARs electronically at FinCen.  On the cover page of the electronic form, select “Other” as the reason for filing late.  An explanation box will appear.  In the explanation box, enter “Streamlined Filing Compliance Procedures.”  If you are unable to file electronically, you may contact FinCEN's Regulatory Helpline at 1-800-949-2732  or 1-703-905-3975  (if calling from outside the United States) to determine possible alternatives to electronic filing.

The following streamlined procedures are referred to as the Streamlined Domestic Offshore procedures.

Eligibility for the Streamlined Domestic Offshore Procedures

In addition to having to meet the general eligibility criteria, individual U.S. taxpayers, or estates of individual U.S. taxpayers, seeking to use the Streamlined Domestic Offshore Procedures described in this section must:  (1) fail to meet the applicable non-residency requirement described in the “Eligibility for the Streamlined Offshore Procedures” (for joint return filers, one or both of the spouses must fail to meet the applicable non-residency requirement described in the “Eligibility for the Streamlined Offshore Procedures”); (2) have previously filed a U.S. tax return (if required) for each of the most recent 3 years for which the U.S. tax return due date (or properly applied for extended due date) has passed; (3) have failed to report gross income from a foreign financial asset and pay tax as required by U.S. law, and may have failed to file an FBAR (FinCEN Form 114, previously Form TD F 90-22.1) and/or one or more international information returns (e.g., Forms 3520, 3520-A, 5471, 5472, 8938, 926, and 8621) with respect to the foreign financial asset, and (4) such failures resulted from non-willful conduct.  Non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.

For information on the meaning of foreign financial asset, see the instructions for FinCEN Form 114 and the instructions for Form 8938.

Description of Scope and Effect of Procedures

U.S. taxpayers (U.S. citizens, lawful permanent residents, and those meeting the substantial presence test of IRC section 7701(b)(3)) eligible to use the Streamlined Domestic Offshore Procedures must (1) for each of the most recent 3 years for which the U.S. tax return due date (or properly applied for extended due date) has passed (the “covered tax return period”), file amended tax returns, together with all required information returns (e.g., Forms 3520, 3520-A, 5471, 5472, 8938, 926, and 8621), (2) for each of the most recent 6 years for which the FBAR due date has passed (the “covered FBAR period”), file any delinquent FBARs (FinCEN Form 114, previously Form TD F 90-22.1), and (3) pay a Title 26 miscellaneous offshore penalty. The full amount of the tax, interest, and miscellaneous offshore penalty due in connection with these filings should be remitted with the amended tax returns.

The Title 26 miscellaneous offshore penalty is equal to 5 percent of the highest aggregate balance/value of the taxpayer’s foreign financial assets that are subject to the miscellaneous offshore penalty during the years in the covered tax return period and the covered FBAR period. For this purpose, the highest aggregate balance/value is determined by aggregating the year-end account balances and year-end asset values of all the foreign financial assets subject to the miscellaneous offshore penalty for each of the years in the covered tax return period and the covered FBAR period and selecting the highest aggregate balance/value from among those years.

A foreign financial asset is subject to the 5-percent miscellaneous offshore penalty in a given year in the covered FBAR period if the asset should have been, but was not, reported on an FBAR (FinCEN Form 114) for that year. A foreign financial asset is subject to the 5-percent miscellaneous offshore penalty in a given year in the covered tax return period if the asset should have been, but was not, reported on a Form 8938 for that year. A foreign financial asset is also subject to the 5-percent miscellaneous offshore penalty in a given year in the covered tax return period if the asset was properly reported for that year, but gross income in respect of the asset was not reported in that year.

For information on the meaning of foreign financial asset, see the instructions for FinCEN Form 114 and the instructions for Form 8938. For example, foreign financial assets may include:

  • financial accounts held at foreign financial institutions;
  • financial accounts held at a foreign branch of a U.S. financial institution;
  • foreign stock or securities not held in a financial account; 
  • foreign mutual funds; and
  • foreign hedge funds and foreign private equity funds.

A taxpayer who is eligible to use these Streamlined Domestic Offshore Procedures and who complies with all of the instructions below will be subject only to the Title 26 miscellaneous offshore penalty and will not be subject to accuracy-related penalties, information return penalties, or FBAR penalties.  Even if returns properly filed under these procedures are subsequently selected for audit under existing audit selection processes, the taxpayer will not be subject to accuracy-related penalties with respect to amounts reported on those returns, or to information return penalties or FBAR penalties, unless the examination results in a determination that the original return was fraudulent and/or that the FBAR violation was willful.  Any previously assessed penalties with respect to those years, however, will not be abated.  Further, as with any U.S. tax return filed in the normal course, if the IRS determines an additional tax deficiency for a return submitted under these procedures, the IRS may assert applicable additions to tax and penalties relating to that additional deficiency.

For returns filed under these procedures, retroactive relief will be provided for failure to timely elect income deferral on certain retirement and savings plans where deferral is permitted by the applicable treaty. The proper deferral elections with respect to such plans must be made with the submission.  See the instructions below for the information required to be submitted with such requests.

Specific Instructions for the Streamlined Domestic Offshore Procedures

Failure to follow these instructions or to submit the items described below will result in returns being processed in the normal course without the benefit of the favorable terms of these procedures.

  1. For each of the most recent 3 years for which the U.S. tax return due date (or properly applied for extended due date) has passed, submit a complete and accurate amended tax return using Form 1040X, Amended U.S. Individual Income Tax Return, together with any required information returns (e.g., Forms 3520, 3520-A, 5471, 5472, 8938, 926, and 8621) even if these information returns would normally not be submitted with the Form 1040 had the taxpayer filed a complete and accurate original return.  You may not file delinquent income tax returns (including Form 1040, U.S. Individual Income Tax Return) using these procedures.
  2. Include at the top of the first page of each amended tax return "Streamlined Domestic Offshore" written in red to indicate that the returns are being submitted under these procedures. This is critical to ensure that your returns are processed through these special procedures.
  3. Complete and sign a statement on the Certification by U.S. Person Residing in the U.S. (Form 14654) certifying:  (1) that you are eligible for the Streamlined Domestic Offshore Procedures; (2) that all required FBARs have now been filed (see instruction 9 below); (3) that the failure to report all income, pay all tax, and submit all required information returns, including FBARs, resulted from non-willful conduct; and (4) that the miscellaneous offshore penalty amount is accurate (see instruction 5 below).  You must maintain your foreign financial asset information supporting the self-certified miscellaneous offshore penalty computation and be prepared to provide it upon request.  You must submit an original signed statement and attach copies of the statement to each tax return and information return being submitted through these procedures.  You should not attach copies of the statement to FBARs.  Failure to submit this statement, or submission of an incomplete or otherwise deficient statement, will result in returns being processed in the normal course without the benefit of the favorable terms of these procedures.  
  4. Submit payment of all tax due as reflected on the tax returns and all applicable statutory interest with respect to each of the late payment amounts.  Your taxpayer identification number must be included on your check.  You may receive a balance due notice or a refund if the tax or interest is not calculated correctly.
  5. Submit payment of the Title 26 miscellaneous offshore penalty as defined above.  
  6. If you seek relief for failure to timely elect deferral of income from certain retirement or savings plans where deferral is permitted by an applicable treaty, submit:
    • a statement requesting an extension of time to make an election to defer income tax and identifying the applicable treaty provision;
    • a dated statement signed by you under penalties of perjury describing:
      • the events that led to the failure to make the election,
      • the events that led to the discovery of the failure, and
      • if you relied on a professional advisor, the nature of the advisor’s engagement and responsibilities; and
    • for relevant Canadian plans, see SFO FAQ 2 for current information (Form 8891 is no longer required).
  7. The documents listed above, together with the payments described above, must be sent in paper form (electronic submissions will not be accepted) to:
    Internal Revenue Service
    3651 South I-H 35Stop 6063 AUSC
    Attn:  Streamlined Domestic Offshore
    Austin, TX 78741

This address may only be used for returns filed under these procedures. For all future filings, you must file according to regular filing procedures.

8. For each of the most recent 6 years for which the FBAR due date has passed, file delinquent FBARs according to the FBAR instructions and include a statement explaining that the FBARs are being filed as part of the Streamlined Filing Compliance Procedures.  You are required to file these delinquent FBARs electronically at FinCen.  On the cover page of the electronic form, select “Other” as the reason for filing late.  An explanation box will appear.  In the explanation box, enter “Streamlined Filing Compliance Procedures.”  If you are unable to file electronically, you may contact FinCEN's Regulatory Helpline at 1-800-949-2732  or 1-703-905-3975  (if calling from outside the United States) to determine possible alternatives to electronic filing.

Other Important Items for U.S. Citizens Working Abroad:

Domicile

The technical definition of "domicile" is a residence or physical presence at a particular place accompanied by proof of an intention to remain there for an unlimited time. In general, you must do two things concurrently to establish domicile in a particular place:

  1. Be a resident at that place, and
  2. Intend to remain there for an indefinite period of time. It is the place where you have a settled connection for legal purposes, either because your home is there, or because the place is assigned to you by law. 

With that in mind, you need to understand three more interesting things about domicile: 

  1. You must have a domicile somewhere, 
  2. You can only have one domicile at a time, and
  3. In order to change your domicile, you must not only move your residence to a new locality, but you must also intend to remain in that new locality. Until the new domicile is acquired, the old one remains. And simply changing your residence, without more, does not change your domicile. The element of "intent" will be determined by looking at all the circumstances surrounding your move and then drawing a reasonable inference.  Therefore, you cannot establish domicile in a particular place simply by declaring that you regard that place as your domicile if your acts or other facts are inconsistent with that declaration. Some of the pro-active things you can do to establish "domicile" in a particular state are registering to vote, getting a driver's license, and opening a bank account. However, if another state claims you are still domiciled there, those indicia of intent may not be sufficent alone to satisfy the state that you have a new domicile elsewhere States will also look at such things as where you have family ties, where you own property and have other financial holdings, where is your principal place of business or work, and where you maintain memberships in a church or synagogue or fraternal organizations or clubs. Thus, your goal is to show that not only do you intend to change your domicil to another state or even another country, but to take actions that back up that intent. 

Residence

A "residence" is defined as a place of abode, a dwelling, the act of abiding in a place for some amount of time.  It is distinguished from "domicile" in that you can have a residence in more than one place, and you can be resident in a place without being domiciled there. Thus, in a simple example, it should be apparent that you could be a resident in France while retaining your domicile in New Jersey. 

Tax Consequences of "Domicile" and "Residence"

You may be thoroughly confused by the "legalese" of the above sections, but if you are reading this at all, it is probably because you have some concern about state tax liability.  This is because many states, once they have their "tax hooks" in you, don't want to let go.  Unless they are satisfied you are no longer domiciled in their state, they may pursue you, even overseas, in an effort to collect tax. 

Other states, interestingly, are quite generous in this regard. They will allow you to still be considered domiciled in their state, but will not tax you on your foreign income so long as you meet certain requirements.  Still other states, bless their hearts, have no income tax at all so it becomes very attractive to be domiciled in those states. 

Many states have a provision where you will be taxed as a resident of the state if you are physically present in that state for a specified number of days in the tax year (usually around 183).  This rule looks only to physical presence-not domicile.  Therefore, it is possible that you will be domiciled in one state and subject to tax there at the same time that you are physically present in another state and thus subject to tax by that state as well.  in most cases, you will need to file a tax return in each state and try to get a credit in one state for the tax paid in the other state.  Which state actually gets your tax dollar will depend on the states involved. To complicate matters even further, some states will give you a credit for foreign tax paid! 

If you move overseas mid-year and qualify as "physically present" in a particular state for the tax year, you should file a part-year return with that state, assuming you are not also domiciled in that state.  If you have a domicile elsewhere (say in a no-ax state), you can indicate that on the return. 

Finally, most states have tax rules for nonresidents.  A "nonresident" is generally defined as an individual who earns income or interest in the specific state, but does not live there or lives there less than the time required to be a "resident" Usually 183 days in the tax year). You will need to file a "nonresident" return in that state if you meet this definition, and your income is above the filing threshold for the state.  Suppose, for example you owned a rental property in Virginia as well as had money in several Virginia banks.  your net income from these investments was $8,000.  Even if you lived overseas for the last 2 years and considered yourself to be domiciled in Florida, you would still need to file a nonresident return for Virginia and pay Virginia tax on the $8,000. 

One final note: Most states have a filing threshold meaning that, if you make less than a certain amount, you don't need to file.  However, if you fall below that threshold because of the foreign income exclusion, you are still better off to file and report the income. This preventivie measure not only establishes your domicile in that state, but protects you from non-filing penalties or other possible claims by the state. 

Contact me (Nick) and tell me about your situation and I will get your taxes squared away. 

Supporting Documents Needed to Prepare Your U.S. Income Tax Return

  • Forms W-2 for wages, salaries and tips
  • Foreign wage statements (if applicable)
  • All Forms 1099 for interest, dividends, retirement, miscellaneous income, Social Security, state or local refunds, gambling winnings, etc.
  • Brokerage statements showing investment transactions for stocks, bonds, etc.
  • Schedules K-1 from partnerships, S corporations, estates and trusts
  • Statements supporting deductions for mortgage interest, taxes, and charitable contributions (including any Form 1098-C)
  • Any tax notices sent to you by the IRS or other taxing authority
  • A copy of your U.S. income tax return from last year
  • A copy of your foreign country tax return (if applicable)
  • A list of travel dates to the US and any foreign country
  • Maximum values of all foreign bank or financial accounts held during the year

If you do not have copies of these documents I can order them directly from the IRS by having you sign either a Form 8821, Tax Authorization Form or Form 2848 IRS Power of Attorney for a small fee. 

 

 
 
 
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 Click on Image to Verify Professional License through the IRS Preparer Directory  Search: Country: Germany Zip: 65812 Last Name: Hartney  

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Search: Country: Germany Zip: 65812 Last Name: Hartney  






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Available for all taxpayers in every state and all Expatriates living abroad. 

CONTACT NICHOLAS HARTNEY, EA

nick@genesistaxconsultants.com
 

Areas of Practice


expat tax preparation 

Foreign earned income and housing exclusions for both federal and state income tax returns. Foreign bank account reporting (FBARs), Statement of Specified Foreign Financial Assets, Tax Treaties, Application for IRS Individual Taxpayer Identification Number,etc.


business tax debt representation 

We will file a power of attorney with the IRS and State Taxing Authority to negotiate a hold on all enforcement action such as bank and account receivable levies while we work on an appropriate resolution including Installment Agreements, Company Restructuring, Penalty Abatements, Offer in Compromises, and Currently Not Collectible Status.  We will also advise you if bankruptcy is an option. 


irs and state tax debt representation 

We will file a power of attorney with the IRS and State Taxing Authorities to negotiate an appropriate resolution for back tax debt including Installment Agreements, Penalty Abatements, Offer in Compromises, Innocent Spouse Requests, and Currently Not Collectible Status.  We will also advise you if bankruptcy is a option. 
 


new business entity formation 

We will educate you of the pros and cons of organizing an Limited Liability Company versus a Corporation, S-Corp., Limited Partnership, etc. and assist in the formation of the entity of your choosing.   


previous years tax returns

We will prepare your previous years tax returns to bring you back into compliance with the IRS and State. 


business tax return preparation 

Whether you have a sole proprietorship with a Schedule C or a 1120 Corporate return we will prepare any business return.  

 
 

 
 
The hardest thing in the world to understand is the income tax.
— Albert Einstein, physicist
 
 

 
 
 

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