Month: April 2014
The Foreign Account Tax Compliance Act (“FATCA“) has begun in force in the year 2014. There are lots of consequences of FATCA, including the obligation of financial institutions throughout the world (“FFIs”) to identify “U.S. account” holders under various circumstances. New accounts that are opened by a FFI, such as a bank in London, a branch in Sao Paulo, Paris, Toronto, Mexico City, Riyadh, Johannesburg, Singapore, Beijing, Vienna, Hong Kong, Geneva, Panama City, Dublin, and the tiniest towns and villages throughout the world, will have to identify the U.S. account holder. A “U.S. account” includes an account opened by a United States Citizen who has lived, all or almost all, of his or her life in a country outside the U.S.
The U.S. Treasury has summarized what FATCA does as a policy and how it generally functions:
- FATCA seeks to obtain information on accounts held by U.S. taxpayers in other countries. It generally requires U.S. financial institutions to withhold a portion of certain payments made to certain foreign financial institutions (FFIs) that do not agree to identify and report information on U.S. account holders. This withholding regime acts as a backstop to the main focus of FATCA, which is to obtain the information about accounts held by U.S. persons and by certain foreign entities with substantial U.S. owners that is needed to detect and deter offshore tax evasion.
The details and complexity of FATCA are mind-numbing, including the hundreds of pages of regulations, which can be accessed at the IRS website here.
One practical problem that a USC or LPR (some LPRs) living overseas will have when they attempt to open an account, is that they will be required to provide a U.S. taxpayer identification number (“TIN”).
Of course, a USC who has spent virtually none of their lives living in the U.S., will typically have no TIN. Herein lies the Catch 22. The bank will ask the USC who wishes to open a new account to provide them with a completed IRS Form W-9, supplying the TIN of the USC or LPR.
Moreover, a U.S. citizen (e.g., someone who was born in the U.S. or obtained it through a U.S. citizen parent – via derivative citizenship) has no choice but to obtain a U.S. Social Security Number (“SSN”) as their TIN, in accordance with U.S. tax law.
Herein lies another Catch 22 (within a Catch 22); since someone who has lived virtually all (or all) of their lives outside the U.S. will almost certainly have no SSN. The process of obtaining a SSN for someone living outside the U.S. is particularly complex and will be left for another post.
U.S. Tax Return Due Date is June 15th (16th for 2013 YR) for Citizens and LPRs Living Outside the U.S.
A basic point in the law that is not well understood is the due date for filing federal income tax returns for USCs and LPRs (where the LPR is a resident, absent a treaty override) residing outside the U.S. Generally both must file IRS Form 1040. See, USCs and LPRs Living Outside the U.S. – Key Tax and BSA Forms
It seems that almost everyone, including many U.S. tax return preparers, erroneously consider April 15th as the due date (for all individual taxpayers), which is only true, if the taxpayer lives in the U.S..
However, if the USC or LPR (where the LPR continues to be an income tax resident; notwithstanding the potential tax treaty override rules) live outside the U.S. the due date of the tax return is June 15th (June 16th in 2014, since the 15th falls on a Sunday). See my earlier post, IRS Beats the Drums – Re: Foreign Assets, Just Days Before April 15,
Finally, both groups of taxpayers (resident or not) can file an automatic extension to file the return on or before October 15th, IRS Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return.
It is quite important to file an automatic extension, particularly when any tax may be owing, since the late filing penalty (of up to 25% of the amount of tax owing) can otherwise be applicable.
The U.S. has income tax treaties with multiple countries. My post from yesterday briefly explains how a LPR living in one of these countries may become a “covered expatriate” if the three conditions of the statute, IRC Section 7701(b)(6) that was added into the law in 2008 are satisfied. See, LPR status can be abandoned for tax purposes (since 2008 tax law changes) by merely leaving and moving outside the U.S. in some cases. Posted on April 28, 2014
Importantly, a LPR who resides in one of these countries where he or she has income tax residency in the treaty country, can inadvertently “expatriate” for U.S. federal income, estate, gift and inheritance taxes. See, Oops…Did I “Expatriate” and Never Know It: Lawful Permanent Residents Beware! International Tax Journal, CCH Wolters Kluwer, Jan.-Feb. 2014, Vol. 40 Issue 1, p9
The list of those countries with income tax treaties are as follows and can be reviewed at IRS website:
Union of Soviet Socialist Republics (USSR)
United States Model
LPR status can be abandoned for tax purposes (since 2008 tax law changes) by merely leaving and moving outside the U.S. in some cases?
Lawful permanent residents may erroneously think they have not “expatriated” for U.S. tax purposes, as long as they have not returned it to the U.S. Citizenship and Immigration Services (USCIS) – i.e., formally abandoned their green cards. Unfortunately, for these individuals, they can be in for a rude awakening regarding the application of IRC Section 7701(b)(6) that was added by Congress in 2008.
The relevant portion of the statute provides as follows:
- An individual shall cease to be treated as a lawful permanent resident of the United States if such individual commences to be treated as a resident of a foreign country under the provisions of a tax treaty between the United States and the foreign country, does not waive the benefits of such treaty applicable to residents of the foreign country, and notifies the Secretary of the commencement of such treatment.
This statutory language has three tests for when the individual is no longer a LPR for federal tax purposes:
- The individual is treated as a resident of a foreign country under the provisions of a tax treaty;
- The individual does not waive the benefits of the treaty, and
- Notifies the Secretary of the commencement of such treatment.
Each of the above tests seem to be satisified by any “green card” holder who files IRS Form 1040NR as a non-resident, when they live in a country with a U.S. income tax treaty. A list of treaty countries is to follow in a later post.
There can be a host of unintended consequences to the individual who falls into this category; i.e., who ceases to be a “lawful permanent resident” under the federal tax law. The expatriation provisions of Section 877A and 2801 (among others) can be implicated, along with many other provisions of the law. See, Accidental Americans” – Rush to Renounce U.S. Citizenship to Avoid the Ugly U.S. Tax Web” International Tax Journal, CCH Wolters Kluwer, Nov./Dec. 2012, Vol. 38 Issue 6, p45.
For those who wish to formally abandon their LPR, there is a specific DHS/USCIS form (I-407) that is used for this purpose:
This article is quite consistent with the many multinational families I have come across in my practice and even person life. The article can be reviewed in its entirety here at More renounce US citizenship but deny stereotype.
The press and certainly Congress focuses on the handful of wealthy individuals who renounced citizenship to pay less U.S. income, estate and gift taxes. Little focus has been on the millions of middle income or even low income individuals who live around the world and are caught up in the complex U.S. tax (estate, income, gift and inheritance tax and reporting) and bank account reporting legal web.
Can the U.S. Federal Government Bar Entry into the U.S. to a U.S. Citizen without a U.S. Passport?
This is a most interesting question that affects many millions of individuals who have lived most all of their lives outside the U.S. They typically have a passport from their home/residence country, but have not taken steps to obtain a U.S. passport.
The U.S. federal regulations seem clear in their requirements. See, the Department of Homeland Security and Department of State published regulations in 2008.
Does a U.S. citizen have a Constitutional right to be permitted to enter into the U.S., notwithstanding these regulations?
More to come on this topic.