IRS Proposes Rules on Gifts and Inheritances from Expats

The proposed rules stem from the Heroes Earnings Assistance and Relief Tax Act of 2008, or “HEART Act,” which applied to certain individuals who terminate their U.S. citizenship or permanent residents who surrender their green cards on or after June 17, 2008.
The HEART Act introduced two new sections to the Tax Code, 877A and 2801. Section 877A imposed an exit tax on such individuals, and the Treasury and the IRS released guidance in 2009 for Section 877A. However, the Treasury and the IRS have not issued guidance for Section 2801 until now.
The key component of Section 2801 is that U.S. taxpayers who receive gifts and inheritances from people who previously expatriated are subject to gift and/or estate taxes on the receipt of such gift or bequest.
 The number of people giving up their U.S. citizenship has accelerated in recent years, in part due to later legislation such as the Foreign Account Tax Compliance Act, or FATCA, which was passed in 2010 as part of the Hiring Incentives to Restore Employment Act, also known as the “HIRE Act.” Last year, 3,415 Americans renounced their citizenship (see Americans Living Abroad Set Record for Giving Up Citizenship). There have been calls in Congress from Sen. Rand Paul, R-Ken., and others to repeal FATCA. But taxes aren’t the only reason why Americans move abroad.
 Under the estate and gift tax rules, a foreign person can make a gift to somebody in the U.S., and there is no gift tax as long as it’s not a U.S.-sited asset.

Link

Interesting FATCA/CBT/FBAR discussions here:
http://reddit.simonvreux.be/p/33y057/new

lol....US Department of Justice blames Americans abroad for their own FATCA injuries

The US Department of Justice has issued a 57-page response to the filing of a Motion for a Preliminary Injunction by the James Bopp FATCA repeal legal team. The report begins as follows:

Plaintiffs seek an extraordinary order that would halt enforcement of several duly enacted statutory provisions, along with associated regulations and implementing international agreements, aimed at curbing offshore tax evasion. The challenged laws are essential to tax enforcement, and the injuries that plaintiffs allege they have suffered as a result of such laws are self-inflicted, speculative, or even illusory. Plaintiffs’ claims for relief fail for lack of Article III standing, are jurisdictionally barred by the Anti-Injunction Act, and are meritless as a matter of well-established constitutional law. The preliminary injunction should be denied because plaintiffs have no likelihood of success on the merits and have no irreparable injury—certainly none to outweigh the great harm that the Government, and public interest in general, would suffer if enforcement of these laws were enjoined.

Republicans Overseas and others are reacting strongly to DOJ's victim blaming tactics. Here are links to the original story at Republicans Overseas and to John Richardson's comments at ADCS.

Here, again, is the complete DOJ document: DEFENDANT'S MEMORANDUM IN OPPOSITION TO PLAINTIFFS' MOTION FOR PRELIMINARY INJUNCTION

It is obvious that victim blaming is, and will continue to be, a central tactic of this Administration, as it is finally put on the defensive and forced to justify its outrageously discriminatory and immoral FATCA campaign. Now is a good time to remind ourselves of the essential characteristics and dynamics of victim blaming, which easily scale from the most primal one-on-one bullying to the targeting and systematic abuse of specific groups by the state. Here are a couple of good references to start with:

Green cards and treaty elections

If you have a green card and live abroad (in a country that has an income tax treaty with the United States) you can choose to be taxed as a nonresident of the United States. As you might guess, this has some unpleasant trickiness when it comes to the exit tax.

I offer here an interesting thought exercise: how a patient and methodical green card holder might avoid the exit tax, even if he/she is wealthy enough to otherwise trigger covered expatriate status.

Basic tax rule for green card holders

If you have a green card visa, you are a "resident alien" for income tax purposes. The consequences are simple:

• Render the IRS full income tax on your worldwide income, no matter where you live; and
• Submit all of the tax paperwork demanded by the U.S. government.

  Becoming nonresident

Every income tax treaty gives a green card holder (but not a U.S. citizen) living abroad the power to choose to be taxed as a nonresident of the United States. If you wield this power:

• You will be taxed only on your income from U.S. sources, and income earned outside the United States will not be taxed by the United States; and
• Your U.S. tax paperwork burden will be only marginally lighter.

You cause yourself to be a nonresident of the United States for income tax purposes by filing Form 1040NR and attaching Form 8833 to it.

some guidance with regards to OVDP or SFCP

The choice of program should be guided by the facts and circumstances. It is a function of the source of your offshore funds, the nature of the failure of your disclosure and whether your behavior was willful or nonwillful.
Questions to ask include:
• Did I have a purpose of avoiding or evading U.S. tax?
• Could my actions appear that I had a purpose of avoiding or evading tax? For example, bringing funds into or out of the U.S., using cash or “mules” rather than checks or wires, or moving assets between institutions, might give that appearance to the IRS.
• What is the size of the accounts?
• What is the amount of foreign assets?
• What is the source of the funds? Were they ever reported when they were first earned?
• Are the funds licit or illicit funds to begin with?
• Were the funds earned from foreign or domestic sources?
• Were the taxpayers living abroad when the accounts were set up? When the accounts were funded?
• What was the amount of earnings from the foreign accounts?
• Were FBARs filed for some accounts but not others?
• Did I provide false information to my tax return preparer?
• Am I in law enforcement, politics or a professional?
• What is the risk tolerance for the taxpayers?
• Will the spouses have different answers to these questions (perhaps separate counsel may be needed)?
Once you elect a program, the other is no longer available as a fallback.

Case : Form 8854 was not filed when green card abandoned

Case : A long-term resident returned to CH in 2013 and filed Form I-407 to abandon her green card.

She was not a covered expatriate because of the balance sheet test or the net tax liability test. However, she could not answer the certification test question (Form 8854, Part IV, Line 6) with "yes" because her 2012 tax return was wrong.

Her income tax return filing history is:

• Her 2012 income tax return (as a resident) was filed but omitted some income. She was a green card holder for the full calendar year of 2012. She did not abandon her green card until 2013.
• She filed a tax return for 2013. (I do not know whether she filed as a resident or nonresident). She did not file Form 8854 with the tax return
• She filed Form 1040 (a resident's tax return) for the full year of 2014, with no Form 8854.

Now, in 2015, she will amend her 2012 income tax returns to fix the problem. Then she will file her Form 8854 in 2015.

What to do?

The question facing the taxpayer is how should Form 8854 be answered? What is the taxpayer's expatriation date (see Part I of Form 8854) -- sometime in 2013 or sometime in 2015?

There is a related problem: do you file Form 8854 with the 2015 tax return or the 2013 tax return?

Foreign Bank Account Report (FBAR) Filing Date Extended by HR 3236‏

Today, July 31, 2015, President Barack Obama signed into a law HR 3236 a highway funding bill. Buried in the Bill is a provision which changes the filing date for Foreign Bank Account Reports (FBARs) to April 15th.  Up until now the due date for the FBAR, which must be filed electronically on FinCEN Form 114 (formerly TD F 90-22.1) was June 30th. The Bill also provides for an extension of time of up to 6 months to file the FBAR, making the extended due date October 15th.  This reconciles the due date for the FBAR with the individual tax return filing date. Before now many taxpayers were tripped up by the differences in the filing dates. Because many taxpayers go on extension for their tax returns, and don't have extensive discussions with their CPAs, or other tax preparers until shortly before the extended deadline of October 15th, there were many instances of individuals not realizing they had a filing responsibility until after the June 30th deadline. Those taxpayers were usually stunned to find out that the extension of the filing date for their tax return did not extend the time to file their FBARs.  This was a common sense fix to an unnecessary problem.

The Bill also authorizes a first time abate (FTA) procedure of sorts. Specifically the Bill states: "[f]or any taxpayer required to file such [FBAR] Form for the first time any penalty for failure to timely request for, or file, an extension may be waived by the Secretary."  This appears to provide authority to abate an FBAR penalty if the FBAR is filed after April 15th, but before October 15th, if this is the first time the FBAR was due. The language doesn't really add anything to the law since the IRS already has wide latitude to waive FBAR filing penalties. These provisions become effective next year so the FBAR filing due date for 2015 will be April 15, 2016.
Finally, the Bill overturns the Supreme Court's decision in Home Concrete (Home Concrete & Supply LLC, 132 S. Ct. 1836 (2012)). That case dealt with the 6 year statute of limitations under Internal Revenue Code Section 6501(e)1)(1)(A) which provides for the longer statute of limitations where there is an omission from gross income in excess of 25%. The Supreme Court held that this rule did not apply in the case of basis overstatements. The Bill specifically amends Code Section 6501(e)(1) to provide that an omission from gross income includes an overstatement of basis. This is part of a disturbing trend by Congress to continue to increase time the IRS has to assess additional taxes.

Moore v US / Western District of Washington Punishes IRS for Failing to Justify or Explain Itself in FBAR Case‏

In Moore v US  judges hold up IRS misconduct to the bright and sanitizing light of judicial review.  
One benefit that hopefully comes from decisions like Moore is that in addition to its impact on the party to the litigation, one hopes that the scathing court review has some impact on how the IRS goes about its business of administering the FBAR penalty regime.
The case is an important case for lots of reasons, including how it emphasizes that the IRS has a legal obligation to explain the underlying reasons for its actions when it proposes and assesses FBAR penalties. Taxpayers, even those who may have stashed cash overseas, have fundamental rights that the IRS should respect. If the IRS fails to respect those rights, cases like Moore provide an important precedent for checking what may be systemic abuses of power but which at a minimum raise troubling fairness concerns for the affected party.

As the IRS gets knee deep in determinations that move away from its traditional deficiency cases, especially when the review is on an abuse of discretion basis, courts are starting to take a more careful look at agency practices. A good example of this is in the FBAR area, where IRS administers the potentially draconian Title 31 penalty regime (See IRM 4.26.16.4.1  (07-01-2008) (discussing the delegation to IRS and how the Code does not apply to the FBAR regime).  IRS adopted a Taxpayer Bill of Rights and it stands to remind IRS employees alike of the importance of informing taxpayers.
Absent a remedy in court, however, sometimes those rights are illusory (or require parties to sue or pursue FOIA to find out what the IRS has done).

In the first Moore opinion, the judge was troubled by the IRS’s failing to explain why it penalized Moore:

The court can only guess, however, as to whether the IRS considered relevant factors or made a clear error of judgment. The record before the court contains no administrative explanation of the IRS's decision to impose penalties.

Moreover, the court was deeply troubled that one of its agents promised Moore that it would not assess the penalty pending an appeal of a proposed assessment but then the IRS assessed Moore anyway:

The Government may also choose to supplement the record to provide contemporaneous explanation of its decision to assess the 2005 penalty without providing the "appeal" it promised Mr. Moore. On the record before the court, that decision is baffling. The only reason the Government offered, its concern that the statute of limitations would expire, is nonsensical on the record before the court.

Determining “Reasonable Cause” for Non-Willful FBAR Violations

For violations involving the non-willful failure to report the existence of a reportable interest in a foreign financial account, the maximum amount of the FBAR penalty that may be assessed under Title 31, Section 5321(a)(5)(B) shall not exceed $10,000, per year, for up to six calendar years. However, no penalty shall be imposed if such non-willful violation was due to reasonable cause and the amount of the transaction or the balance in the account at the time of the transaction was properly reported [see 31 U.S.C. § 5321(a)(5)(B)(ii)]. The reasonable cause exception does not apply to willful FBAR violations. [see 31 U.S.C. § 5321(a)(5)(C)(ii)].

UBS Too Dirty To Sue Billionaire Offshore Tax Cheat, Judge Rules

Billionaire offshore tax cheat Igor Olenicoff has won a big one in his long running court battle with his former Swiss bank, UBS AG, and his former UBS banker turned whistleblower, Bradley Birkenfeld.
In a ruling from the bench Thursday, Orange County Superior Court Judge Kim G. Dunning shot down a malicious prosecution suit UBS and Birkenfeld had brought against real estate developer Olenicoff, Olen Properties, and an Olen lawyer, on the grounds that they themselves are too dirty to sue. The big bank and Birkenfeld both sued Olenicoff in state court in 2012 after he lost a federal court suit claiming they had duped him into breaking the tax law and then secretly ratted him out to U.S. authorities, while also mismanaging the $200 million plus he had hidden offshore.

green card holder case study

My original question / case
——————————-
* 5+ year green card holder, EU citizen
* Looking to potentially get US citizenship
* No FBARs filed (ever) (at the time of asking the question at least, which was June 2015)
* Aggregate foreign balances of $30-$100k in the last 6 years, not reported anywhere
* Total capital gain + income from accounts less than $1000 per year (and in most cases, as little as $200 per year), but never reported on US tax returns
* Everything fully taxed in home country, and no taxes owed in the US even if it had been properly reported here
* Had contacted 3 lawyers about how to come into compliance, and gotten three different responses
– Lawyer 1: Go with Streamlined Domestic
– Lawyer 2: Follow the Delinquent FBAR procedures since there are no taxes owed
– Lawyer 3: Amend 3 tax-returns, and back-file 6 FBARs.

Some of the advice I received :

—————————-
a) * Lawyer 2 has best answer…
* Streamlined just opens a can of worms, don’t do it
* Amending tax returns is a red flag
b) * Simply file FBARs going forward
* Do nothing else
* Use the “I didn’t know” option when filing FBARs
* Don’t attach any written statements (someone has to read them -> red flag)

Some responses from the Expat Forum :

 ——————————-
a) * File past 6 years FBARs as a first step
* Select “I didn’t know” as the reason for the late ones
* Potentially amend tax returns as a second step
b) * File past 6 years FBARs as a first step
* Do nothing more
c) * File FBARs for the last 6 years
* Use “I didn’t know” as the reason
* Review tax returns / amend, as need be

What I decided
——————————-
I filed 6 years worth of FBARs (this was the one thing nearly all commenters agreed on!), and I will continue filing going forward, both as the FBAR goes, and also including any foreign investment income on my US tax return. A word of note here — which wasn’t really a factor for me as my wish would have been to be in compliance anyway — would be to everyone that lots of European banks will start reporting this information back to the US this year. So coming into compliance before that happens, arguably would be the better the option, in my opinon.

Regarding tax returns / amending: at this moment I haven’t yet amended any tax returns for any of the past 3 years, as I’m still undecided on whether it’s worth it (primarily talking about my time / their time, the effort needed, and the cost of filing, potentially paying an accountant as well, and also the fact that I am wondering if such action could come with the risk of opening up issues and just having the potential to be another huge time sink for me. Someone said “let sleeping dogs lie”, and while my own preference would always be to do these things as “correctly” as possible; given the threatening language and scare tactics that the IRS employs, I’m quite frankly concerned that any benevolent actions on my part could backfire. Who knows.

IRS Advises re Delinquent International Information Return Submission Procedures

Taxpayers who do not need to use the OVDP or the Streamlined Filing Compliance Procedures to file delinquent or amended tax returns to report and pay additional tax, but who:

• have not filed one or more required international information returns,
• have reasonable cause for not timely filing the information returns,
• are not under a civil examination or a criminal investigation by the IRS, and
• have not already been contacted by the IRS about the delinquent information returns

should file the delinquent information returns with a statement of all facts establishing reasonable cause for the failure to file.

Describe your situation in the reasonable cause statement

As part of the reasonable cause statement, taxpayers must also certify that any entity for which the information returns are being filed was not engaged in tax evasion.  If a reasonable cause statement is not attached to each delinquent information return filed, penalties may be assessed in accordance with existing procedures.

• All delinquent international information returns other than Forms 3520 and 3520-A should be attached to an amended return and filed according to the applicable instructions for the amended return.
• All delinquent Forms 3520 and 3520-A should be filed according to the applicable instructions for those forms.
• A reasonable cause statement must be attached to each delinquent information return filed for which reasonable cause is being requested.

Information returns filed with amended returns will not be automatically subject to audit but may be selected for audit through the existing audit selection processes that are in place for any tax or information returns.

http://www.irs.gov/Individuals/International-Taxpayers/Delinquent-International-Information-Return-Submission-Procedures

Residence-Based Taxation: A Necessary and Urgent Tax Reform

Contents

RBT

Executive Summary

Introduction

Understanding current law

Residence-based taxation

Positive consequences of RBT for the United States

Implementing RBT

How much tax revenue will RBT bring in?

Conclusion 

  https://www.penflip.com/lenxdart/aca-cbt-proposal-book

Form 1040NR with Form 8833 attached or Green card + treaty election = exit tax danger

This matters to you if you are a green card holder:

• thinking about expatriating, or
• you want to keep the green card, live abroad, and stop paying income tax in the United States.
  Let's say you are a citizen of another country, and you are living there. You also happen to hold a U.S. green card.
  Within two years of living in the United States, you decide to return to your home country to live permanently. You will no longer live in the United States. So you leave and you have been living in your home country for a year or so.
  Since you are leaving the United States and will no longer live here, you want to stop paying U.S. income tax and filing U.S. income tax returns.

  How to do this

  There are two ways to go about this:
• One way is to give up your green card. You do this by filing Form I-407.
• The other way to stop paying U.S. income tax is by taking advantage of the income tax treaty between your home country and the United States (if such a treaty exists).
  
  

Ex-US Rep. Michael Grimm Gets 8 Months For Tax Fraud

Former Staten Island Rep. Michael Grimm was sentenced to eight months Friday for under-reporting taxes from a restaurant business after a Brooklyn federal judge acknowledged the rarity of prison terms for such crimes in New York but noted his status as lawyer, former FBI agent and lawmaker who “exploited” bottom-rung workers.

TAS Objectives for 2016 report

http://www.taxpayeradvocate.ir...

Personal residence exclusion under exit tax rules

American citizens who give up their American citizenship (expatriates) are classified into covered expatriates and non-covered expatriates. A covered expatriate is subject to a “mark to market” rule, where the US pretends that the covered expatriate sold all his property on the day before expatriation and imposes a tax on the gain from the pretend sale.

Normally, you get a personal residence exclusion of $250,000 when you sell your principal residence. The question is: Do you get the exclusion for the pretend sale under mark to market?

Summary

If you actually sell your principal residence, you get a $250,000 exclusion from the gain. It’s not clear whether you get the exclusion when you calculate the gain for exit tax purposes. If it is feasible to sell the residence, consider doing so in preparation for expatriation.

FBAR and Tax Crime Statutes of Limitations – Suspended When Overseas?

What is a Statute of Limitations (SOL), Generally?
The tax laws contain what is known as a statute of limitations. The statute prescribes the length of time permitted to the IRS to enforce the tax rules. If the length of time runs out for a particular tax year, then the IRS is forever barred from claiming that you owe more tax in that year. It is important to understand how the various statutes of limitations work, because in certain cases, the statute of limitations will be longer than others or it will not start to run at all.  There are often different SOL time periods for civil versus criminal actions. You can learn more about the various tax related SOL in my earlier blog posting here. 
How does the SOL Work for FBAR Purposes?
The Internal Revenue Manual at IRM Section 4.26.17.5.5.4 provides a good summary of bullet points on the topic. These are elaborated upon, below:
The Title 26 statutes of limitations do not apply to FBAR cases. Title 26 refers to a particular Title in the United States Code; Title 26 contains the Internal Revenue Code.
The statute of limitations on assessment of civil FBAR penalties is 6 years from the date of the violation. Typically, the date of the violation is the date when an accurate and complete FBAR being due, is not received by the Treasury (i.e., June 30 due date. This refers to June 30th of the year following the calendar year for which the foreign financial account should be reported.). It is very important to note that unlike the case of tax returns, the FBAR SOL “clock” does start to “tick” (the SOL time period begins and continues to run) even if the taxpayer has not filed the FBAR (FinCen Form 114).  Therefore, a US person with an FBAR filing duty, might just get lucky and win the audit lottery simply by waiting for the 6-year SOL to run on the old, unfiled FBARs.  By filing prospectively, such a taxpayer can become FBAR compliant merely by the passage of time.  The question arises whether the SOL is tolled or suspended if the taxpayer is outside of the US?  More on this below.

Relinquish your U.S. citizenship or their green card, but have not filed FBARs.

It is possible to expatriate, not file FBARs, and certify to the IRS that you have complied with your tax obligations. It is not necessarily a good idea, however.

Summary

An expatriate must certify whether he has complied with all tax obligations under Title 26 of the United States Code. FBAR filings are required under Title 31. Therefore, the expatriate does not need to certify whether he is up to date with FBAR filings.

Three ways to be a covered expatriate

When you relinquish your U.S. citizenship, you will be a “covered expatriate” if:

• Your net worth exceeds $2,000,000;
• Your average net Federal income tax liability for the prior 5 years exceeded $160,000 (for expatriations in 2015); or
• You do not certify under penalty of perjury that your prior 5 years of tax obligations are up to date.

For this blog post, we will focus on the third test: The certification requirement.

Use Form W-8BEN to eliminate US tax

When a US person (like, say, a 401(k) plan administrator) pays taxable income to someone outside the United States, 30% must be subtracted from the payment and given to the IRS. This is the withholding tax required by IRC §1441(a).

Paying 30% tax to the United States on a 401(k) distribution when the income tax treaty between the United States and Switzerland says that the USA cannot tax the distribution? Sounds like a bad idea. Here is how you prevent this from happening.

Fill in Form W-8BEN and give it to the 401(k) plan administrator. In particular, use Part II of Form W-8BEN to use the CH-income tax treaty to force the result of zero tax withholding in the United States.

• On Line 9, you certify that you are a resident of New Zealand.
• On Line 10, you claim the benefit of Article 18.1(a) to create a rate of withholding of 0% on your 401(k) distribution.
• The explanation is that the treaty gives exclusive power to tax the 401(k) distribution to the country of residence. Nothing more remarkable than that will be required to complete Part II.

Other countries' treaties

The US has income tax treaties with many countries. Treaties like CH's (the country of residence gets to tax cross-border pension distributions) are common but far from universal. The treaties may provide for different treatments for different types of distributions. For example, the US-UK income tax treaty gives the source country the exclusive right to tax lump sum distributions. US-UK Income Tax Treaty, art. 17.2 (2001, as amended).

Conclusion

If you are receiving cross-border retirement account distributions, look for an income tax treaty between your home country and the United States. It may well give you a better tax result than the default tax rules of the United States and your home country. The pension benefits are most commonly found in article 18, but because each country negotiates its version, and the treaties were adopted at different times, you might find pension benefits clauses in other articles.