Expatriates and US Taxation

Expatriating to Avoid US Income Tax

   Many US citizens that have considerable wealth or that are just "retired" move overseas in an attempt to avoid having to pay US income tax. Some revoke their US citizenship and some just move without notifying anybody. The plan is to take advantage of the tax treaties by living in foreign countries and pay less income tax. If you follow the law, however, you will find out that the plan doesn't work. You are taxed on your worldwide income by the US Government, and the treaties will not help you avoid paying US tax. Do you have dual citizenship?

    Additionally, if you renounced your US citizenship, did you file the proper financial disclosure (before leaving) under IRC Section 877, probably not. Accordingly, the reason for leaving will be considered tax avoidance, and you will be required to file returns for 10 years. Just because you have been living overseas in peace, does not mean that you are safe.

    Despite the cold hard facts, there are many US citizens that play the hide and seek game, thinking that the IRS will never contact them, but they are wrong. The IRS is diligently working on their world banking reporting system, designed to track US citizens with offshore accounts and that is how you will be identified, fined, and maybe even prosecuted. Unfortunately, the FBAR disclosures carry heavy penalties and there will be very little protection afforded you, and this will all come about within the next couple of years. At a 2012 criminal tax conference in Las Vegas, the IRS disclosed that it had been obtaining banking information from China on US citizens, for the last 6 or so years and that they (Chinese) were described as being very cooperative.YIKES

US Citizens Living Abroad

   US citizens are taxed on their worldwide income and living in a foreign country is not going to give you relief from US taxation. You will be required to file a tax return, just as you did when you lived in the US. You are also required to file the foreign bank account disclosure forms FBAR, each year, if you have $10,000 or more in your combined accounts.

Have You Not Filed Your Tax Returns?

   You may be able to take advantage of a new Streamlined compliance program that was designed for low risk taxpayers, to help them become filing compliant.This program is similar to a voluntary disclosure program. Maybe you qualify?

US Citizens Revoking Their Citizenship

   US citizens revoking their US citizenship that have annual incomes of $100,000 or a net wealth of $500,000 will be presumed to have moved to avoid US tax, regardless of their actual motivation, and Leaving the US without filing the financial disclosure is an automatic violation. This invokes the "penalty tax" under Internal Revenue Code 877. The burden is on the taxpayer to overcome this rebuttable presumption, and the Internal Revenue Code Section 877 alternative tax would then apply to them for the next 10 years. Yes, even though you have revoked your citizenship, if 877 applies to your facts and circumstances, you will be required to file a US tax return for ten years after leaving the country. Foreign source income is usually excluded from this section 877 tax. FATCA

What about the tax treaty of the foreign country?

Well, most treaties reserve to the US, the right to tax its citizens without regard to the treaty and a "citizen" defined in these treaties usually includes former citizens.

   US citizens losing citizenship are also required to file a statement with the State Department or Federal Court, providing financial information relating to net worth, residency, citizenship, and other personal financial information. If you don't file the required disclosures, you are presumed to be within the regime of section 877 and will be subject to the tax.

   Hey, i'll just transfer my assets to a foreign corporation and avoid this mess, will that work? First of all, don't be duped by these tax planning kits that teach people how to avoid paying US tax, the IRS has already been there. Former US citizens that contribute property to a foreign corporation within 10 years after expatriation and 5 years before, will be taxed as if the taxpayer still owned the property under section 877.

Heart Act

  The risks of innocent costly mistakes are high when dealing with offshore accounts and trusts especially after the recent passage of the Heroes Assistance and Relief Act “HEART” of 2008. If you are considering expatriating in the near future or are living abroad and gifting to children within the US, you most likely will fall under the provisions of this new legislation. You should familiarize yourself with the FBAR rules concerning foreign account disclosures, and the rules under IRC 877 dealing with expatriation to avoid us taxation.

Thinking of Opening a Foreign Bank Account?

   If you have overseas bank account(s) that have combined balances of over $10,000 at anytime within the calendar year, then you must file a FINCEN form 114 (FBAR) by your income tax filing deadline for the current tax filing year. This form is not related to the filing of your tax return, and is filed online with the FINCEN website under the provisions of the Bank Secrecy Act.
   So, can transferring assets offshore protect you from paying taxes? Not even remotely, the IRS can make you disclose your off-shore accounts and trusts, by forcing you to sign waivers to allow the IRS to obtain financial records from foreign banks and institutions. If you don’t sign, you go to jail until you change your mind, U.S. v. Spearbeck, 80 AFTR 2d. In Spearbeck, a U.S. District Court found there was no right to privacy, and ordered the taxpayer to sign several consent directives, allowing the IRS to obtain their financial records from foreign institutions. A foreign jurisdiction's secrecy laws are of little protection against the IRS.
   The reporting and disclosure rules concerning offshore accounts and trusts are ominous to say the least, requiring disclosure filings for the settlor, fiduciary, beneficiary and responsible parties connected to the offshore trusts and accounts. What happens if I have an offshore bank account that has no income, what can the IRS do for failing to disclose the account? Well, the IRS can seize the account and levy 30% of the account balance as a penalty under the law. The IRS can prosecute you for tax evasion, or they can assess penalties and interest for failure to file the required disclosure forms, which can be significant. Additionally, if the account pays interest and you have a credit card attached to the account, you may have violated criminal provisions of the Federal Code and your name may be on the list along with hundreds of thousands of other US citizens that the IRS recently acquired from offshore banking institutions. Aside from this, there are jeopardy provisions in the IRS code that suspend your due process rights in situations where taxpayers under investigation, transfer or possesses assets offshore which indicate to the IRS that there is a collection risk, allowing for streamlined seizure and levy action. If you own foreign property, you may have an interest in a foreign entity that you are also required to disclose under the law.

Foreign Earned Income Exclusion

  Internal Revenue Code Section 911 (IRC Sec 911) allows for an election to be made, to exclude up to $91,500 in foreign earned income for the 2010 tax year. You must file a form 2555 with your tax return, claiming the election. Although the election is supposed to be made pursuant to a timely filed tax return with extensions (form 2350), there is a provision within the Treasury Regulations that permit late filings to be accepted. Regulation Section 1.911-7 describes the procedures necessary to file the form 2555 with your delinquent tax return to obtain relief. The total earned income is reported on line 7 of your form 1040 and the exclusion amount is then subtracted as a negative number on line 21.
  Not all income will be excludible under IRC 911, because some income, such as income earned from US Government entities, is not excludible. There are other tax benefits to working overseas as well, such as a housing allowance exclusion and a person considering working overseas should read section 911 to become familiar with the rules. See Working Overseas.

  Do I have any other option if my election is denied? Yes, you can claim the foreign income taxes that may have been withheld from your foreign wages as a credit or deduction against your US income tax. File form 1116 to obtain the credit and file it with your income tax return, listing the credit on line 47 of your form 1040 tax return. Accordingly, many foreign countries have internal tax regimes that will exceed the US tax that would normally be due on your US tax return, so your foreign tax bill may very well exceed the US tax.

  Issues With Real Property

Renting real property can be dangerous if you do not make the proper elections. See ECI Elections

The Internal Revenue Service publication 54 has valuable information regarding the filing requirements for individuals living and working overseas.