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FinCEN, FBAR and other tax costs that prompt or slow U.S. expatriations

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The rate of Americans giving up their citizenship has slowed in the last few years. Are lower taxes a reason for fewer expatriations?

Immigration remains at the top of most news lists, especially since the Democratic-controlled House and Republican-led Senate both rejected Donald J. Trump's emergency declaration to shift funds to build a U.S.-Mexico border wall.

But the reverse phenomenon of U.S. citizens formally leaving the country forever isn't getting as much attention as it has in the past. Perhaps that's because the number of American expatriates is falling.

The Treasury Department on March 12 published its quarterly list of names of those who renounced their U.S. citizenship or, for non-citizens, terminated their long-term U.S. residency during the fourth quarter of 2018.

That list contained just 685 names, bringing the total of published expatriates last year 3,981.

That's a 22 percent decrease from the 2017 list of U.S. expatriates. That year, the 5,133 U.S. expatriates was the first decline in five year.

In fact, in 2016 the expatriation total, which had been trending upward, hit a new record of 5,411 citizenship and/or residency renunciations.

Taxes matter, but not only reason: Many in the tax world are quick to point to taxes as a key reason why folks decide to officially leave their land of birth.

These same folks are not surprised that the expatriation rate has slowed over the last couple of years thanks to the promise of and eventual enactment of GOP tax cuts.

But taxes are only part of why folks decided to formally leave a country. The motives are many, often complex and usually interconnected, involving not only finances, but also family wishes (and needs) and lifestyle preferences.

That said, there's no doubt that U.S. taxpayers with global income and other worldwide connections hate the Foreign Account Tax Compliance Act, or FATCA.

FATCA basics: Most tax laws are complicated. When they involve international issues, the complications are exponential.

But here's a brief explanation by the Internal Revenue Service of how FATCA works:

Under FATCA, certain U.S. taxpayers holding financial assets outside the United States must report those assets to the IRS on Form 8938, Statement of Specified Foreign Financial Assets. There are serious penalties for not reporting these financial assets. This FATCA requirement is in addition to the long-standing requirement to report foreign financial accounts on FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR) (formerly TD F 90-22.1).

FATCA will also require certain foreign financial institutions to report directly to the IRS information about financial accounts held by U.S. taxpayers or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. The reporting institutions will include not only banks, but also other financial institutions, such as investment entities, brokers, and certain insurance companies. Some non-financial foreign entities will also have to report certain of their U.S. owners.

Therefore, if you set up a new account with a foreign financial institution, it may ask you for information about your citizenship. FATCA provides special (and lessened) reporting requirements about the U.S. account holders of certain financial institutions that do not solicit business outside their country of organization and that mainly service account holders resident within it. In order to qualify for this favorable treatment, however, the local foreign financial institution cannot discriminate by declining to open or maintain accounts for U.S. citizens who reside in the country where it is organized.

OK, maybe it wasn't that brief or easy. Which is why if you have substantial foreign financial holdings, you need to consult a tax professional who specializes in this area.

When FATCA applies: OK, you own an overseas account. What constitutes substantial when it comes to reporting these assets?

Fatca_treasury_IRS

Again, I defer to the IRS on FATCA reporting thresholds:

Reporting thresholds vary based on whether you file a joint income tax return or live abroad. If you are single or file separately from your spouse, you must submit a Form 8938 if you have more than $200,000 of specified foreign financial assets at the end of the year and you live abroad; or more than $50,000, if you live in the United States. If you file jointly with your spouse, these thresholds double. You are considered to live abroad if you are a U.S. citizen whose tax home is in a foreign country and you have been present in a foreign country or countries for at least 330 days out of a consecutive 12-month period.

The rules also are different depending on where you live.

Taxpayers living in the United States must file Form 8938 if they must file an income tax return and are:

  • Unmarried and the total value of specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year,
  • Married filing a joint income tax return and the total value of specified foreign financial assets is more than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year, or
  • Married filing separate income tax returns and the total value of specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year. For purposes of calculating the value of specified foreign financial assets in applying this threshold, include one-half the value of any specified foreign financial asset jointly owned with your spouse. However, report the entire value on Form 8938 if you are required to file Form 8938.

Taxpayers living abroad also must file a Form 8938 if they must file a U.S. income tax return and are:

  • Married filing a joint income tax return and the total value of specified foreign financial assets is more than $400,000 on the last day of the tax year or more than $600,000 at any time during the year. These thresholds apply even if only one spouse resides abroad. Married individuals who file a joint income tax return for the tax year will file a single Form 8938 that reports all of the specified foreign financial assets in which either spouse has an interest. 
  • Not married person and the total value of your specified foreign financial assets is more than $200,000 on the last day of the tax year or more than $300,000 at any time during the year. 

When to report: Finally, something easy when it comes to FATCA, the reporting deadline.

If you must file Form 8938 you do so by attaching it to your annual return and submitting all by the annual due date, including extensions, for that return.

The annual returns covered here include an individual taxpayer's Form 1040, as well as 1040NR, 1041, 1041-N, 1065, 1120 and 1120-S forms.

For individual taxpayers, the applicable due date this year April 15 if you live in most of the United States or April 17 for residents of Maine and Massachusetts.

And the IRS warns, "Do not send a Form 8938 to the IRS unless it is attached to an annual return or an amended return."

Failure to follow FATCA penalties: If you must file Form 8938 and do not do so, you may be subject to substantial penalties. Yes, penalties plural.

There's a $10,000 failure to file penalty, an additional penalty of up to $50,000 for continued failure to file after IRS notification and a 40 percent penalty on an understatement of tax attributable to non-disclosed assets.

The statute of limitations is extended to six years after you file your return if you omit from gross income more than $5,000 that is attributable to a specified foreign financial asset, without regard to the reporting threshold or any reporting exceptions. If you fail to file or properly report an asset on Form 8938, the statute of limitations for the tax year is extended to three years following the time you provide the required information. If the failure is due to reasonable cause, the statute of limitations is extended only with regard to the item or items related to such failure and not for the entire tax return.

If you make a showing that any failure to disclose is due to reasonable cause and not due to willful neglect, no penalty will be imposed for failure to file Form 8938, however. Reasonable cause is determined on a case-by-case basis, considering all relevant facts and circumstances.

Don't forget FinCEN: In addition to Form 8938, you also might face additional foreign account filings with Financial Crimes Enforcement Network (FinCEN).

"Filing Form 8938 does not relieve you of the requirement to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), if you are otherwise required to file the FBAR," note the IRS Form 8938 instructions.

Unlike Form 8938, the FBAR, officially known as FinCEN Form 114, is not filed with the IRS. It must be filed directly with the office of Financial Crimes Enforcement Network, a bureau of the Department of the Treasury that operates separately from the IRS.

FBAR threshold, deadline: The FBAR reporting threshold is an aggregate value of financial accounts of more than $10,000 at any time during the calendar year.

Note that this is a cumulative balance, meaning if you have two accounts with a combined account balance greater than $10,000 at any one time, both accounts would have to be reported.

The FBAR deadline for individual taxpayers also is the April income tax filing due date — it was changed from June 30 a couple of years ago — or Oct. 15 if you file for an extension.

If you don't file a required FBAR, the noncompliance penalties, like those for Form 8938, are steep. For willful violations, the penalty may be the greater of $100,000 or 50 percent of the balance in the account at the time of the violation, for each violation.

The IRS has as special Web page that compares the Form 8938 and FBAR requirements.

There's also an special IRS page on FBAR.

And FinCEN has at its Bank Secrecy Act (BSA) e-filing site, which is where you must submit your FBAR FinCEN Report 114, a FAQ page.

Here's where I repeat if you have substantial foreign financial holdings, you need to consult a tax professional who specializes in this area.

Costs of expatriating: You also might want to talk with that tax pro about the expatriation alternative.

If after considering your personal and tax situations you do decide to take the expatriate route, remember that it'll cost you.

First, there's a $2,350 fee to renounce and/or relinquish your U.S. citizenship. The State Department says this money goes to cover the time and paperwork required of tracking the exiting Americans.

You also could face an exit tax. This levy applies when you meet any of the following conditions:

  • Your net worth is $2 million or more,
  • You have an average net U.S. income tax liability of more than $162,000 for the five-year period prior to expatriation, or
  • You didn't meet all your federal tax obligations for the preceding five years.

If you're subject to the expatriation exit tax, the amount you'll owe is calculated as if you sold all of your assets at fair market value on the day prior to your citizenship relinquishment and the associated capital gains in excess of the first $699,000 (inflation adjusted) that are excluded are subject to this tax.

The tax payment is due within 90 days after giving up your U.S. citizenship.

So if you're leaving the United States for good, be sure to take these costs into account as your figure your budget for your new international home.

And again, for a third and final time, hire a good international tax expert to guide you through this process.

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