Staying IRS Compliant As An American Abroad
It’s tax time again for us Americans.
That is, tomorrow, Monday, Oct. 16, is the reporting deadline for those of us who filed for an extension back in April.
How many tax dates do Americans have to deal with? Let’s see…
There’s the initial tax deadline of April 15 each year. Then you have the automatic extension deadline for Americans living abroad. That’s June 15.
Finally, you have the six-month extension deadline for anyone who files Form 4868, which gets you to Oct. 15 (unless it falls on a weekend, as it does this year).
Since 1970 and through this year, those of us who’ve met the reporting requirements also have to file a Foreign Bank Account Report (FBAR), now re-designated as the FinCEN Form 114. This is due on April 15… though, again, you can file for an extension (to Oct. 15, same as for your tax return).
Lief spent the better part of last week hunkered down at home finalizing our IRS offering for this year. I’m happy to be able to report that our completed return is on its way to Uncle Sam, courtesy of La Poste, the French postal service.
Over the past couple of weeks, as this deadline has loomed, we’ve heard from readers struggling to finalize their own IRS offerings. Some have contacted us almost in a panic, hoping for help with their reporting and filing questions.
Here’s one of the most common:
Q: How do I report my offshore LLC that holds a rental property and the related rental income if the LLC is owned by my IRA?
A: Assets held by your IRA are reported by your custodian. Therefore, the good news is that you don’t have to report the LLC or the rental income. The bad news is that you do have to pay taxes on the rental income earned in your traditional IRA when you take withdrawals from the account.
If you have a bank account for your IRA LLC… and you qualify otherwise to file an FBAR… then that bank account must be reported on your FBAR. However, neither the LLC nor the bank account need to be reported on Form 8938.
As we’ve been saying for years now, it’s not so much the taxes owed anymore as it is the information reporting requirements. That’s what the FBAR and Form 8938 are—information reporting to make it possible for the U.S. government to track every American’s assets so the U.S. government can try to determine if you might be earning income from an asset that you’re not reporting.
The return Lief has prepared for us this year is about 100 pages including worksheets. That translates to 55 pages sent to the IRS, 80% of those informational.
The information reporting requirement isn’t only for expats but for any U.S. person with assets outside the United States. Fortunately, the threshold for filing Form 8938 is four times higher for an expat than for a resident American. Still, the thresholds are low at US$50,000 for a single living in the United States and US$200,000 for someone living outside the country (double those figures for married couples).
Which brings me to another frequently asked U.S. tax question:
Q: What assets must be reported on Form 8938?
A: Anything that can be identified as your asset only through a piece of paper is considered a financial asset reportable on Form 8938. Specifically excluded by the IRS are real estate held in your own name and allocated metals (gold and silver, but also industrial metals held for investment).
Note that, in the case of gold, silver, and other metals, I’m speaking of the physical metals themselves. Gold represented by a piece of paper, such as a Perth Mint Certificate, is reportable.
As are those junior mining stocks from Canada you bought directly from the company years ago and stuffed in your filing cabinet.
And real estate held by an offshore entity is reportable as an asset of the entity… unless the entity is owned by your IRA.
Take these reporting requirements seriously. Fail to report foreign financial assets as required on Form 8938, and the IRS could disallow your basis when calculating your capital gain. In other words, if you don’t report an offshore financial asset and then sell that asset, you could be facing tax on 100% of the proceeds of the sale rather than the gain only. Not to mention the potential fines for not having reported the asset in the first place.
It’s all part of a crackdown on offshore investments because the U.S. government believes it’s missing out on billions of tax dollars from Americans not reporting their international transactions. That’s what FATCA was meant to help with… tracking Americans’ offshore assets.
But the math is faulty. The U.S. government won’t collect enough additional tax, these current and increasingly aggressive efforts notwithstanding, to make a dent in U.S. debt. Meantime, they’re growing their bloated staffs and overheads and making it harder all the time for honest, hardworking Americans to pursue interests offshore… and more expensive all the time for those of us who continue to try.