Friday, May 27, 2016

When Junior Has A Foreign Bank Account: What's To Be Expected!

Picture Courtesy: Free Images From
I looked up my last blog post and realized I have not posted here since January! What a tax season it was, and how did time get away from me? Oh wait...I know how! 

The past few years have seen a steady growth of a client base that have foreign accounts, no complaints there! Most clients have very routine FBAR filing requirements but then some times things are a little out of the ordinary and that gets me all excited...yes I does! That either tells you about my lack of a life during tax season or we should just notch it up to tax nerd-iness!  

So you see this year, one family that came to see us had a letter from a foreign bank under FATCA regulations. The name on the account was their minor son's. The account for all these years had been forgotten because the parents never thought it figured into any calculations. 

A parent might open an account for their child in their home country for many reasons: to cover higher education, gifts from grandma, grandpa and other relatives, holiday funds and so on. And at some point, if the parents and the children move to the US & become "US persons" for tax purposes. This can happen if they have substantive presence in the US/ get a Green Card/ become US citizens. Now the parent has triggered a information-reporting requirement if the financial account balance crosses reporting thresholds.

There are U.S. Income Tax rules if a parent/ a caregiver elects to include the investment income of a child/ dependent on their own tax return. This is done by filing Form 8814 with the parent's tax return. This may reduce the burden of having to file separate FBARs and/ Form 8938 for the child, however this is possible only if ALL of the following are true: 

  • The child was under 19 years of age or under 24 AND a full time student. 
  • The child only had investment/ passive income and no earned income. 
  • The child's gross income was < $10,500.
  • the child would have been required to file a Form 1040 if the parent had not elected to include his income on their tax return. 
  • The child does not file jointly. 
  • The child did not make estimated payments for the year. 
  • No tax over-payment has been applied from a previous year to the child. 
  • No federal income tax has been withheld under the child's name. 
Alternatively, if the parent is ineligible to or unwilling to make the above election, the child will have to file a Form 1040 and enclose a Form 8615.  

Hence if the foreign financial account balances cross reporting thresholds, the parent filing a Form 8814 of such a child needs to or in the second case where the child is reporting filing the Form 1040 with a Form 8615 enclosed: 

  1. Report the income from such accounts on Form 1040.
  2. Check the box "Yes" on Schedule B to form 1040 to the presence of foreign financial accounts and disclose the existence & location of the foreign account.
  3. Enclose Form 8938 if need be. 
Now, all of the above would apply to form 1040 and the accompanying schedules & forms such as the Schedule B and Form 8938. 

But what about the FBAR?

The online instructions for the FBAR rules for children were updated in June 2014. Irrespective of how the the child's investment income is reported on the Form 1040 either by the child or the parent, the FBAR needs to be filed in the child's name.  

Quoting from the online instructions from the FinCEN, 

" Responsibility for Child's FBAR
Generally, a child is responsible for filing his or her own FBAR report. If a child cannot file his or her own FBAR for any reason, such as age, the child's parent, guardian, or other legally responsible person must file it for the child.

Signing the child's FBAR. If the child cannot sign his or her FBAR, a parent or guardian must electronically sign the child's FBAR. In item 45 Filer Title enter “Parent/Guardian filing for child."

Please see an Enrolled Agent or a tax professional specializing in foreign bank accounts if you have questions regarding the above or if any of that applies to you. 

Bibliography: Form 8615; Form 8814; BSA Filing Instructions; Form 8938; Journal of Taxation

As always, read my disclaimer here. Please consult a qualified tax professional for your unique tax needs. More of my contact information is on my website,  


Thursday, January 14, 2016

Tax Filing Season's Here: Get Your Record Ducks In A Row!

Picture Courtesy: Google Images

Just before tax season I sometimes feel like that man in the old movies about cars- you know the one where he ran ahead with a flag announcing there was a car on the way! Well, tax season is officially just a few days away & the Internal Revenue Service has announced January 17th, 2016- so go figure!

I usually send out a nifty Tax Organizer for my clients every year around this time, so they have all their records together when they are ready for me. But this is a great list to have whether you do your taxes by yourself or you hand them over to your Enrolled Agent or other tax professional

Income Information & Taxes Paid:

  • Social Security Numbers for yourself, spouse and dependents. 
  • All your general taxable income information including W-2's, 1099s etc. 
  • Do you get tips on your job? Hope you keep records of that, you will need it. 
  • Unemployment income if you filed for it, you'll receive a Form W-2G from your state. 
  • Alimony paid & received are deductible & taxable. 
  • Gambling winnings are taxable & losses are deductible to the extent of the winnings- so Forms W-2G's and records of losses. 
  • Retirement distributions, Social Security statements and Forms 5498 showing basis in your accounts.
  • Estimates Paid to the feds and the state.

  • Deduction Information:

  • Homeowners may have mortgage interest statements, property tax and other related expenses. Interest paid on home equity loans or line of credit. 
  • Medical and dental expenses out of pocket. 
  • Other deductible taxes: prior year state taxes paid, local income taxes, personal property taxes, sales tax write-offs if you had major purchases
  • Charitable contributions, both cash & non-cash. 
  • Casualty or theft losses if you had any, not reimbursed by your insurance company is deductible on your taxes. 
  • Hope you have been keeping track of your unreimbursed work-related expenses, including expenses of looking for a new job. 
  • Some investment expenses are deductible, so you had hefty advisor fees? Let your tax pro know of them. They may also be listed on the brokerage statements. 

  • Other Life Status Changes That Effect Your Taxes: 

  • Marriage or Divorce.
  • Yourself, your spouse or dependents going to college.
  • Major Improvements to your home. 
  • Renting out real estate. 
  • Birth or adoption of a child. 
  • Moving in connection with your job.
  • Cancellation of non-residential debt.
  • Served in the military, received combat pay? That has special treatment
  • Had grandchildren? Gifted money to their Education Savings Plan?

  • Some Other Information You May Need:

    > Bank account information if you want your refund direct deposited. (Safest recommended way)
    > If you had a problem with Identity theft and the IRS issued you a PIN, then you will need that to e-file. 
    This is no way an exhaustive list, you may need more documents depending on your unique tax situation. Do make your appointment with an Enrolled Agent today to get your taxes prepared. If this Enrolled Agent is a member of the National Association of Enrolled Agents (the NAEA), you will then be assured of meeting a tax professional with 30 annual Continuing Professional Education hours to be back you up. 

    As always, read my disclaimer here. Please consult a qualified tax professional for your unique tax needs. More of my contact information is on my website,


    Thursday, December 31, 2015

    Hee-Haw! It's All Serious Business At The 2015 FATCA Roundup!!

    A lot has been written about the Foreign Account Tax Compliance Act {FATCA} in the past year. As this year comes to a close and I write up my 89th post, I wanted to give you all, my dear readers a synopsis at your finger-tips, a round-up, if you will of some major FATCA events for 2015: 

    1. FBAR Deadlines Changed:

    On July 31, 2015 President Obama signed the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 into law, which modified the due date of several key forms for Americans with foreign income and Americans living abroad. That includes the Report of Foreign Bank and Financial Accounts, or Form 114, colloquially known as the FBAR

    Any U.S. person with a financial interest in, or signatory authority over, foreign financial accounts must file the FBAR, if at any time, the aggregate value of their relevant foreign account or accounts exceeds $10,000. An account over which a person has signature authority but no ownership interest is included in this computation.

    The new due date for the FBAR will be April 15th with a maximum 6-month extension till October 15th. For US citizens living abroad the deadline will be June 15th. The new deadlines are effective starting for the 2016 tax returns due in 2017. 

    More details on the new FBAR deadline in my blog post here.

    2. More countries entered into IGAs with the USA:

    More than 50 countries have entered into Inter-Government Agreements (IGAs) with the US since FATCA came into existence. 

    Countries that sign the FATCA Agreement or Inter Governmental Agreement (IGA) are considered tax compliant. This means the banks/ foreign financial institutions (FFI) in these countries send information as demanded by the IRS to their own tax authorities which is then shared with the IRS. This is "Model 1". 

    Other countries, like Switzerland, for example, leave it up to the banks/ financial institutions to come to an agreement with the IRS, this is a "Model 2" agreement. 

    The consequence of these IGAs have been varied and wide-spread, the harshest being many banks in these countries do not want to do business with US citizens any more. 

    More on this in my blog post here.

    3. New Rules on Gifts & Inheritances from Expats to any US person Proposed by the IRS:

    Under the proposed regulations, if an expatriate meets the covered expatriate definition in Sec. 877A, he or she is considered a covered expatriate for Sec. 2801 purposes at all times after the expatriation date, except during any period beginning after that date during which he or she is subject to U.S. estate or gift tax as a U.S. citizen or resident. 

    This new component { Prop. Reg. 28.2801-1} says that US taxpayers who receive gifts & inheritances from people who had previously expatriated are subject to  gift and/or estate taxes on the receipt of such gift or bequest. This tax is imposed on US Citizens who receive, directly or indirectly, "covered" gifts or "covered" bequests from a "covered" expatriate. 

    More on this on my blog post here.

    4. Offshore Compliance Programs-OVDP/ Streamlined Procedures/Swiss Bank Programs:

    These disclosure programs are not new to 2015 but the Internal Revenue Service has been increasingly coming up with new rules and penalties through these programs. More banks signing agreements with the USA have resulted in increased penalties for those with accounts in such banks going into the OVDP. 

    I wrote in detail about these programs earlier this year in this post here.

    5. Final Regulations on Form 8938:

    A release from the Internal Revenue Service on the 10th of March, 2015 incorporated into the Form 8938 instructions for reporting requirements made under the Final Regulations for § 6038D of the Internal Revenue Code. It also contains additional information not included in the published 2014 Instructions for Form 8938.

    More about the final regulations in my blog post here

    6. You Owe Taxes? Your Passport Could Be Confiscated!:

    December 4th, 2015, President Obama signed into law the "FAST Act". FAST stands for Fixing America's Surface Transport, tucked away in this Act, is a provision that the Dept. of State  can deny a passport/ deny renewal/ revoke passport previously issued ti a seriously delinquent tax payer. 

    The "seriously delinquent taxpayer" is defined as one who has a tax debt greater than $50,000, including interest and penalties, this debt should have been assessed and a notice of lien or notice of levy should have been filed. 

    Although this does not strictly fall under the FATCA rules, a large number of US citizens who live abroad are concerned about this. One of the primary reasons being that the IRS still does not have the means to process foreign addresses which are in a different format than US addresses and due to this many times IRS notices/ letters to such citizens living abroad are returned undelivered. 

    7. Case Filed Against Imposition of FATCA by Rand Paul Et Al:

    A case was filed against the enforcement of FATCA by Senator Rand Paul and other opponents of this Act. It suffered an initial set-back when Judge Thomas Rose of the United States District Court refused to grant preliminary injunctive relief in October 2015. 

    The latest news on this case is that a plaintiff's memorandum was filed by James Bopp, Jr from The Bopp Law Firm of Indiana. Mr. Bopp has argued that the plaintiffs should be granted relief requested based on their claims for four reasons: the IGAs are unconstitutional sole executive agreements, reporting requirements violate equal protection for Americans living abroad, the challenged penalties violate the Excessive Fines Clause, and reporting requirements violate the Fourth Amendment.

    We will have to wait and watch what Judge Rose's ruling will be on this matter. 

    Entire document here. 

    Dear Readers: Thank you all so much for your following on Google Plus, Tax connections and LinkedIn. Wish you all a fantastic and "compliant" 2016! 

    As always, read my disclaimer here. Please consult a qualified tax professional for your unique tax needs. More of my contact information is on my website,  

    Tuesday, December 1, 2015

    Foreign Trust Protection for Foreign Assets: A Myth Busted!

    It is not uncommon anymore that a US Citizen has parents and elders living in foreign countries who may have set up trusts in those countries under (obviously) its laws. There are also US Citizens who have expatriated to/ now live in foreign countries and set up trusts for their children there. 

    Today's post was prompted by questions from several clients about an urban legend that seems to be perpetuating itself out there: "You do not have any US tax reporting requirements if you are a US citizen/ permanent resident and your foreign assets and/ investments are in a foreign trust." 

    If you have believed this to be true and set up a trust in a foreign country or are thinking of taking this step or are just plain curious about foreign trusts, then you need to read this blog post.  U.S.owners and beneficiaries of foreign trusts have complex U.S. reporting requirements, which are different from the reporting requirements imposed on U.S.
    domestic trusts. 

    Please Note: All references to “U.S. owners” and “U.S. beneficiaries” refer to persons who are considered U.S. residents for income tax purposes; i.e., either a U.S. citizen, a green card holder, or someone who meets the “substantial presence test” in any tax year. 

    The U.S. taxation of the income and distributions from a foreign trust depends on the type of foreign trust and the status of the trust’s beneficiaries at the time of distribution. 

    How is the Tax Residence of the trust determined?
    If your trust fails the "Court Test" and the "Control Test", then it is considered a foreign trust as per § 301.7701-7 (a) (2).  

    For purposes of brevity for this post:

    • A "Court Test" is fulfilled when "any federal, state, or local court within the United States is able to exercise primary authority over substantially all of the administration of the trust (the authority under local law to render orders or judgments)". There are also bright-lines rules and safe harbor rules for fulfilling the "Court Test". 
    • "Control Test" is fulfilled when "one or more U.S. persons have the authority, by vote or otherwise, to make all “substantial decisions” of the trust with no other person having veto power (except for the grantor or beneficiary acting in a fiduciary capacity)".
    • The trust will automatically fail these two tests if the trust instrument provides words to the effect that will cause it fail the 2 tests. 

    There are TWO types of foreign trusts, Foreign Grantor Trust and Foreign Nongrantor Trust:
    The "grantor" is the person who creates the trust, and the beneficiaries are the persons identified in the trust to receive the assets. The "trustee" is a person who manages the trust for the benefit of someone else, namely, a "beneficiary". 

    The US income taxation of a foreign trust depends on whether the trust is a grantor or nongrantor trust. Income from a foreign grantor trust is generally taxed to the trust’s grantor, rather than to the trust itself or to the trust’s beneficiaries. 

    On the contrary, income from a foreign nongrantor trust is generally taxed when distributed to US beneficiaries, except to the extent US source or effectively connected income is earned and retained by the trust, in which case the nongrantor trust would pay US income tax for the year such income is earned. 

    The following flow charts explain the tax compliance obligations of the trustees & US beneficiaries of the foreign grantor & nongrantor trusts. They only provide a broad overview of the obligations of the trustees, US owners and beneficiaries. 

    Flow Chart for Foreign Grantor Trust Tax Compliance Obligations:

    Flow Chart for Foreign Nongrantor Trust Tax Compliance Obligations:

    There will also be reporting & tax obligations if a beneficiary uses property owned by a foreign trust, since the use itself is considered a "distribution". 

    The disclosure requirements under § 6038D also apply to foreign trusts and so also the requirements to file the FinCEN Form 114. 

    The Internal Revenue Service states that, "Citizens and residents of the United States are taxed on their worldwide income. To help prevent the use of foreign trusts and other offshore entities for tax avoidance or deferral, Congress has enacted several specific provisions in the Internal Revenue Code. Some provisions trigger recognition of gains that would otherwise be deferred. Others deny deferral of tax on income moved offshore."

    So going back to the urban legend we started with, please consult an Enrolled Agent, CPA or Tax Attorney well-versed in foreign trusts if you are a beneficiary/ trustee of a foreign trust or are thinking of setting up a trust in a foreign country. 

    Bibliography:; §301.7701-7; Form 3520; Form 3520-A; § 6308D; Abusive Offshore Tax Avoidance Schemes from the IRS. 

    As always, read my disclaimer here. Please consult a qualified tax professional for your unique tax needs. More of my contact information is on my website, 

    Thursday, November 19, 2015

    Your Field Guide To Foreign Account Disclosure Programs- Which Is Your Pick?

    There is a lot of buzz going around these days about FBARs, foreign accounts, foreign corporations, IGAs, tax treaties, more & more Swiss banks on the roll-call list, you name it and they cry "FATCA"! Confusion all-around, fear mongers are having a field day, may be rightfully so, fines are high and penalties higher. People are ready to hit the panic button. Or so one would think! 

    To quote my favorite Buddhist teacher, Thich Nhat Hanh here, “People have a hard time letting go of their suffering. Out of a fear of the unknown, they prefer suffering that is familiar.” 

    If you are wondering what a Thich Nhat Hanh quote is doing on a tax blog but you have one hand hovering over the panic button, just think about it...without going into many of Buddhism's wonderful practices let me assure you, do decide to end your suffering, however first- DON'T PANIC! Second, hire yourself a good Enrolled Agent who specializes in foreign tax matters. And third, look through your options

    The Internal Revenue Service (IRS) has offered several formal offshore voluntary disclosure programs or initiatives since 2009. These programs are for those qualifying taxpayers who would like to come forward and disclose their foreign bank accounts in exchange for reduced penalties and a promise not to be criminally investigated. This was called the Offshore Voluntary Disclosure Program or the OVDP.  

    This was updated in June of 2014, and major changes were brought to the OVDP, some penalties were increased from 27.5% to 50%. The IRS also announced the Streamlined Compliance Filing Procedures for US Citizens living abroad and then expanded that to include US citizens living in the country. There are also some other disclosure programs that can be used if you qualify. 

    In the post today, we will touch briefly on each disclosure program: 
    A. The Offshore Voluntary Disclosure Program {OVDP}: 

    Taxpayers can avoid a long list of potential penalties by participating in the OVDP. They would have to submit to a standard, uniform penalty structure administered through the OVDP. Under the 2014 OVDP, participating taxpayers agree to pay a penalty equal to 27.5% of the highest year's aggregate value of OVDP Assets during a period that covers the past eight years, along with any applicable failure-to-file, failure-to-pay, and accuracy-­related penalties.

    One has to go through a preclearance request process to determine if the taxpayer is eligible for the OVDP. Once the preclearance is received from the IRS, the taxpayer can go ahead and file the OVDP. The process of filing the OVDP is very complicated and arduous. It is not recommended you go through this as a DIY project.   

    B. The Streamlined Compliance Filing Procedures:

    The Streamlined Filing Compliance Procedures are available to both qualifying US citizens living abroad and withing the country. The taxpayers filing under this program have to certify that their failure to report their foreign bank accounts/ financial assets and pay all tax due in respect of income from it was not due to willful conduct. 

    Under this process, the $1,500 tax threshold and the risk assessment process associated with it have been eliminated. It is open to both eligible individual taxpayers and to the estates of individual taxpayers.The taxpayers or their estates must have valid Tax Identification Numbers (TINs) and they must pay any previous penalty assessments on their delinquent returns before participating under the Streamlined Compliance Procedure.   

    C. Delinquent Foreign Bank and Financial Accounts or FBARs Submission Procedure:

    If you have properly reported your income from your foreign financial assets and paid all tax on timely filed US tax returns, the IRS will not impose a penalty on your failure to file the delinquent FBARs. 

    More detail on my recent blog post here on this procedure.  

    D. Delinquent International Information Return Submission Procedures :

    Taxpayers who do not qualify to use the OVDP or the Streamlined Filing Compliance Procedures can use this procedure if they have not filed one or more required international information returns and have a reasonable cause for not doing so in a timely manner. As a part of the reasonable cause statement under this procedure, the taxpayer must certify that any entity for which the information return is being filed did not engage in tax evasion.  Without the reasonable cause statement attached, penalties may be assessed. 

    You CANNOT use any of the above programs if:

    1. The Internal Revenue Service has already initiated a civil examination or criminal investigation of the taxpayer OR 
    2. Has notified the taxpayer that it intends to begin an examination or investigation OR 
    3. If it has already received information from a third party (e.g., informant, other governmental agency, or the media) alerting it to the specific taxpayer's noncompliance OR
    4. If it has acquired information directly related to the taxpayer's specific liability from a criminal enforcement action. 

    Under all the programs, the taxpayer must make good-faith arrangements to satisfy the tax, interest, and penalties determined to apply. Please consult with an Enrolled Agent who specializes in these matters to decide which of these programs would be best suited to your needs. 

    Bibliography: Internal Revenue Manual;; Legal Information Institute; AICPA Resources- Tax Advisor 

    As always, read my disclaimer here. Please consult a qualified tax professional for your unique tax needs. More of my contact information is on my website,

    Friday, November 13, 2015

    Story of a Good Citizen Who Reports Foreign Bank Accounts But Forgets FBARs! Huh?

    I have to say today's blog post was triggered by a phone call a few weeks ago. The would-be client wanted to report his foreign bank accounts. Apparently, this good citizen had all his Is dotted & Ts crossed- so to speak- so what was the problem you ask? I hate to say this, but it happens more than you would think. He did not know there were additional reporting requirements involved when it came to bank accounts in foreign financial institutions. (More on FBAR thresholds in my post here)

    You have to know that the IRS will not impose a penalty for the failure to file the delinquent FBARs if you "properly" reported the foreign bank accounts on your US tax returns, and paid tax on the income from these accounts and have not been contacted by the IRS for an income tax examination or a request for the delinquent returns has not been made by them. 

    In which case, you can file the FBARs (electronically at FinCEN) for the previous years in which the foreign bank accounts were above the $10,000 mark, including a statement explaining why the FBARs are late. 

    Simple? In essence- yes. But here's what you have to remember:

    1. You should make sure you are not required to report these foreign bank accounts under the Offshore Voluntary Disclosure Program (post here) or the Streamlined Domestic Procedures to file delinquent or amended tax returns to report and pay additional tax.

    2. You cannot be under a civil examination or a criminal investigation by the IRS. 

    3. You should not have already been contacted by the IRS about the delinquent FBARs.  

    4. The FBARs will not be subject to audit automatically, but may be selected for audit for many other reasons that the IRS may determine. 

    5. All open accounts during the disclosure period should be reported. So an account could be currently closed but if it was open during the period of disclosure, details have to be provided on the FBARs. 

    If the above applies to you, know that a consultation with a knowledgeable Enrolled Agent specializing in Foreign Bank Account Regulations is a must. 

    As always, read my disclaimer here. Please consult a qualified tax professional for your unique tax needs. More of my contact information is on my website.

    Friday, November 6, 2015

    QLACs and RMDs: Need a Break On Your Required Minimum Distribution? Read This!

    I had a number of clients hit the magic RMD age this past year. RMD is an acronym for Required Minimum Distributions, if you are getting close to 70 years of age, you will be hearing that a lot. Even if that magic number is quite a ways down the road for you, this is a post you will want to read & remember. 

    Read more about RMDs in detail here on my blog post.  

    For a quick recap about what Required Minimum Distributions are, the Internal Revenue Service (IRS) defines it as "Required Minimum Distributions generally are minimum amounts that a retirement plan account owner must withdraw annually starting with the year that he or she reaches 70 ½ years of age or, if later, the year in which he or she retires. However, if the retirement plan account is an IRA or the account owner is a 5% owner of the business sponsoring the retirement plan, the RMDs must begin once the account holder is age 70 ½, regardless of whether he or she is retired."

    The idea of required minimum distributions at the age of 70 years has been in contention for sometime now. Many people these days are still working at that age and are not ready to draw from their retirement accounts. People also are living much longer due to many medical advances and sometimes outliving their retirement savings does become a matter of concern. 

    In essence, a retiree must begin to take RMDs from his/ her qualified plans and IRAs by April 1st of the year after the year in which he or she turns 70 and a half in age. This requirement is postponed for qualified plans like the 401(k) if the taxpayer is still working and not a 50% or more owner of a business. The amount of the RMD is calculated on the account balances at the end of the previous year and life expectancy tables. 

    Like I said earlier, since there were a few more clients than usual this year that hit 70 and half years in age, we heard the term "QLAC" thrown around a lot. "QLAC" stands for qualified longevity annuity contracts. The Internal Revenue Services (IRS) recognizing the above short-comings so to speak, approved QLACs to be included for use in Traditional IRAs, 401(k)s and other approved retirement plans in the middle of 2014. 

     Under the new rules: 
    • You can use up to 25% of your non-Roth retirement funds or $125,000, whichever is less, to fund a QLAC
    • You can defer funds from the QLAC for an additional 15 years or till you reach 85 years of age
    • You can lessen your RMDs
    • Since QLACs cannot include a variable, indexed or comparable component, they must be fixed annuities, hence your principal is protected. 
    • The QLAC is indexed for inflation
    Do contact your Enrolled Agent or your financial advisor if this is an option for you and please make an informed decision regrading your retirement & your estate needs.

    Bibliography: IRB 2014-30; Journal of Accountancy; CPA Practice Advisor

    As always, read my disclaimer here. Please consult a qualified tax professional for your unique tax needs. More of my contact information is on my website,