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,