Thursday, February 28, 2019

Interesting Court Cases: When Your Friend Tells You Not To File an FBAR!

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Clients tell me many times about how they heard about disclosing their foreign bank accounts because their friends were doing it. It is funny when I am asked why should they disclose their foreign bank accounts when their friends are not doing that. I am reminded of those times when as kids we would ask our parents for permission to something mundane, and be subjected to an inquisition! The fun is because I get to say something most Indian kids grow up listening to their mom say it many times when , "Would you go jump in a well if your friend did it?" The angst is lost in translation but you get me, don't you? 

Something along similar lines must have happened with the Horowitzes. Peter and Susan Horowitz were US Citizens living in Saudi Arabia between years 1984 to 2001 and they opened a bank account in Switzerland with UBS. The Horowitz's never closed the account on their return to the US. By 2008, the account had grown to $2 million. Towards the end of 2008, Peter closed the account and tried to open a joint account with his wife at a bank named Finter. But the bank did not add her on because she was not present, hence the account remained in Peter's name only till 2009 when Susan traveled to Switzerland and her name was added to it. 

The Horowitzes' tax returns were filed using tax summaries sent to their US tax preparers. Peter never asked his tax preparers if he needed to disclose this bank account. Their tax returns were filed every year with the questions on Schedule B asking if they have foreign bank accounts being answered with a "No".

A long story short, the IRS held that willfulness penalty applied with respect to both taxpayers for 2007 and with respect to Peter for 2008. 

The Horowitzes testified that they had conversations with other expatriates living in the United States and they believed that income earned in Saudi Arabia was only subject to taxes in Saudi Arabia. Peter said he did not believe he had FBAR filing requirements for 2007 and 2008, Susan said she did not know what an FBAR was. The tax accountants never asked them if they had accounts overseas nor did they explain the Schedule B questions regarding the foreign account questions. The Horowitzes argued that their friends told them they did not need to pay taxes on interest in their foreign accounts. 

The Court argued that it did not have any information from which the court could assess whether it was reasonable for them to accept what their friends said as legally correct. Their friends' views did not override the clear instructions on Schedule B. It was also deemed that the very fact that the Horowitzes were having conversations with their friends about the taxability of interest on their foreign accounts meant that they were aware about their compliance needs. They should have had the same conversation with their accountants!  The Court inferred based on these facts willful blindness could be inferred. 

Moral of the story: If you have foreign bank accounts, please have conversations with your tax professionals on HOW TO disclose the accounts not conversations with your friends on HOW NOT TO. If your tax professionals are not aware of your compliance needs, find an Enrolled Agent on the NAEA Find a Tax Expert Directory who is an expert at expatriate taxation. And definitely do not try to do this yourself. 

Bibliography: Horowitz, (DC MD 1/18/2019) 123 AFTR 2d ¶2019-362

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Consult with a Circular 230 Tax Professional for your unique tax needs. Please read my disclaimer here. If you have any questions regarding this issue or other tax matters, all of my contact information is on my website, www.mntaxbiz.com



    

Tuesday, January 22, 2019

What's New on the 2018 Form 1040NR: Small Changes, Big Impact!


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Do train stations make you wistful? My husband and I lived on the East Coast when we first moved to the US and sometimes took the train from Baltimore to DC. Passing the town of Riverdale, MD got us all excited because like every other Indian teenager of our generation, we had grown up on a rather unhealthy dose of Archie comics! 

Well, it was around this time that I discovered Tax Law and found it quite fascinating. I started to prepare our own taxes which involved Form 1040NR's, India-US Treaty knowledge and the rest is rather choppy history which is reserved for another post because today we need to talk to about this 2018 Form 1040NR. 

For the longest time ever this foreign cousin of the good ol' Form 1040 had a rather mundane existence, nothing usually changed on it. Tax geeks got all excited when the Form 1040NR finally entered the digital age in 2017, we had hardly settled down from that when the BIG 2017 Tax Reform happened and everything pretty much is different now. 

Just so we are clear, the Form itself has not changed much but if you have to file the NR, your bottom-line will change due to the following: 

1. No Personal Exemption: First off, the personal exemption has been removed, so that nice $4,050 that reduced your taxable income? Not available to you anymore.If you file a Form 1040NR, your taxable income will be higher. 

2. Standard Deduction is Higher: Now this is the twist in the Treaty tale I was talking about earlier, the higher standard deduction will only help students and researchers from India. Why? Because they are the only non-resident aliens who are allowed to claim the standard deduction on their Form 1040NR per the India-US Tax Treaty. Students/ student-trainees/ researchers from India on an F1/ J1 visa will be able to lower their taxable income. All others see #3. 

3. Itemized Deductions Have Changed: The great Mahatma Gandhi marched to protest the Salt Tax imposed by the British Empire, this was a turning point in the Indian struggle for independence from the British. There was no such momentum with the SALT cap protest by the people in the US and many states. SALT here my dear readers stands for "State And Local Taxes". Those non-resident aliens who cannot take the standard deduction ( See #2), had the opportunity to write off state and local taxes they paid as part of the Itemized Deductions on Schedule A, that is now capped at $10,000. 

I have not seen many foreign students or researchers earn a lot of money (been there, done that), so the above may be non-consequential to most. However, adding salt to injury (too much?), Miscellaneous Deductions have been removed from Schedule A as well.  

Any personal casualty loss or loss from theft is also no longer allowed unless they occurred in federally declared disaster areas. 

Some solace: These disallowances are temporary through 2025. 

4. Moving Expense Cannot Be Deducted Any Longer: So you are a non-resident alien who moved to the United States in connection with your employment or are self-employed? You can no longer deduct your moving expenses to the US. You can now deduct your moving expenses only if you are a member of the Armed Forces. 

The 2017 Tax Reform has many changes and many forms and instructions are still work-in-progress. The Instructions to the 2018 Form 1040NR at the time of posting still has a draft watermark. Do not attempt to do this by yourself, hire a tax professional to help you navigate the Law. 

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Consult with a Circular 230 Tax Professional for your unique needs and make sure your questions are answered. Please read my disclaimer here. If you have any questions regarding this issue or other tax matters, all of my contact information is on my website, www.mntaxbiz.com