No hiding from US tax authorities
A Bermudian (and his foreign-born spouse) come home for permanent residence in Bermuda.
A reader FAQ featured on September 16, 2017 asked the following: “A Bermudian friend of ours is returning to Bermuda with his foreign spouse after two decades living in the United States. What are the ramifications of his US connections? Does he have to do anything? (goo.gl/N8EK9s).
My disclosure: the following discussion is general in nature and cannot be considered in any way whatsoever as specific tax, investment, immigration, estate, legal, or any other financial planning advice for anyone referencing this article. Tax, financial, legal, immigration legislation and regulations are subject to change without notice. I make no representation as to the current accuracy or representation of hypothetical facts. Readers, if you, or anyone you know has similar questions, you must seek advice specific to your personal situation from qualified US tax professionals (in Bermuda) experienced in both domestic and international tax and finance relevant to the jurisdictions connected, both United States and Bermuda.
Returning Bermudian fact pattern:
• Owns US property with rental income.
• Has a US 401k individual pension account.
• May be eligible for US social security on retirement.
• Wants to start a new Bermuda business.
• May have US life insurance, US wills, US bank and investment accounts.
What we don’t know is even more critical. How long did he really live and work in the United States? Is he a US citizen, a US green card holder, or just a foreign person who was a tax resident in the United States. We also do not know whether he may have become a simultaneous dual-citizen of Bermuda and the United States at birth, a distinction we will discuss in part 3, October 21, 2017. We assume that it is highly unlikely that he would have resided in the US for so many years without being a US citizen or a US green card holder.
The US taxing authorities position relative to US persons, according to US Internal Revenue Service. (goo.gl/3XhBQp )
If you are a US citizen or resident alien, the rules for filing income, estate, and gift tax returns and paying estimated tax are generally the same whether you are in the US or abroad. Your worldwide income is subject to US income tax, regardless of where you reside.
This US tax responsibility requirement continues to apply whether our Bermudian/US person is just returning home, or, critically, to US connected persons who may not have lived in the US.
A composite story. “I’m a US citizen on paper, but emotionally I have always been a Bermudian. So, I declined to renew my passport, it is sitting in a drawer. I’ve cut all ties to the US, and as far as I am concerned — this stuff is a dead issue. I am free of the US.”
However, when I inquired whether he/she used the US passport when travelling? The sheepish answer was: “Well, not always, but I’ve had to use it a few times because some countries have rejected a Bermuda passport.”
So much for cutting ties and leaving vital documents in a drawer.
Question, readers. Do you think that the US might be tracking this passport use?
What are the consequences of being out-of-compliance?
US federal income, gift, estate tax position
• Possible significant cost for catch-up US tax preparation and advice.
• Penalties for non-wilful non-compliance; claiming that one did not understand or know about one’s US tax compliance responsibilities is wearing extremely thin these days.
• Severe penalties if a taxpayer is deemed to have deliberately wilfully avoided US tax compliance.
• Interest and penalties for non-payment of tax liabilities, if any.
• Additional financial penalties for non-filing and non-disclosure of foreign bank accounts and financial interests (FBARS) with US Treasury Financial Crimes Enforcement Network BSA E-filing System (https://bsaefiling.fincen.treas.gov/NoRegFBARFiler.html)
• Possible forfeiture of US passport and denial of entry into the United States, but you will still have to settle up with your US tax responsibilities, this also applies generally to US green card holders.
US state tax positions
California, New York, Virginia (and other US states) are rigorously determined to collect all tax due from their residents. You are a considered a resident in a state in the United States — until you notify formally, say on final tax return or notification — that you have permanently given up US residency and have moved abroad.
• An individual left California, moves back to Bermuda, never notifies California Revenue of his change in permanent resident status.
• Still owns rental property in California.
• New York and Virginia insist that if you own property in their state, it is your permanent place of abode. See two court cases: https://goo.gl/BK47cB and Virginia Tax Commissioner ruling, 11-116.
• You will continue to receive a tax bill that, if ignored, will eventually result in said state taking legal steps for collection, such as attaching a lien or levying your US bank accounts and your property.
Well, how will they know? Readers, believe it or not, from time to time, there is that thought is out there. “How will any of these tax authorities know? Why are they bothering me? I am a Bermudian, my allegiance and my permanent home is here in Bermuda now.”
Under the mandatory Bermuda/US International Governmental Agreement Model 2 promulgated December 19, 2013, foreign financial institutions (local banks, etc) must provide full disclosure of US-connected persons in Bermuda to the US Internal Revenue Service (goo.gl/ZwUCh1).
Needless to say, for our composite individual emotional disconnect is not an excuse; if caught, he/she may be assessed significant tax and filing penalties for non-compliance, possibly under the more punitive wilful tax avoidance category.
A US citizen’s (and US green card holder) taxation and reporting responsibilities never go away. There is no escape if an individual wants to maintain that US status connectivity.
And many do.
Know what your tax status is and get with the programme. Do not put your US passport or your US green card in a drawer — as if it did not exist.
Next week: why it matters, and what decisions does our reader’s friend have to make?
Martha Harris Myron CPA JSM: Masters of Law — International Tax and Financial Services. Pondstraddler, life financial perspectives for Bermuda islanders with multinational families and international connections on the Great Atlantic Pond. Contact: firstname.lastname@example.org
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