Getting to grips with US tax regulations
What will be next? In just the last six years, our global tax world has ramped up significantly more detailed tax compliance, residency reporting and filing information.
Driven initially by the United States and its Foreign Account Tax Compliance Act initiatives, country-to-country reporting (in numerous forms) is more comprehensive and inclusive as governments seek to identify and derive the appropriate tax revenue from all citizens or residents responsible. Acronyms such as Fatca, CRS, BEPS, CbC are in constant media exposure.
Please note that this article is focused on the thousands of Bermuda residents with United States connections through US citizenships, US green card-holder status, multinational families, and Bermudians who have overstayed in US, who are considered US tax residents for income tax purposes (the Group of US persons) and Bermuda residents with US real estate and business interests, all of whom will, or have responsibilities for complying with United States tax regulations.
The 2017 tax year will continue to be a complicated and possibly expensive one for all of the above due to new US tax law regulations, changes, amendments, and directives all complex and lengthily detailed.
The responsibility for understanding all reporting and filing requirements in order to be fully compliant with US tax law has become almost beyond the comprehension of the average US person. This has been a constant reiteration of Nina Olson, the United States National Taxpayer Advocate, who for more than ten years has expressed serious concerns about the tax compliance challenges of Americans and their families overseas.
In her 2011 Report to Congress, Ms Olson stated that, “the complexity of international tax law, combined with the procedural burden on international taxpayers, creates an environment where honest taxpayers who are trying their best to comply simply cannot.
“For some, this means paying more US tax than is legally required, while others may be subject to steep civil and criminal penalties. Some US taxpayers abroad find the tax requirements so confusing and the burden of complying with them so great that they give up their US citizenship.”
Nothing appears to have improved, either. The 2017 NTA report to US Congress highlighted concerns about the recent US passport revocation legislation and many other concerns in Ms Olson’s Most Serious Problems report. Here is the link https://goo.gl/JTt1Ef
On an individual level, internationally US-connected persons should be aware of some common problem areas (not inclusive) that are confusing, prone to computation mistakes, or represent errors of interpretation or misinformation.
The Biggest Mistake. The US-connected individual does not file a US income tax return because his/her personal foreign-earned compensation falls below the Foreign Earned Income Exclusion limit (2017 — $102,100).
The individual must file the appropriate tax return with US Internal Revenue Service in order to make the claim for the exclusion. Otherwise, their foreign income is considered subject to US taxation.
1. Self-preparing US tax returns using various paper tax forms with by-hand calculations. Simply following the same method each year seems safe, but can be a recipe for disaster.
2. Using obsolete forms and/or omitting new forms required. US IRS changes tax forms and dates frequently due to refinement and revision of US tax regulations.
3. Reporting only US-source income. US persons are subject to tax on all their worldwide income, not just US sources.
4. Incorrect application of the foreign-earned income exclusion.
5. Incorrect filing status and dependent classifications.
6. Mailing extensions-to-file and original tax returns without detailed proof of mailing and a legible date stamp. Always use some form of proof of mailing: registered receipts, advice of delivery receipts, tracking numbers with recipient signature required. Far too numerous instances of lost in passage important US IRS notices sent to Bermuda residents or posted from Bermuda to US occur, unfortunately, far too often in Bermuda.
7. Missing items on the report of foreign banks and financial accounts. The list of reportable financial interests is extensive.
8. Failing to link the report of foreign banks to the individual tax return (FATCA). This one missed by self-preparers, sometimes international and US domestic tax practitioners, too.
9. Using the wrong name ie did you marry/divorce? Does your tax return name data match your US Social Security legal name?
10. US green card-holders who have not formally given up their green cards need to ascertain their correct US tax and filing compliance status.
11. Bermuda residents invested in US rental property (and other businesses) will have possible US tax filing obligations to both federal and state.
12. Foreign mutual funds, investment portfolios are not treated the same as US investments, ie different tax liability and gain/loss structures.
13. Interests in foreign corporations (minority or majority), foreign partnerships, foreign trusts, foreign estates, and related-type entities may encompass a host of complex filing and reporting for entity activity.
14. Gifts from foreign nationals, including spouses, distributions from foreign estates, and foreign trusts, loans/guarantor to/from foreign trusts, foreign companies, partnerships, foundations, etc.
Over the years, I’ve been told by some individuals that preparing a United States tax return is as easy as following a recipe in a book!
It emphatically is NOT.
Every single reporting line represents thousands of underlying data nuances and interpretations of US Internal Revenue Code and supporting tax law. Never underestimate the power of the United States Internal Revenue Service. See related article by my friend, US tax attorney, Virginia LaTorre Jeker, JD. IRS On a Roll with Passport Denials and Revocations.
Self-preparers, please consider using electronic tax software instead of paper returns. Many ordinary honest mistakes can be avoided by following the tax software that is absolutely current to US tax law and format.
Those feeling overwhelmed, consult a local Bermuda CPA tax professional registered with US Internal Revenue Service. https://irs.treasury.gov/rpo/rpo.jsf
It’s your choice. Remember, this is general information only and cannot be considered specific US tax advice for your personal situation.
Martha Harris Myron CPA CFP 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