Five US expat tax nightmares and how to avoid them

It’s no secret that filing US expat taxes can be intimidating. There are many nuances to consider and myriad of forms to sort through – not to mention the prospect of stiff penalties if you do things wrong – willingly or not.

Five US expat tax nightmares and how to avoid them
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However, knowing where the pitfalls lie can be the first step toward staying out of trouble, and with that in mind we caught up with David McKeegan, Co-Founder of Greenback Expat Tax Service for insights on five common “nightmare scenarios” for US expats – and what you can do to avoid them.

Not filing your US federal tax return

It’s a common scenario: you’ve left the US more or less permanently, lived abroad for years and dutifully filed your foreign tax return each year. All good, right? Not so fast. A few years down the line, you learn you still have tax filing obligations in the US. Yikes! Surely this can’t be true, right?

“It’s true: you are required to file your federal tax return annually and report all worldwide income,” McKeegan warns.

If you’ve forgotten to file due to “unfamiliarity” with the law, the IRS offers the Streamlined Procedures Program that allows ignorant taxpayers to catch up (this being the IRS, there’s even a special form for certifying your lack of filing was “non-wilful”).

And what if you knew the rules but did “wilfully” ignore them, perhaps because you didn’t want to disclose foreign accounts or have to deal with reporting on foreign investments?

“Those who didn’t file after knowing their obligations may consider the Offshore Voluntary Disclosure Program (OVDP),” advises McKeegan.

The OVDP, besides giving you yet another memorable IRS abbreviation, lets you come clean and avoid the risk of and IRS investigation or (gulp) criminal prosecution. However, the IRS has recently announced that the OVDP will be ending on September 28, 2018, so those who need to utilize this program should do so as soon as possible.

Not filing the Statement of Specified Foreign Financial Assets (Form 8938)

Be warned! This nightmare scenario can result in a $10,000 penalty – with further penalties up to $50,000 if don’t file your Form 8938 following IRS warnings.

But who exactly needs to file this Statement of Specified Foreign Financial Assets?

“You are meant to file this form along with your federal tax return if your specified financial assets at the end of the calendar year are over $200,000 living abroad or $50,000 if living in the US,” McKeegan explains.

“This is the big one – so much so that the US government enacted it under the Foreign Account Tax Compliance Act (FATCA) with the intent of preventing tax evasion.”

FATCA imposes reporting requirements on US expats as well as banks, foreign investment companies, brokers, and insurance companies, all of which must report to the IRS directly on financial accounts or foreign entities owned by US persons.

“If the income relating to these foreign assets is not declared on the tax return, you are penalized at 40 percent on the attributable tax,” McKeegan adds.

Non-compliance with FBAR (Foreign Bank Account Reporting)

This is another doozy of a nightmare. Indeed, non-compliance on your FBAR can leave your financial life FUBAR.

“Those who are required and do not file may be looking at civil monetary penalties,” says McKeegan. “Up to $12,459 per violation judged to be non-wilful. And for wilful violations, the penalty may be $124,588 or 50 percent of the balance in the account – whichever is higher.”

Ouch! And what exactly is FBAR?

“As a US person you are required to file an FBAR if you had ownership or signature authority on one or more financial accounts outside of the US and if the aggregate balance of all the accounts was more than $10,000 at any time during the year – for even a day,” he explains.

And just to make things trickier, the FBAR filing procedure is a bit different. Rather than filing with your federal tax return, the FBAR is filed online via the BSA E-Filing System – although it should still be filed by the April 15th tax filing deadline, although it is possible to get an automatic six-month extension until October 15th.

Getting lost trying to navigate PFIC rules

Do you own any foreign mutual funds? If so, you’d better pay attention to this additional gem of an IRS abbreviation.

PFIC stands for Passive Foreign Investment Companies and refers to non-US registered funds. Reporting rules for them were originally aimed to discourage taxpayers living in the US from investing in foreign tax havens. And getting the reporting right is no easy task.

“The IRS estimates over forty hours are required to research the law, record keep, and prepare the form for one mutual fund,” says McKeegan. “In addition, each PFIC needs to be reported separately on separate 8621 forms, which can be both expensive and time-consuming.”

Indeed, sorting out the proper reporting and calculations for Form 8621 is so complex that your best option is getting help from a tax professional.

“And even if you’re not required to file Form 8621, you still need to confirm if you are required to report it on Form 8938,” he adds.

Complex foreign company investments

Having more than a 10 percent ownership stake in a foreign company can also result in a nightmare scenario when it comes to correctly filing US tax returns.

In such cases, you may need to file Form 5471 – Information Return of US Persons With Respect to Certain Foreign Corporations.

“Be warned that you will need to delve into the four categories of individual filers and understand what a public officer or directorship may entail, as well as the surrounding intricacies. Each category filer has specific forms to be completed and must be accurate to be considered compliant,” says McKeegan.

Things get even more complex if a company in which you own more than a 10 percent is incorporated in a foreign country.

“Like the other scenarios, the penalties can be harsh. Even if the company is reporting losses or not trading it is very important to file,” McKeegan adds.

And if you have expatriated or are contemplating doing so, you really need to make sure you file Form 5471 – not doing so may jeopardize the certification that you have been compliant for the preceding five years or, worse yet, classify you as a covered expat, and leave you subject to hefty expatriation tax penalties.

Bottom line? Speak with a tax professional experienced in this area who can help make sure you comply with all the requirements.

One option is tuning in to this video from a recent free webinar with Greenback Expat Tax Services.

For further information about these scenarios and others, or to speak with an expert on expat tax requirements, contact Greenback Expat Tax Services today!

 This article was produced by The Local Client Studio and sponsored by Greenback Expat Tax Services.

For members


How to see if you have any notifications from the Spanish tax office

The Spanish tax system can seem a little daunting, but one way to simplify things and keep your mind at ease is to stay on top of your online notifications from the tax office. Here's how to do it online.

How to see if you have any notifications from the Spanish tax office

Spanish administration is, to say the least, a little laborious. Infamous for its longwinded, time-consuming processes and systems, even completing the most rudimentary of administrative tasks can become an ordeal and take an entire morning or afternoon as you head between the town hall (ayuntamiento) and bank and police station, and probably back again.

The Spanish tax system is no different, and the various rules and regulations can be particularly confusing. If you’re new in Spain or don’t speak the language, registering yourself, paying taxes and keeping on top of all the various documents and deadlines can be a bit daunting. 

READ ALSO: Will you pay more under Spain’s new social security rates for self-employed?

Many people choose to get a ‘gestor‘, which is like an all-in-one accountant and financial advisor that should, in theory, arrange everything for you. This is particularly common among self-employed people in Spain, as the tax system is even more convoluted for autónomos, as they’re known in Spanish.

They are the first port of call in Spain for the endless bureaucratic processes that come with anything official here; intermediaries between you and the often-complicated government departments.

READ ALSO: What does a ‘gestor’ do in Spain and why you’ll need one

Despite the complicated system of tax returns, fortunately, Spain’s tax office also has a safety net to help you keep on top of your tax obligations. 

Even if you have a gestor, they could miss something and it’s a good idea to be able to check your own notifications. 

 f you’re registered as a taxpayer in Spain, you’ll be able to check any notifications and obligations you have from them online.

Here’s how to do it.

How to see if you have any notifications from the tax office in Spain

  1. The first step is going to the tax office website, which you can access here. From there, you need to click on the ‘Todas las gestiones‘ button at the right of the blue banner at the top of the page.

2. Once you’ve done that you’ll see another page that looks like the one below. From there: click ‘otros servicios‘, which is the option at the bottom of the page.

3. Next, you click on ‘Notificaciones,’ which is halfway down the menu.

READ ALSO: Spanish tax returns: A handy guide for foreigners

4. That will take you to the following screen, where you need to click ‘Consulta de notificaciones y comunicaciones.’

5. You’ll then be prompted to log-in, so you can check your notifications, on a screen like the one below. You can do this with your NIE, digital certificate or [email protected] PIN.

A digital certificate is a piece of software in Spain that you can download on your computer, allowing you to identify yourself during administrative processes. Spain is notorious for its overly laborious bureaucratic systems, but the digital certificate can save you a lot of hassle and allow you to complete many processes online, without having to go in person to the various offices and agencies.

READ MORE: What are the fines and prison sentences for tax evasion in Spain?

If you haven’t got a digital certificate, you can find out how to get one here.

READ ALSO: Access all areas: how to get a digital certificate in Spain to aid online processes

6. Once you’ve done that and logged in, you’ll be taken to the following screen, which is like a sort of notification inbox. Any unread or outstanding notifications or messages you’ve got from the tax office will be in there, and you’re able to search for past documents by number, name, type, date, and whether or not you’ve read them before.

Or, alternatively, once you’re logged in with the digital certificate, you’ll be able to see if you have any unread notifications from the little blue button with your name that shows in the top right-hand corner of the page.