Friday, March 16, 2012

How To Report Foreign Real Estate Held In A So-Called Foreign "Trust"

Your starting point should be form 8938 which covers all foreign assets including everything which would be included on this June's FBARs. The 8938 has a part that deals with interests in foreign financial institutions and there is a part which deals with "everything else." That section lists the relevant forms for foreign corporations, (5471) trusts,( 3520's ) and partnerships, (8865)  the idea being regardless of a taxable event, all foreign assets over a stated threshold now have to be registered with the IRS, and if you kindly file a form 3520, for example, the IRS will not make you repeat the details on the 8938. 

 I cannot imagine having to ask for the abatement of any late penalties on a 3520 if you are timely attaching new FATCA form 8938 to the 1040 which clearly contemplates the attachment of a 3520. The Service should not have a problem with it. 

 2012 is the first year of FATCA.  The year 1040 filers have to register their foreign assets with Uncle. Next year and the year after, almost every foreign bank in the world (if they want to continue to handle U.S. source income, ) will be required to sign an agreement with the IRS to turn over the SSNs of all their American depositors or close their accounts. 

A truthful completion of this year's 8938 requires all 1040 filers to disclose with this year's1040, whether there were foreign assets owned BEFORE 2011. 

 Tax preparers should be asking clients direct questions about foreign holdings. Your files should document your conversation about the details of foreign HOLDINGS because we are moving beyond the concept of a taxable event triggering a reporting requirement, to a full foreign asset disclosure concept where foreign assets are registered with the government.

Wednesday, March 14, 2012

American Expatriates in Panama and FATCA

I recently spent a week on a FATCA exploratory journey visiting with bankers, CPA’s, attorneys and American ex patriots in Panama.  Despite the bad press America has been getting all over the world today for a variety of reasons, Panama is one place on the planet where surprisingly, Americans are made to feel welcome almost everywhere you go.  We first invaded that country in 1856 to protect an American railway company from local nationalists. Between 1903, when we stole the country from Columbia to build the Panama Canal,  through  1989 when we went in to dislodge CIA bad boy Manuel Noriega, you would need more than two hands to count all the other times our government has “intervened” militarily or secretly in Panamanian affairs. Nevertheless, they still love us down there and Americans have been moving there in droves to escape the hassles of life in the States.
I was invited by Lee Zeltzer, an American expat and kindred spirit, to speak at the Tuesday Community Meeting in Boquete, to give an update on FATCA.  Boquete is an idyllic spot-- a community about an hour’s flight from Panama City in the cool mountainous region of Chiriquí, where a large number of American expats have made their home.  I had prepared a detailed talk on the elements of FATCA and the new requirements of form 8938. The room was packed with close to 200 people and fifty people were turned away for lack of space. Needless to say, FATCA and U.S. taxes are a hot button issue for everyone.
Despite my lecture preparations, everyone wanted to get right down to questions.  To no one’s surprise, the concerns of American expatriates in Panama parallel the concerns of American expatriates all over the world:  why do we have to file FBARs if the very same information requested has to be reported on new form 8938? If my home in Panama is in the name of a Panamanian trust, do I have to fill out forms 3520 or 3520A?  What if I don’t want my local Boquete bank to pass on my social security number to the IRS?  Are my social security checks from the U.S. subject to FATCA withholding?  How does the IRS “audit” American taxpayers who live abroad?  What if I haven’t filed for years? What if I want to simply start filing now?  Is there anything I have to do about all the years in which I did not file?  Is renouncing my U.S. citizenship a good way to escape all of the problems people seem to be having with FBARs and U.S. tax compliance generally? How safe is it enter the IRS’s voluntary disclosure program? What is my maximum exposure? What does it mean to opt out of a voluntary disclosure? Can we trust the IRS to be fair if we come forward now and seek to be compliant?  Can the IRS seize my Panamanian bank accounts? If all my savings is in gold bars, do I have to worry about FBARs or form 8938? Why is it that the IRS can never seem to be able to take a joke?
I made a lot of new friends in Boquete and my visit there seemed to confirm what I suspected all along; for American expatriates living in Panama and anywhere else in the world, being an American is kind of like the Eagles song, Hotel California.  “Good night said the watchman. We are programed to receive.  You can check out any time you like but you can never leave!”
In my next post I will share some observations after meeting with a number of Panamanian bankers.

Tuesday, March 6, 2012

American Ex Pats Beware!

How You Could Increase Your Chance Of An Audit When You File This Year's New Form 8938, Statement of Foreign Assets

There is a new wrinkle this year on required disclosure of foreign assets.
The general rule used to be that “taxable events” during the past year determined what had to be reported on an annual tax return. For example if you sold an asset or received a dividend or other distribution from that asset you would be required to report that taxable event on a tax return.  Now, at least with respect to foreign assets, the requirement is to TELL THE IRS WHAT YOU HAVE, regardless of a taxable event.   
The government opened this door with the requirement to file FBARs which were required since the 1970’s but not enforced until around 2004.  The FBAR (or form TD F 90-22.1) requires filers to simply report the existence of an interest in a foreign financial institution regardless of whether there was a taxable event during the reporting year. For example, even if a foreign bank account earned no interest that year, the very existence of the foreign bank account was required to be disclosed.  FATCA has expanded the definition of what must be disclosed with the requirement to file new form 8938. The real question now is, what is there that doesn’t have to be reported to the government apart from personal effects or a personal residence?  The answer is “nothing.” Everything must be reported if the dollar threshold is met unless it is a personal residence in the taxpayer’s own name, or personal effects such as jewelry.
The reason for this change, in part, is the fact that FBARs are not required to be attached to your tax returns and in fact are filed with a government data center which is miles away from any nearby IRS service center where tax returns are normally filed.  Even though FBARs are mailed to a data center under the overall control of the United States Treasury Department, an IRS agent auditing a return of an American ex pat would have to separately request a taxpayer’s FBAR from the FBAR data center to complete an audit. This made it a hassle for agents to complete their audit on one case and move on to the next, so Congress made it easier for the IRS as part of FATCA to require the filing of TWO foreign asset reports.  One is for foreign bank accounts (FBARs or TD F90.22.1) which is still required, but now, filers must attach new form 8938: Statement of Specified Foreign Financial Assets to their annual tax returns.  Assuming a taxpayer files his tax return on time on April 15,  new form 8938 requires the taxpayer to “tell all” once, and then again on June 30, the due date for filing FBARs, at least for all of the taxpayer’s foreign bank accounts.     
New form 8938 is deceptively simply but contains some traps for the unwary. In part I regarding foreign bank accounts, the filer must check a box and disclose whether the account was opened or closed during the tax year.  If the “opened” box is not checked, an examining agent would readily conclude that the filer has had this account since before 2011.  Similarly,  In Part II where every other foreign investment or other property is required to be shown,  if the form is  properly filled out, the taxpayer is required in effect, to make a statement  as to whether the  asset was owned prior to 2011.
The IRS likes to think it operates efficiently. That means they like to pick returns for audit which are likely to disclose abuses of the law as opposed to conducting audits which produce a “no change” or relatively small adjustments. While it is true that most agents are just as happy to close a case with no change as opposed to one with a lot of adjustments, IRS management wants to use their agents effectively and that means spending their scarce resources where they get their best bang for the buck.
It is not hard to connect the dots here. A truthful filing of form 8938 essentially opens the door for an agent to ask, “you didn’t indicate on your form 8938 that this bank account or this partnership interest was closed or acquired during 2011. How long have you had it and where did the money come from to acquire it?
 The point here is very simple. The IRS has gotten pretty good at matching data from other sources and previously filed returns.  Filers should make sure that the information submitted on current forms is not only accurate but consistent with other or previous filings.