Expatriate Tax Reporting Obligations

1
Expatriate Tax Reporting Obligations

• U.S. citizen or resident alien worldwide income
  is subject to U.S. income tax regardless of where
  you are living.
• The income tax filing requirements that apply to
  U.S. citizens or residents living in the United
  States are the same to those that have worldwide
  income.
• They are several income tax benefits that may
  apply if you meet certain requirements while
  living abroad.
• Some may be able to exclude from your income a
  limited amount of your foreign earned income.
  Also may be able either to exclude or to deduct
  from gross income your housing amount.
• But to claim these benefits, you must file a tax
  return and elect the exclusion. You may be able
  to claim a tax credit or an itemized deduction
  for the foreign income taxes that you pay.
• Also, under tax treaties or conventions that the
  United States has with many foreign countries,
  you may be able to reduce your foreign tax
  liability

2
INCOME EARNED ABROAD

• You may qualify for an exclusion from tax of up
  to 87,600 (2008)/ 91,400 (2009) in income
  earned while working abroad. However, the tax
  return must be file to claim the exclusion.
• Foreign earned income is income received from
  services you perform outside of the United
  States. Excluded from gross earned income is your
  allowance housing costs that are over a certain
  base amount.
• Generally, you will qualify for these benefits if
  your tax home is in a foreign country, or
  countries, throughout your period of Bona-fide
  foreign residence or physical presence.

3
Bona fide residence or physical presence test
1) A U.S. citizen who is a bona-fide resident of
a foreign country or countries for an
uninterrupted period that includes a complete tax
year, or 2) A U.S. resident alien who is a
citizen or national of a country with which the
United States has an income tax treaty in effect
and who is a bona-fide resident of a foreign
country or countries for an uninterrupted period
that includes an entire tax year, or 3) A U.S.
citizen or a U.S. resident alien who is
physically present in a foreign country or
countries for at least 330 full days during any
period of 12 consecutive months.
4
TAX HOME

• The tax home is the area of your main place of
  business, employment, or post of duty where you
  are permanently engaged to work.
• You are not considered to have a tax home in a
  foreign country for any period during which your
  abode in the United States, but being temporally
  present in the United States or maintaining a
  dwelling there, does not mean that your abode is
  in the United States.
• A foreign country is conceder any territory under
  the sovereignty of a government other than that
  of the United States, including air space and
  territorial waters.
• Also included the seabed and subsoil of those
  submarine areas adjacent to the territorial
  waters of the foreign country and over which it
  has exclusive rights under international law to
  explore and exploit natural resources.

5
The waiver of time requirements.
You may not have to meet the minimum time
requirements for bona-fide residence or physical
presence if you have to leave the foreign
country. Examples War, civil unrest, or
similar conditions in the country that prevented
you from conducting normal business. You must,
however, be able to show that you reasonably
could have expected to meet the minimum time
requirements.
6
TRAVEL RESTRICTIONS

• If U.S. travel restrictions are violated, you
  will not be treated as being a bona-fide resident
  of, or physically present in, a foreign country
  for any day during which you are present in a
  country in violation of the restrictions.
• The income that you earn from sources within such
  a country for services performed during travel
  restrictions does not qualify as foreign earned
  income, and housing expenses that you incur
  within that country while you are present in that
  country in violation of travel restrictions
  cannot be included in figuring your foreign
  housing amount.

7
EXCLUSION OF FOREIGN EARNED INCOME

• If the tax home is in a foreign country and you
  meet either the bona fide residence test or the
  physical presence test, you can choose to exclude
  from gross income an amount limited to the
  foreign earned income.
• Your income must be for services in a foreign
  country during the period of foreign residence or
  presence. However, exclude the pay you receive as
  an employee of the U.S. Government or its
  agencies.
• You cannot exclude pay you receive for services
  abroad for Armed Forces exchanges, officers'
  mess, exchange services, etc., operated by the
  U.S. Army, Navy, or Air Force.

8
FOREIGN CREDITS AND DEDUCTIONS

• If you claim the exclusion, you cannot claim any
  credits or deductions that are related to the
  excluded income.
• Foreign tax credit or deduction cannot be claim
  for any foreign income tax paid on the excluded
  income. Nor can you claim the earned income
  credit if you claim the exclusion.
• Also, for IRA purposes, the excluded income is
  not considered compensation and, for figuring
  deductible contributions when you are covered by
  an employer retirement plan, is included in your
  modified adjusted gross income.

9
FOREIGN AMOUNT EXCLUDABLE

• If your tax home is in a foreign country and you
  qualify under either the bona fide residence test
  or physical presence test for all of the calendar
  year, you can exclude your foreign income earned
  during the year up to 87,600 (08).
• However, if you qualify under either test for
  only part of the year, you must reduce ratably
  the 87,600 maximum based on the number of days
  within the tax year you qualified under one of
  the two tests.

10
FOREIGN HOUSING EXCLUSION

• If your tax home is in a foreign country and you
  meet either the bona fide residence test or the
  physical presence test, you may be able to claim
  exclusion or a deduction from gross income for a
  housing amount paid to you. 
• Housing amount is the excess, if any, of your
  allowable housing expenses for the tax year over
  a base amount.
• You can include the rental value of housing
  provided by your employer in return for your
  services.
• Also, include the allowable housing expenses of
  a second foreign household for your spouse and
  dependents if they did not live with you because
  of dangerous, unhealthy, or otherwise adverse
  living conditions at your tax home.
• You may exclude your housing amount from income
  to the extent it is from employer-provided
  amounts.

Continue
11

• Claiming the exclusion, you cannot claim any
  credits or deductions related to exclude income,
  including a credit or deduction for any foreign
  income tax paid on the excluded income.
• Housing deduction If self-employed and housing
  amount is not provided by employer, you can
  deduct it in arriving at your adjusted gross
  income, but the deduction is limited to the
  amount your foreign earned income for the tax
  year is more than the excluded foreign earned
  income and housing amount.
•  
• Foreign Housing Carryover If housing amount in a
  tax year cannot be deduct because of the limit,
  you can carry over the unused part to the next
  year.
• You can deduct this carryover to the extent the
  limit for that year is more than your housing
  deduction for that year. You cannot carry over
  any remaining amount to any future tax year.
• By choosing the exclusion you make a separate
  choice to exclude foreign earned income or to
  exclude or deduct your foreign housing amount.

Continue
12

• If you choose to take both the foreign housing
  exclusion and the foreign earned income
  exclusion, you must figure your foreign housing
  exclusion first. Your foreign earned income
  exclusion is then limited to the smaller of (a)
  your annual exclusion limit or (b) the excess of
  your foreign earned income over your foreign
  housing exclusion.
• Once you choose to exclude your foreign earned
  income or housing amount, that choice remains in
  effect for that year and all future years unless
  you revoke it. You can revoke your choice for any
  tax year.
• However, if you revoke your choice for a tax
  year, you cannot claim the exclusion again for
  your next 5 tax years without the approval of the
  IRS.
• Exclusion of employer-provided meals and lodging
  If as a condition of employment you are required
  to live in a camp in a foreign country that is
  provided by or for your employer, you can exclude
  the value of any meals and lodging furnished to
  you, your spouse, and your dependents.

Continue
13
For this exclusion, a camp is lodging that is
1) Provided for your employer's convenience
because the place where you work is in a remote
area where satisfactory housing is not available
to you on the open market within a reasonable
commuting distance, 2) Located as close as
practicable in the area where you work, and 3)
Provided in a common area or enclave that is not
available to the public for lodging or
accommodations and that normally houses at least
10 employees.
14
FOREIGN INCOME TAXES

• A limited amount of the foreign income tax you
  pay can be credited against your U.S. tax
  liability or deducted in figuring taxable income
  on your U.S. income tax return. It is usually to
  your advantage to claim a credit for foreign
  taxes rather than to deduct them.
• A credit reduces your U.S. tax liability, and any
  excess may be carried back and carried forward to
  other years. A deduction only reduces your
  taxable income and may be taken only in the
  current year.
• You must treat all foreign income taxes in the
  same way. You generally cannot deduct some
  foreign income taxes and take a credit for
  others.
• Foreign tax credit Credit foreign taxes against
  your tax liability, complete Form 1116, Foreign
  Tax Credit, and attach it to your U.S. income tax
  return.

15
FOREIGN TAX LIMIT

• Your credit cannot be more than the part of your
  U.S. income tax liability allocable to your
  taxable income from sources outside the United
  States.
• If you have no U.S. income tax liability, or if
  all your foreign income is exempt from U.S. tax,
  you will not be able to claim a foreign tax
  credit.
• Foreign taxes you paid or incurred during the
  year exceed the limit on your credit for the
  current year you can carry back the unused
  foreign taxes as credits to 2 prior tax years and
  then carry forward any remaining unused foreign
  taxes to 5 later tax years.
• Foreign taxes paid on excluded income. You cannot
  claim a credit for foreign taxes paid on amounts
  excluded from gross income under the foreign
  earned income exclusion or the housing amount
  exclusion, discussed earlier.

16
SELF-EMPLOYED PERSONS ABROAD

• You must file a U.S. income tax return if you had
  400 or more of net earnings from
  self-employment, regardless of your age.
• You must pay self-employment tax on your
  self-employment income even if it is excludable
  as foreign earned income in figuring your income
  tax. Net earnings from self-employment include
  the income earned both in a foreign country and
  in the United States. 

17
ESTIMATED TAXES WHILE ABROAD

• If you are working abroad for a foreign employer,
  you may have to pay estimated tax, since not all
  foreign employers withhold U.S. tax from your
  wages.
• Your estimated tax is the total of your estimated
  income tax and self-employment tax for the year
  minus your expected withholding for the year.
• When you estimate your gross income, do not
  include the income that you expect to exclude.
  You may subtract from income your estimated
  housing deduction in figuring your estimated tax
  liability. However, if the actual exclusion or
  deduction is less than you expected, you may be
  subject to a penalty on the underpayment.
• Use Form 1040 ES, Estimated Tax for Individuals,
  to estimate your tax. The requirements for filing
  and paying estimated tax are generally the same
  as those you would follow if you were in the
  United States.
• When to file If your tax year is the calendar
  year, the due date for filing your income tax
  return is usually April 15 of the following year.

18
US WITHHOLDING TAX

• You may be able to have your employer discontinue
  withholding income tax from all or a part of your
  wages. You can do this if you expect to qualify
  for the income exclusions under either the bona
  fide residence test or the physical presence
  test.
• Withholding from pension payments. U.S. payers of
  benefits from employer deferred compensation
  plans (such as employer pension, annuity, or
  profit-sharing plans), individual retirement
  plans, and commercial annuities generally must
  withhold income tax from the payments or
  distributions. Withholding will not apply only if
  you choose exemption from withholding. You cannot
  choose exemption unless you provide the payer of
  the benefits with a correct taxpayer
  identification number and a residence address in
  the United States or a U.S. possession or unless
  you certify to the payer that you are not a U.S.
  citizen or resident alien or someone who left the
  United States to avoid tax.
• For rules that apply to non periodic
  distributions from qualified employer plans and
  tax-sheltered annuity plans get Publication 575,
  Pension and Annuity Income (Including Simplified
  General Rule).

19
FILING EXTENSIONS WHILE ABROAD

• If you are a U.S. citizen or resident and both
  your tax home and your abode are outside the
  United States and Puerto Rico on the regular due
  date of your return, you are automatically
  granted an extension usually to June 15 to file
  your return and pay any tax due. You do not have
  to file a special form to receive this extension.
  You must, however, attach a statement to your tax
  return when you file it showing that you are
  eligible for this automatic extension.
• It may benefit you to file for an additional
  extension of time to file. You may benefit if, on
  the due date for filing, you have not yet met
  either the bona fide residence test or the
  physical presence test, but you expect to qualify
  after the automatic extension discussed above and
  have no tax liability. To file for an additional
  extension, send Form 2350, Application for
  Extension of Time To File U.S. Individual Income
  Tax Return, to the Internal Revenue Service
  Center in Philadelphia or to your local IRS
  representative. Send the form after the close of
  your tax year but before the end of the first
  extension. If an extension is granted, it will be
  to a date after you expect to meet the time
  requirements for the bona fide residence or
  physical presence test. You must attach the
  approved Form 2350 to your income tax return when
  you file it. 

20
FOREIGN BANK and FINANCIAL ACCOUNTS

• If you had any financial interest in, or
  signature or other authority over, a bank
  account, securities account, or other financial
  account in a foreign country at any time during
  the tax year, you may have to complete Treasury
  Department Form TD 90-22.1, Report of Foreign
  Bank and Financial Accounts, and file it with the
  Department of the Treasury, P.O. Box 32621,
  Detroit, MI 48232. You must file this form no
  matter where you live. You need not file this
  form if the combined assets in the account(s) are
  10,000 or less during the entire year, or if the
  assets are with a U.S. military banking facility
  operated by a U.S. financial institution.

21
TAX AGREEMENTS FOR EXPATRIATES

• There are a number of tax agreements that may
  affect the taxes of an expatriate. Some of these
  are host country specific. Always check the
  country you live in to check tax status.

22
Tax Treaty Benefits

• U.S. tax treaties or conventions with many
  foreign countries entitle U.S. residents to
  certain credits, deductions, exemptions and
  reduced foreign tax rates. This is a way to pay
  less tax to those host countries.
• For example, most tax treaties allow U.S.
  resident to exempt part or all of their income
  for personal services from the treaty (host)
  country's income tax if they are in the treaty
  country for a limited number of days.

23
Information Exchange Agreements

• A host of countries have information sharing
  agreements with the United States
• Barbados, Bermuda, Colombia, Costa Rica,
  Dominican, Dominican Republic, Grenada, Guyana,
  Honduras, Jamaica, Marshall Islands, Mexico,
  Peru, St. Lucia, Trinidad and Tobago.
•  
• IRS Announces Voluntary Disclosure Program
  Affecting U.S. Persons with Offshore Financial
  Accounts
• March 27, 2009
• On March 26, 2009, the Internal Revenue Service
  ("IRS") made public a program allowing U.S.
  persons with foreign financial accounts to
  greatly reduce their exposure to significant
  civil penalties and, in many cases, to eliminate
  the prospects of criminal prosecution.

Continue
24

• The program comes in the wake of UBS's admission
  to the existence of some 50,000 accounts held by
  U.S. persons and of increasing pressure on the
  IRS to deal with tax avoidance schemes utilizing
  offshore financial structures.
• Many U.S. persons with undisclosed offshore
  financial arrangements have been hesitant to
  disclose them to the government for fear of the
  multiple steep penalties that may apply to such
  offshore financial accounts and arrangements. In
  many instances, particularly where trusts or
  foreign corporations are involved, the panoply of
  penalties may exceed the highest balance in the
  offshore account.
• The new Penalty Framework for Voluntary
  Disclosure Requests applies to all voluntary
  disclosure requests containing offshore issues.
  It will apply to all pending voluntary disclosure
  requests and will remain in effect until
  September 23, 2009. After a preliminary
  determination by IRS Criminal Investigation that
  a taxpayer is eligible for voluntary disclosure,
  all voluntary disclosure requests will be sent to
  the Philadelphia Offshore Identification Unit
  ("POIU") for civil processing.

Continue
25

• The POIU is authorized to enter into closing
  agreements relative to offshore issues in the
  following manner
• Assess all tax and interest going back six years
  unless the account/entity was formed or acquired
  within the six-year period, in which case the
  lookback period will start with the earliest year
  in which the account/entity was formed/acquired
• File or amend all returns, including a Report of
  Foreign Bank and Financial Account ("FBAR")
• Assess an accuracy-related penalty or delinquency
  penalty on all years (the reasonable-cause
  exception will not apply)
• In lieu of all other penalties that may apply,
  including FBAR and information return penalties,
  assess a penalty equal to 20 percent of the
  amount in the foreign bank accounts/entities in
  the year with the highest aggregate account/asset
  value and
• A 5-percent penalty is substituted for the
  foregoing 20-percent penalty where (a) the
  taxpayer did not open or cause to be opened any
  accounts or formed any entities, (2) there has
  been no activity (deposits, withdrawals) in the
  account or entity during the period the taxpayer
  controlled the account/entity, and (3) all
  applicable U.S. taxes have been paid on the funds
  in the account/entity and only account/entity
  earnings have escaped U.S. taxation.

Continue
26
The IRS will not pursue charges of criminal tax
evasion against taxpayers who voluntarily
disclose their offshore assets under this new
policy and   The IRS will not pursue other
penalties against participating taxpayers, such
as the Code Sec. 6663 fraud penalties (75-percent
of the unpaid tax) or the statutory penalty for
willful failure to file a TD F 90-22.1, Report of
Foreign Bank and Financial Accounts Report,
(FBAR) (the greater of 100,000 or 50-percent of
the foreign account balance) that both annually
apply to undisclosed accounts and assets during
the relevant tax years.

• This is not the first occasion that the IRS has
  offered an "amnesty" program for U.S. persons
  with tax-evading offshore financial arrangements.
  In 2003, the IRS uncovered evidence suggesting
  that tens of thousands of U.S. persons accessed
  untaxed dollars through the use of credit and
  debit cards issued by institutions in so-called
  bank secrecy jurisdictions. The 2003 Offshore
  Voluntary Compliance Initiative offered
  incentives but was generally avoided by U.S.
  persons with offshore financial arrangements.

Continue
27

• The IRS anticipates that the new penalty
  framework will result in significant
  participation by U.S. persons with undisclosed
  foreign accounts. Several advantages of
  participation in voluntary disclosure exist. U.S.
  persons taking advantage of voluntary disclosure
  are likely to be in a position to repatriate
  their funds to the U.S. without concern. The new
  penalty structure is far less steep than the
  penalties that could otherwise be imposed. For
  most U.S. persons, participation in voluntary
  disclosure is likely to eliminate the prospect
  for criminal prosecution.
• The new penalty structure is open to U.S. persons
  until September 23, 2009, at which time its
  benefits will expire. Those U.S. persons who do
  not participate may face stiff penalties and the
  prospect of criminal prosecution.
• Voluntary disclosure may be appropriate for many
  U.S. persons with a financial interest in or
  signature authority over one or more undisclosed
  offshore accounts. Before making a voluntary
  disclosure, the particular circumstances of each
  U.S. person should be considered by a qualified
  tax advisor, and the pros and cons of disclosure
  should also be weighed, given the particular
  circumstances of the case.

28
30 Questions by CID
Here are 30 questions that Special Agents in the
Criminal Investigation Division are asking
taxpayers (or their agents) who are submitting
under the Voluntary Compliance Disclosure program.

1. What prompted the taxpayers to go into the
   voluntary disclosure program?
2. Where are the funds held?
3. What is the total amount of funds?
4. Do you have bank records?
5. What was the initial source of the funds?
6. Who assisted the taxpayer in opening the bank
   account?
7. Who told the taxpayer about the bank account
   (This seems to refer to  an inherited account)?
8. Is there a trust involved?
9. How did the taxpayer deposit money into the
   account?
10. How did the taxpayer withdraw money from the
    account?
11. Are there any credit or debit cards associated
    with the accounts?
12. How did the taxpayer correspond with the bank
    regarding the account?

Continue
29

1. Who is the current bank contact?
2. Did the taxpayer ever meet face to face with the
   banker?
3. Did the taxpayer travel outside the U.S. to
   conduct banking activities?
4. Where were the bank statements sent?
5. Who has access to the accounts?
6. Who prepared the tax returns?
7. Have you prepared amended tax returns?
8. Were the returns timely filed?
9. Did the taxpayers know about the issues discussed
   today?
10. Did the taxpayer file FBARs with regard to this
    account?  If not, why not?
11. If the account was inherited, when did the
    taxpayer take possession of the account?
12. Did the account trade in U.S. securities?
13. Did the taxpayers actively trade securities in
    the account?
14. Did the taxpayer file foreign returns?
15. Does the taxpayer have any direct or indirect
    control over any foreign entities?
16. Did the taxpayer file returns with regard to the
    foreign entities?
17. This question is specifically directed at UBS AG
    account holders  Has the taxpayer been notified
    that the U.S. requested information pertaining to
    the taxpayers UBS bank account?
18. In which countries do the taxpayer have foreign
    accounts?

30
Notes
Offshore Case Development. An SBSE memorandum
provides that field personnel should give
priority treatment to offshore transactions and
entities during examinations, with a special
emphasis on detecting unreported income.
Examiners are instructed to use all tools,
including interviewing taxpayers, making third
party contacts, and timely issuing summonses in
order to gather information and make
determinations about applicable penalties.
Managers are asked to ensure that income and
penalty considerations are fully developed and
documented. The memorandum also advises that as
of March 23, 2009, taxpayers will no longer be
permitted to minimize penalties through the Last
Chance Compliance Initiative (LCCI). Relevant
portions of the IRM addressing the LCCI are in
the process of being obsoleted. Taxpayers in open
examinations where LCCI terms have been offered
will be able to resolve their cases under LCCI if
they respond to the examiner within 15 days of
their prior notification.
31
Voluntary Disclosure. Another SBSE memorandum
addresses a change in the processing of voluntary
disclosure requests containing offshore issues.
Such requests will continue to be initially
screened by Criminal Investigation (CI) to
determine eligibility for voluntary disclosure
and, if involving only domestic issues, will be
forwarded to Area Planning and Special Programs
for civil processing. Voluntary disclosure
eligibility for offshore issues, including those
in current inventory, will be initially screened
by CI, and forwarded to the Philadelphia Offshore
Identification Unit (POIU) for processing.   For
submitted, but as yet unresolved, disclosure
requests forwarded to the POIU, an internal LMSB
memorandum sets forth a liability and penalty
framework to be used for processing such cases
during the next six months. POIU is authorized to
assess all taxes and interest going back six
years, or the period of existence of an
account/entity if shorter, require the taxpayer
to file or amend all returns, and impose an
applicable penalty as set forth in the
memorandum.