US-Steuerberatung – Ihr Partner bei US-Steuerfragen
- Foreign Financial Account Reporting (FBAR)
- Additional Reporting Requirements by US Taxpayers Holding Foreign Financial Assets (Form 8938)
- Passive Foreign Investment Companies (PFICs)
- Foreign Pensions and Retirement Accounts
- Controlled Foreign Corporations (CFCs)
- Streamlined Filing Compliance Procedures For Taxpayers Who Had A Transition Tax Liability
- The Streamlined Filing Procedure – How it works
- “Quiet Disclosure” – Playing with Fire
- Consequences of the FATCA Regime on US taxpayers not in compliance with their US tax requirements
Offshore Steuererklärungen USA Deutschland
The US is the only OECD country to tax its citizens, including an estimated 7 million expatriates, wherever they reside. For US citizens or resident aliens, the rules for filing income, estate, and gift tax returns and paying estimated tax are generally the same whether they are in the United States or abroad. Their worldwide income is subject to US income tax, regardless of where they reside. The 2010 Foreign Account Tax Compliance Act ( FATCA), designed to curb tax evasion by US taxpayers with offshore assets, has made tax matters very complicated, requiring tax expertise typically not available abroad. Our experience has shown that US citizens or residents living outside the US are not always aware of the additional reporting requirements.
Penalty regimes associated with these reporting requirements are severe. Nondisclosure can result in severe consequences. Taxpayers who previously failed to comply with US tax laws may have several options available to get on par with reporting requirements at a lower penalty rate provided they meet certain conditions.
The Tax Cuts and Jobs Act (“TCJA”) made significant changes that affect international and domestic businesses, such as deductions, depreciation, expensing, tax credits, and other tax items. A side-by-side comparison can help taxpayers understand the changes and plan accordingly. Some provisions of the TCJA that affect individual taxpayers can also affect business taxes. Businesses and self-employed individuals should review tax reform changes for individuals and determine how these provisions work with their business situation.
Passport Revocation – Another Arrow in the Quiver
Internal Revenue Code Section 7345 authorizes the IRS to certify that a taxpayer has “seriously delinquent tax debt” to the State Department. Once the State Department receives certification of the tax debt from the IRS, it will not issue or renew the individual’s US passport. It may even revoke the passport. In the case of passport revocation, the State Department may limit the passport to return travel to the US. Having a “seriously delinquent tax debt” generally means that the taxpayer has an outstanding IRS tax bill (i) owing to the IRS more than $55,000 (2022 amount; the figure is adjusted yearly for inflation) in back taxes, penalties and interest AND (ii) the IRS has filed a Notice of Federal Tax Lien and the period to challenge it has expired, or the IRS has issued a levy about the tax debt. The IRS has a detailed information page explaining the process and the rules.
Americans abroad are at an increased risk now that foreign financial institutions and the German Fisc send detailed financial information to the IRS. Suppose tax returns have not been filed or have not correctly been including income. In that case, the IRS can prepare a tax return based on its available information. An IRS-prepared tax return is called a “Substitute for Return” (“SFR”), and it can be a dangerous thing. The IRS uses the SFR to assess the amount of tax owed to calculate applicable penalties and interest and to move forward with the collection process. Because the IRS will prepare the SFR without utilizing any deductions or exemptions that the taxpayer could have otherwise taken, the threshold of more than $55,000 in “seriously delinquent tax debt” can easily be reached.
Please get in touch with us for assistance: The Streamlined Filing Compliance Procedure may be the solution.
Reporting Obligations for Foreign Assets and Investments
Foreign Financial Account Reporting (FBAR)
While reporting obligations have been on the books since the 1970s, reporting requirements and penalties under this regime increased in recent years. Today, US taxpayers are required to disclose their financial interest in or signature or other authority over any foreign financial accounts if the combined value of their account(s) exceeds $10,000 at any time during a given calendar year.
The report must be filed electronically. The prescribed exchange rate for 2022 is 0.936 EUR / 1 USD ( list of all exchange rates since 2001). FinCEN (Financial Crimes Enforcement Network) has issued detailed FBAR – Electronic Filing Instructions.
For more information about the FBAR, please click on the following link or contact us:
Additional Reporting Requirements by US Taxpayers Holding Foreign Financial Assets (Form 8938)
Taxpayers with specified foreign financial assets that exceed certain thresholds must report those assets to the IRS on Form 8938, Statement of Specified Foreign Financial Assets. The new Form 8938 filing requirement does not replace or otherwise affect a taxpayer’s obligation to file FBAR.
Penalties for failure to accurately report offshore transactions can be severe. A summary of these potential penalties, as well as a comparison of is reported on Form 8938, Statement of Specified Foreign Financial Assets, and the Report of Foreign Bank and Financial Accounts (FBAR), can be found on IRS.gov.
For more information about Form 8938, please click on the following link or contact us:
Passive Foreign Investment Companies (PFICs)
Among the most complex of IRS requirements affecting individual taxpayers are the rules for passive foreign investment companies (PFICs). Taxpayers owning interests in PFICs have a significantly higher reporting burden than US taxpayers owning interests in US-based mutual funds. Further complicating matters is that, unlike US-based funds, foreign investments have no obligation to furnish US-based investors with any tax reporting information, so the responsibility falls entirely on the shareholder to determine ownership share and tax obligations arising from that share.
US taxpayers who hold certain types of investment in certain foreign entities generating mostly passive income are required to disclose them. US taxpayers investing in these funds, e.g., in foreign funds or ETFs are taxed even on the undistributed income the foreign investment generates. US taxpayers holding this kind of investment cannot benefit from the potential tax deferral created by a systematic non-distribution of the foreign entity’s income. The PFIC legislation provides options to taxpayers wanting to decrease the burden of this taxing regime.
For more information about PFICs, please click on the following links or contact us:
- Form 8621
- Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund
- German Investment Funds
- AICPA Passive Foreign Investment Company (PFIC) Checklist
- Anwendungsfragen zum Investmentsteuergesetz, BMF Schreiben 21. Mai 2019
Foreign Pensions and Retirement Accounts
US citizens who live and work for significant periods in foreign countries, as well as non-citizens who relocate to the US, often own some type of foreign pension or retirement account. These assets create unforeseen tax and reporting obligations.
The primary concern in evaluating the taxability of ownership of foreign retirement accounts is that most overseas plans will not be considered “qualified plans” under IRC 401, which means the accounts generally do not qualify for tax-deferral treatment. In some instances, however, the Double Taxation Treaty and the Totalization Agreement may provide a reprieve, see also www.ssa.gov/international.
Taxpayers required to file a US tax return may have to treat employer contributions to the foreign retirement accounts as taxable compensation, and any increase in the account’s value is taxable in the year the growth occurs.
Another primary concern is the reporting obligation that ownership of foreign retirement account assets creates. Taxpayers with foreign retirement account interests often must file informational reports, such as FinCen Form 114, Report of Foreign Bank and Financial Accounts (FBAR), FATCA reporting, and IRS Form 3520.
For more information about Foreign Pensions and Retirement Accounts, please contact us.
Controlled Foreign Corporations (CFCs)
If a foreign corporation qualifies as a “Controlled Foreign Corporation”, its US shareholders owning 10% or more of the total combined voting power of all classes of stock entitled to vote in this corporation must include certain types of the CFC’s income in their US gross income.
When a US shareholder holds more than 50 percent of the vote or value of a foreign corporation, the company is a controlled foreign corporation or CFC. A US shareholder is a US person who owns 10 percent or more of the foreign corporation’s total voting power. That triggers reporting, including filing an annual IRS Form 5471. It is an understatement to say this is an important form. Failing to file it means penalties, generally $10,000 for each tax form. A separate penalty can apply to each Form 5471 filed late, and to each Form 5471 that is incomplete or inaccurate.
The penalty can apply even if no tax is due on the return. That seems harsh, but the next rule about the statute of limitations is even more surprising. If you have a CFC but fail to file a required Form 5471, your tax return remains open for audit indefinitely. Typically, the statute expires after three or six years, depending on the issue and its magnitude. This statutory override of the regular statute of limitations is sweeping. The IRS not only has an indefinite period to examine and assess taxes on items relating to the missing Form 5471. The IRS can make any adjustments to the entire tax return with no expiration until the required Form 5471 is filed. You might think of a Form 5471 like the signature on your tax return. Without it, it is not a return.
And don’t assume that you have no issue if there is no CFC because US shareholders don’t own over 50%. In fact, Forms 5471 are not only required of US shareholders in CFCs. They are also required when a US shareholder acquires stock that results in 10 percent ownership in any foreign company.
For more information about CFCs, please click on the following link or contact us:
Transnational Tax Information Reporting: A guide
Form 926 – Return by a US Transferor of Property to a Foreign Corporation
Instructions for Form 926
Form 1042S – Foreign Person’s US Source Income Subject to Withholding
Form 1116 – Foreign Tax Credit
Instructions for Form 1116
Form 3520 – Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts
Instructions for Form 3520
Form 3520-A – Annual Information Return of Foreign Trust With a US Owner
Instructions for Form 3520-A
Form 5471 – Information Return of US Persons With Respect To Certain Foreign Corporations
Instructions for Form 5471
Form 8621 – Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund
Instructions for Form 8621
Form 8621-A – Return by a Shareholder Making Certain Late Elections To End Treatment as a Passive Foreign Investment Company
Instructions for Form 8621-A
Form 8832 – Entity Classification Election
Form 8854 – Initial and Annual Expatriation Statement
Instructions for Form 8854
W-8 CE, Notice of Expatriation and Waiver of Treaty Benefits
Form 8858 – Information Return of US Persons With Respect To Foreign Disregarded Entities
Instructions for Form 8858
Form 8865 – Return of US Persons With Respect to Certain Foreign Partnerships
Instructions for Form 8865
Form 8938 – Statement of Specified Foreign Financial Assets
Instructions for Form 8938
Report of Foreign Bank and Financial Accounts
Form 8992 – US Shareholder Calculation of Global Intangible Low-Taxed Income
Instructions for Form 8992
Form 8993 – Section 250 Deduction for Foreign-Derived Intangible Income and GILTI
Instructions for Form 8993
Voluntary Disclosure – Selbstanzeige USA
US taxpayers with unreported foreign assets beware! The Offshore Voluntary Disclosure Program (2014 OVDP) had been used by taxpayers to avoid criminal and to reduce civil penalties for willful failure to report foreign assets. The IRS ended this program on September 28, 2018.
The IRS offers the following options for addressing previous failures to comply with US tax and information return obligations concerning those investments:
- IRS Criminal Investigation Voluntary Disclosure Practice;
In April 2020, the IRS quietly released an updated voluntary disclosure practice form and instructions. The instructions accompanying the form contain answers to myriad questions for practitioners concerned about who is eligible for the disclosure practice.
- Streamlined Filing Compliance Procedures;
- Delinquent FBAR submission procedures; and
- Delinquent international information return submission procedures.
For further information on OVDP, please contact us. We will support you in determining which option is the most appropriate solution.
The courts have made it increasingly easy for the IRS to succeed in proving “willful” behavior. The IRS continues to combat offshore tax avoidance and evasion using whistleblower leads, civil examination, and criminal prosecution. Since 2009, 1,545 taxpayers have been indicted related to international activities through the work of IRS Criminal Investigation. Taxpayers with offshore tax noncompliance skeletons in their closet need to respond to this danger. The appropriate action may vary between taxpayers, depending on the specific facts. Doing nothing is a dangerous game, especially now that the IRS can revoke US Passports due to “seriously delinquent” tax debt. The IRS will maintain a pathway for taxpayers who may have committed criminal acts to voluntarily disclose their past actions and come into compliance with the tax system.
Many people assume that the IRS will not impose penalties if you were not trying to cheat on your taxes. After all, taxes are complicated, and mistakes happen. But the burden is on you to show that you acted reasonably. Relying on professional tax advice can be one way. If you cannot convince the IRS, you will probably end up with penalties. The size of penalties varies, but they are often around 25%. Higher penalties and even criminal prosecution are possible in some cases. You might even have to prove you are right or that your mistakes were innocent. If the IRS believes you were trying to cheat, you could face a civil penalty of 75% or even criminal prosecution. And remember, most criminal tax cases start with civil audits.
Streamlined Filing Compliance Procedures For Taxpayers Who Had A Transition Tax Liability
The “transition tax” per section 965 of the Internal Revenue Code generally treats the accumulated post-1986 deferred foreign income (DFI) of a Specified Foreign Corporation (SFC) as Subpart F income. Section 965(a) defines DFI as the greater of the DFI of such SFC determined as of November 2, 2017 or December 31, 2017. For general information on the transition tax, see Questions and Answers about Reporting Related to Section 965 on 2017 Tax Returns.
A taxpayer who uses the Streamlined Filing Compliance Procedures to come into compliance remedies a specific number of tax years, generally the most recent 3 years for which the U.S. tax return due date (or properly applied for extended due date) has passed. Taxpayers that own SFCs and have a section 965(a) inclusion using the Streamlined Filing Compliance Procedures must come into compliance for the section 965 transition tax in their submission and include the tax year in which the transition tax inclusion might occur (generally 2017 and/or 2018) even if that tax year would not be within the standard three-year lookback period. In other words, the lookback period for any submission to the Streamlined Filing Compliance Procedures involving SFCs with a section 965(a) inclusion in 2017 must include tax year 2017 and include all subsequent tax years.
The Streamlined Filing Procedure – How it works
Returns submitted under the Streamlined Filing Compliance Procedures would not automatically be subject to an IRS audit. The IRS would select returns under existing audit selection processes as they apply to any US tax return. The tax return may also be subject to verification procedures for accuracy. The completeness of submissions may be checked against information received from banks, financial advisors, and other sources. Thus, returns submitted under the streamlined procedures may be subject to IRS examination, additional civil penalties, and even criminal liability, if appropriate. This process has become more stringent. The audit now includes an interview process, and a request for relevant documents as an auditor determines whether you qualify for a non-willful designation. After a taxpayer has completed the streamlined filing compliance procedures, he or she will have to comply with US law for all future years and file returns according to regular filing procedures.
The IRS provides the following material for addressing previous failures to comply with US tax and information return obligations concerning those investments:
- Streamlined Filing Compliance Procedures
- US Taxpayers Residing Outside the United States
- Required: Certification by US Person Residing Outside of the US – see note below
- US Taxpayers Residing in the United States
- Required: Certification by US Person Residing in the US – see note below
- Delinquent FBAR submission procedures; and
- Delinquent international information return submission procedures.
- Form 14653 – Foreign Streamlined Certification – see note below
- Form 14654 – Domestic Streamlined Certification – see note below
“Quiet Disclosure” – Playing with Fire
The IRS warns against so-called “Quiet Disclosures”. IRM 4.63.3 makes it very clear that any quiet disclosure is subject to the full range of civil and/or criminal penalties (including FBAR penalties) and that all quiet disclosures are supposed to be forwarded, by the receiving department, to the quiet disclosure coordinator. For quiet disclosures, the formal information flow within the IRS has not yet been posted. Right now, it is up to the center receiving the returns.
The IRS is aware that some taxpayers have made „quiet disclosures“ by filing amended returns, filing delinquent FBARs, and paying any related tax and interest for previously unreported income from offshore assets without otherwise notifying the IRS. Unlike voluntary disclosure, quiet disclosures do not protect from criminal prosecution. The IRS has announced that all quiet disclosures will be reviewed and subject to civil or criminal penalties as determined under existing law. „Those who still think they can hide their assets offshore need to rethink their strategy“ (Kathy Keneally, former Assistant Attorney General of the US Department of Justice Tax Division).
In several instances, we were engaged to salvage or mitigate the dire situation after a quiet disclosure. The most significant assessed penalty so far amounted to $ 1.5 million.
Consequences of the FATCA Regime on US taxpayers not in compliance with their US tax requirements
As stated previously, FATCA requires taxpayers who own specified foreign assets to disclose them when they exceed certain thresholds. However, more than requiring such disclosure from the asset holders, the FATCA regime requires individual foreign institutions to disclose their US account holders (but not only). Failure to do so results in the withholding of a 30% tax on certain payments made from the US to these specific foreign institutions. Since this withholding constitutes a real threat, foreign institutions are likely to try to comply with the FATCA disclosure requirements.
Most importantly, the US has entered into bilateral intergovernmental agreements (“IGA”) to implement the information reporting and withholding tax provisions of the FATCA regime. Through these agreements, the US authorities will have access to the information of accounts held abroad by US persons. That, in turn, will make it easy for the US authorities to find out about any undisclosed foreign asset a US person may hold.
Expat Americans face an account freeze as IRS’ FATCA grace period ends. Beginning in 2020, expatriate US persons must provide their US tax identification number (TIN) to their local banks, or risk having their bank accounts closed or frozen. Regulations under the Foreign Account Tax Compliance Act (FATCA), requiring financial institutions to identify their US clients by TIN, come into full force in 2020. Any foreign bank failing to comply after January 1 will be at risk of having the 30 percent FATCA withholding tax applied to all their income from US sources.
US taxpayers not in compliance with their US tax requirements may want to think very seriously about reporting, instead of waiting for the IRS to discover their foreign assets and facing criminal prosecution. Full details of the options available for US taxpayers with undisclosed foreign financial assets are on IRS.gov.
For more information on FATCA, please contact us.
Expatriation Tax – US Wegzugsbesteuerung
We guided and piloted many of our clients through the maze of the expatriation and the expatriation tax (amerikanische Wegzugsbesteuerung). We will walk you through the process and explain, step by step, using the references below.
For more information about Expatriation rules – Wegzugsbesteuerung USA, please get in touch with us.
IRS on Expatriation Tax
Form 8854 – Initial and Annual Expatriation Statement
Instructions for Form 8854
IRS Publication 519 – residence rules, dual status tax return
Notice 2009-85 – the only thing the IRS has published on expatriation so far
Internal Revenue Code Sections 877, 877A – the old and current exit tax rules, respectively
Internal Revenue Manual Section 18.104.22.168.5 – how the IRS will process your return
Proposed Regulations Under Section 2801 – Gifts and Bequests from Covered Expatriates
Other Taxes – A Trap for the Unwary
Current Law – 2022
An individual may become a US citizen at birth either by being born in the United States (or in certain US territories) or by having a US citizen parent. All US citizens generally are subject to US income taxation on their worldwide income, even if they reside abroad.
US citizens residing abroad may also be subject to tax in their country of residence. Potential double taxation is generally relieved in two ways. First, U.S. citizens can credit foreign taxes paid against their US taxes due, with certain limitations. Second, US individuals may exclude from their US taxable income a certain amount of income earned from working outside the United States. US citizens living abroad are also eligible for the same exclusions from gross income and deductions as other US taxpayers. They, therefore, may have taxable income that is low enough that no income tax is due.
The Internal Revenue Code (Code) imposes special rules on certain individuals who relinquish their US citizenship or cease to be lawful permanent residents of the United States (expatriates). Expatriates who are “covered expatriates” generally are required to pay a mark-to-market exit tax on a deemed disposition of their worldwide assets as of the day before their expatriation date.
An expatriate is a covered expatriate if they meet at least one of the following three tests:
(a) has an average annual net income tax liability for the five taxable years preceding the year of expatriation that exceeds a specified amount that is adjusted for inflation (the tax liability test);
(b) has a net worth of $2 million or more as of the expatriation date (the net worth test); or
(c) fails to certify, under penalty of perjury, compliance with all US Federal tax obligations for the five taxable years preceding the taxable year that includes the expatriation date (the certification test).
The definition of covered expatriate includes a special rule for an expatriate who became at birth a citizen of both the United States and another country and, as of the expatriation date, continues to be a citizen of and taxed as a resident of such other country. Such an expatriate will be treated as not meeting the tax liability or net worth tests if they have been a resident of the United States for not more than ten taxable years during the 15-taxable year period ending with the taxable year during which the expatriation occurs. However, such an expatriate remains subject to the certification test.
Suppose a taxpayer renounces US citizenship or abandons lawful permanent resident status. In that case, that taxpayer must file Form 8854, Initial and Annual Expatriation Statement, with their US tax return to make the certification described in the preceding paragraph and provide information to determine whether the individual is subject to the exit tax (and to compute such tax, if applicable).
Generally, the IRS has three years from the date a return is filed to assess the tax. However, existing law extends the assessment statute of limitations in some instances, such as when the taxpayer fails to furnish required information returns relating to various international transactions or assets. In these cases, the statute of limitations does not expire until three years after the information required to be reported is provided. Existing law does not include Form 8854 as one of the information returns that would trigger an extended statute of limitations.
Under the Foreign Account Tax Compliance Act (FATCA) provisions of the Code, a foreign financial institution must collect certain information about US persons who hold an account with the institution, including the person’s US taxpayer identification number (TIN). A foreign financial institution that fails to comply with these rules may be subject to US withholding tax on certain US source payments. Foreign financial institutions consequently require an account holder who is a US citizen to provide a TIN.
Relief Procedure For Accidental Americans (Zufallsamerikaner) Who Have Relinquished, Or Intend To Relinquish, Their US Citizenship
Finally, there is good news for some “Accidental Americans” in Germany who have relinquished or intend to renounce their US citizenship and who are not in compliance with their US tax and filing obligations:
On September 6, 2019, the IRS announced new procedures enabling specific individuals who relinquished their US citizenship to come into compliance with their US tax and filing obligations and receive relief for back taxes. The Relief Procedures for Certain Former Citizens apply only to individuals who have not filed US tax returns as US citizens or residents and owe a limited amount of back taxes to the United States. They have net assets of less than $2 million. The IRS offers these procedures without a specific termination date and will announce a closing date before ending the procedures. Individuals who relinquished their US citizenship any time after March 18, 2010, are eligible so long as they satisfy the other criteria of the procedures.