US citizens still need to file their tax forms

WEDNESDAY, JULY 4: Mark Jennings, assistant vice president of Investments, at LOM Securities (Bermuda) Ltd. last week hosted a conference on International Taxes and Trusts for US Citizens Living in Bermuda and US Beneficiaries of Bermuda Trusts.

The speakers were Dina Kapur Sanna, an international trust and estate specialist, partner, Day Pitney LLP, New York, NY and myself, a US tax specialist, CPA, and president, ETS Limited, Hamilton, in Bermuda.

We discussed the changes that have taken place over the past 10 years regarding tax law changes and information reporting requirements that affect US citizens abroad, expatriation-Surrender of US citizenship, grantor and non-grantor trusts, estate, gift and generation-skipping transfer tax Issues and a case study.

Over the last 10 years, greater attention has been paid to US citizens residing abroad or owning financial assets outside US:

• Enactment of two successive and different laws governing taxation of US citizens who give up US citizenship

• Issuance of three different formal IRS voluntary disclosure initiatives for US citizens with unreported foreign income or assets

• US prosecution of foreign banks that facilitate the maintenance of unreported foreign accounts by US citizens

• Enforcement of Form TDF 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR), which was previously a widely ignored form

• Enactment of Foreign Account Tax Compliance Act of 2009 (FATCA), as part of 2010 legislation, the purpose of which is to give the IRS new tools to find and prosecute US individuals who hide assets overseas in foreign accounts or in foreign entities.

US citizens must file a tax return if their gross income is equal to or greater than their personal exemption amount and standard deduction. There is a long standing misconception in Bermuda that if your earned income is less than $80,000 that you do not have to file a US tax return. This is just plain wrong and can get you into serious trouble with the IRS.

How to they compare?

The differences of Form 90-22.1 filing requirements and Form 8938 filing requirements:

FBAR

• Filing threshold is $10,000

• Required if U.S. taxpayer has a financial interest or signature or other authority

• Due date is June 30th and filed with the Internal Revenue Service in Detroit

• Financial interest is based on whether the person is the owner of record for or holds legal title to the account or is the indirect beneficial owner.

• Required by persons who do not have a direct financial interest in a foreign financial account, e.g., an individual is required to report the foreign financial account of his or her wholly owned domestic or foreign corporation If a domestic corporation has a direct or indirect financial interest in the foreign account, it will also be required to report the account, as would any individuals, such as employees, that have signature authority over the financial account.

• Does not toll or extend statute of limitations on assessment of tax if not filed.

• Civil penalties range from $10,000 to greater of $100,000 or 50% of account.

Form 8938

• Filing threshold is $50,000

• Required if U.S. taxpayer has an interest (not signature or other authority)

• Due date is tied to income tax return and filed with applicable IRS service centre

• Financial interest is based on potential tax attributes or transactions related to the account that would be reported on the individual’s tax return.

• If a foreign financial account is reported by a specific individual, the foreign account will not also be reported by a specified domestic entity, and vice-versa.

• Tolls statute of limitation on assessment of tax for relevant year until filed; can extend statute to 6 years if omission attributable to unreported financial account exceeds $5,000.

• Civil penalties range from $10k to $50k plus accuracy related penalty of 40% if underpayment of tax is attributable to undisclosed account