| | UNITED STATES TAX ISSUES
A significant number of tax increases became effective on January 1, 2013 and expatriates should be reviewing their 2013 estimated tax payments to insure that they will not be subject to an underpayment penalty when they file their tax returns in 2014.
Minimum Tax Payment Due
To avoid an underpayment penalty the minimum tax paid in 2013 must be equal to 110% of your 2012 tax or 90% of your 2013 tax liability. For example, if your 2012 tax was $10,000 and your 2013 tax $12,000 than your minimum payment has to be either $10,000 x 110% = $11,000 or $12,000 x 90% = $10,800. How do you choose what to do when your 2013 actual tax won’t be known until 2014 and your first 2013 estimated tax payment was due on April 15, 2013?
If the amount of your 2013 income and tax is uncertain, a “safe harbor” solution is to pay 110% of your 2012 tax. If you feel that your 2013 income will be lower than 2012, then you need to choose between overpaying your 2013 tax by paying 110% of your 2012 tax or projecting your 2013 tax on the maximum income you expect to receive in 2013.
2013 Tax Increases
The 2013 tax increases will generally affect individuals with gross income over $200,000. Many individuals tend to think of their income in terms of their base salary and bonus but as an expatriate gross incomet will also include your housing allowance, home leave, car allowance, etc. as well as all investment income (dividends, interest, capital gains, etc.).
Tax increases will include a 0.9% Medicare surtax on earned income, a 3.8% surtax on investment income, a 5% increase in tax on qualified dividends and long term capital gains, an increase of 4.6% in the top tax bracket, a 3% disallowance in itemized deductions and a phase out of the personal tax exemption. Based on the number of 2013 tax projections that we have prepared, an expatriate in the upper tax brackets can expect a 2013 tax increase of about 10%.
Foreign Account Tax Compliance Act ( FATCA)
The due date for compliance with FATCA by foreign banks and financial institutions has been postponed from December 31, 2013 to June 30, 2014. What is FATCA?
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Under FATCA, foreign financial institutions (FFIs) may register with the IRS and agree to report to the IRS certain information about their U.S. accounts, including accounts of certain foreign entities with substantial U.S. owners. FFIs that enter into an agreement with the IRS to report on their account holders may be required to withhold 30% on certain payments to foreign payees if such payees do not comply with FATCA. FFIs include, but are not limited to: Depository institutions (for example, banks), Custodial institutions (for example, mutual funds), Investment entities (for example, hedge funds or private equity funds), Certain types of insurance companies that have cash value products or annuities. FFIs that do not both register and agree to report face a 30% withholding tax on certain U.S.-source payments made to them. While many FFI’s have registered with the IRS, they are attempting to get around the reporting requirements by purging themselves of all U.S. clients. If you do not have a U.S. citizen/resident/entity as a client, there is nothing to report.
If you are a US citizen/resident with an account in an FFI it is likely that information regarding the details of you account will be reported to the IRS next year. If you have not been filing a US tax return or not reporting some or all of your foreign income you still have a short period of time to participate in the IRS Offshore Voluntary Disclosure Program.
Offshore Voluntary Disclosure Program (OVDP)
We have found that there is confusion regarding the OVDP program available for non-filers and the new procedure available to individuals who have not filed but who owe $1,500 or less in tax. Under the OVDP an individual needs to file or amend tax returns and the FBAR for 8 years, pay back taxes and penalties as well as to forfeit 27.5% of their unreported foreign assets. In turn, the IRS will likely (no assurances) waive criminal prosecution.
Under the procedure announced last September individuals who have not filed but who owe $1,500 or less in tax are required to file tax returns for 3 years and the FBAR for 6 years and pay back taxes and penalties. If the IRS considers a person to be low risk (not defined) the filings are accepted and all prior years are forgiven. However, under the procedure, the IRS retains the right to criminally prosecute a person and also to require that prior year’s returns and FBAR’S be filed.
So for a person at the lower end of the economic scale who has not filed they face a difficult choice. By opting into the OVDP they knowingly will likely forfeit 27.5% of their lifetime savings, but they will likely stay out of prison. If they opt for the procedure, they gamble that the IRS will consider them a low risk, allow them to keep their lifetime savings and not send them prison or the IRS could take a larger portion of their lifetime savings and send them prison. This is clearly a difficult decision for a low income person who wants to become compliant with U.S. tax law.
What Happens If A Non-Filer Does Nothing?
With FATCA looming on the horizon, active audits of foreign banks increasing and a doubling of personnel resources at the international level the chances of being caught will greatly increase. The IRS is well aware of the fact that thousands of US citizens/residents living abroad do not file tax returns. The IRS through the Offshore Voluntary Disclosure Program, now in its 4th year, has given non-filers ample opportunity to become compliant.
Our experience has been that the IRS has no mercy on those that are caught. Seizure of assets and criminal prosecution are almost a given.
Pursuant to the requirements relating to practice before the Internal Revenue Service, any tax advice in this communication is not intended to be used, and cannot be used, for the purpose of (i) avoiding penalties imposed under the United States Internal Revenue Code, or (ii) promoting, marketing or recommending to another person any tax related manner.
The tax advice given by this column is, by necessity, general in nature. You should, of course, check with your own U.S. tax consultant as to how specific transactions affect you since tax advice varies with individual circumstances.
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