After the presidential election, some citizens planned on renouncing their citizenship and moving abroad to Canada, or elsewhere. It would be interesting to survey those who stated this proposition to see if they followed through on their promise (or threat).
The Immigration and Nationality Act applies to U.S. citizens who exercise the right to voluntarily renounce their U.S. citizenship. However, potential relocating Americans must realize that renouncing American citizenship has profound implications on any future return to the United States. Why? Signing an oath of renunciation is an irrevocable act for Americans over the age of 18. Despite this serious implication, the number of individuals that renounced their citizenship in 2015 was eighteen times as many Americans that renounced their citizenship in 2008, which set yet another record for the third consecutive year.
I.R.C. § 6038 requires U.S. taxpayers to file Form 5471 (Information Return of U.S. Persons With Respect to Certain Foreign Corporations) with their tax returns. The reporting requirements of § 6038, as well as § 6046, require Form 5471 to be filed by certain U.S. persons who are officers, directors, or shareholders in certain foreign corporations.
A person required to file Form 5471 who fails to file the form, or files a late or incomplete form, subjects himself to steep monetary penalties. Also, the statute of limitations on assessment for the taxpayer’s entire return remains open until three years after the required information is submitted to the IRS.
U.S. taxpayers that have paid or accrued foreign taxes to a foreign country or U.S. possession, while subject to U.S. tax on the same income, may be able to take either a credit or an itemized deduction for these payments for foreign taxes. The foreign tax credit intends to reduce the double tax burden that would otherwise arise when foreign source income is taxed by both the United States and the foreign country from which the income is derived.
Qualifying Foreign Taxes
Taxpayers may only claim a credit for foreign taxes that are imposed by a foreign country or U.S. possession. The tax must meet four tests to qualify for the credit:
Some U.S. taxpayers may be required by I.R.C. § 6038 to file Form 5471 (Information Return of U.S. Persons With Respect to Certain Foreign Corporations) with their tax returns. To adhere to the reporting requirements of § 6038, as well as § 6046, Form 5471 is required to be filed by certain U.S. persons who are officers, directors, or shareholders in certain foreign corporations.
A person required to file Form 5471 who fails to file the form, or files a late or incomplete form, is not only subject to substantial monetary penalties, but the statute of limitations on assessment for the taxpayer’s entire return remains open until three years after the required information is submitted to the IRS.
In the first week of May, 2016, the U.S. Department of the Treasury announced several actions to strengthen financial transparency and combat the misuse of companies to engage in illicit activities. Treasury announced a Customer Due Diligence (CDD) Final Rule, proposed Beneficial Ownership legislation, and proposed regulations related to foreign-owned, single-member limited liability companies (LLCs). Together, these efforts target key points of access to the international financial system – when companies open accounts at financial institutions, when companies are formed or when company ownership is transferred, and when foreign-owned U.S. companies seek to evade their taxes.
Do you live abroad? Do you own an asset or bank or investment account that had an accumulated value or total exceeding $10,000 at any time in 2015 (or any year)? If so, you are required to file a Report of Foreign Bank and Financial Reports (FBAR). Thus, if an asset was valued at, or an account totaled, $10,001 for just one day, an FBAR is due and must be filed. The Treasury Department’s Financial Crimes Enforcement Network (FinCen) received a record high 1,163,229 FBARs in 2015. What is surprising is that FinCen data shows that FBAR filings have grown an average of 17 percent per year during the last five years. Over 90,000 taxpayers filed FBARs in 2015.
Here’s a primer for United States taxpayers residing abroad:
U.S. citizens must file a tax return. Any U.S. citizen who earns income of any kind is obligated to file a U.S. tax return every year, no matter where he or she resides in the world. Many Americans, living abroad and in the U.S., find it unfair that the United States is the only country that requires citizens to file tax returns whether or not they are earning income on U.S. shores. This is a leading reason why some Americans are renouncing their U.S. citizenship.
Unlike most countries, the U.S. taxes its citizens on all income, no matter where they live and where their income is earned. The current United States tax laws, because of requirements for reporting income, filing tax documentation, as well as the ensuing tax obligations, have made many Americans renounce their citizenship. Section 349(a)(5) of the Immigration and Nationality Act details a U.S. citizen’s right to voluntarily renounce his or her citizenship. Signing an oath of renunciation is an irrevocable act unless the individual is under the age of 18.
In March, 2010, FATCA , or The Foreign Account Tax Compliance Act, was enacted by Congress to remedy a perceived growing problem with foreign banks facilitating and encouraging U.S. taxpayers to conceal assets in their financial institutions. Seventy-nine countries have since signed FATCA agreements with the IRS, which require the financial firms within each of the participating countries to report account data for accounts owned by U.S. taxpayers or face severe penalties.
Also, the IRS is now automatically exchanging digital financial account information with tax authorities in other countries.
If you have a financial interest in or signature authority over a foreign financial account, the Bank Secrecy Act may require you to report the account yearly. The Act requires that each qualifying taxpayer file a FBAR or Report of Foreign Bank and Financial Accounts. The types of foreign financial accounts to which the Bank Secrecy Act applies this requirement includes a bank account, brokerage account, mutual fund, trust, or other type of foreign financial account, exceeding certain thresholds.