2012 Tax Filing Deadline Tips for Friends of Bander
Two important deadlines for 2012 income tax returns are approaching fast. If you are a U.S. citizen (or green card holder) living outside the United States, do the following things now:
File Form 4868 to get an extension of time to file your tax return until 15 October 2013.
Prepare and file Form TD F 90-22.1. I recommend getting this form in a courier envelope for delivery to the IRS no later than Monday, 24 June 2013.
I’m in Riyadh, and flying out tonight. (Lufthansa. Riyadh to Frankfurt to Los Angeles). Bander Alnogaithan was kind enough to give my Saudi mobile to a few of his friends. I met him on Twitter a few years ago. He is @saudilawyer on Twitter. Follow him!
Two of his friends called. They both had the same questions. I will bet there are a few other people out there on the internet who have the same problem. So this blog post is for all of you.
Who Needs This Information
This information matters to you if you are:
- A U.S. citizen or green card holder; and
- You live outside the United States; and
- You have not done anything about your income tax returns for 2012.
Yes, you almost certainly do have a requirement to file a U.S. income tax return. I’m not going through the analysis for you. If you are breathing, there is SOME reason why the United States government thinks you should file income tax returns.
By 17 June 2013: Get an Extension of Time to File Income Tax Returns
For U.S. citizens or green card holders living abroad, the filing deadline for tax returns for the 2012 calendar year is 15 June 2013. Because that falls on a Saturday this year, the filing deadline is the next business day–17 June 2013. Today is 10 June 2013.
You need to file Form 4868 (PDF). Now.
You can mail the form. You can send it by FedEx, DHL, or UPS. But in true government tradition, the instructions to Form 4868 give you only a Post Office Box address and then tell you that you need a street address to send the form by FedEx, DHL, or UPS. Good luck finding the street address. I would usually have some potty-mouth words right now but the NSA reads everything we write and records all of our telephone conversations, and winter is coming. I, for one, welcome our new IRS Overlords. Sigh.
So your best bet it to do this online. Start here and follow the links along the happy trail until you find Form 4868. I will help you with a couple of useless government-mandated clicks. Start here instead.
Or you can find all sorts of commercial establishments happy to do this for you online for a modest fee.
This will get you an extension of time until 15 October 2013. Read the instructions and get this done.
By 24 (WTF?) June 2013: File Form TD F 90-22.1
Yes. It is a weird date. The explanation is below.
This is the dreaded FBAR form, where you declare the existence of all of your financial accounts outside the United States. The filing deadline is 30 June 2013. The piece of paper must be physically received at the IRS office in Detroit, Michigan on or before the deadline.
Since the deadline of 30 June 2013 falls on a Sunday this year, I want you to think of 28 June 2013 as your filing deadline. We are going to be doing something terribly archaic–sending a piece of paper across the great, wide ocean. This takes time. I want you to ignore regular postal delivery. I want you to think of overnight courier service only. FedEx. DHL. That kind of thing.
Plan on getting your package picked up by FedEx or DHL (or whoever you use) no later than Monday, 24 June 2013. This will allow enough time for the package to get to the Internal Revenue Service before the deadline. Also, you will have proof that the package arrived and was received by the IRS. This is a Very Good Thing.
Download the form. Fill it in. The delivery address is in the instructions.
Alternatively, you can in theory file Form TD F 90-22.1 online. Whether you trust government IT systems is up to you. If it blows up (because government IT systems are of course well-engineered) and you miss a deadline, you are hosed. Do not expect mercy. And of course the closer you are to the filing deadline the more likely it is that the IT systems will crash.
Recommended: do your Form TD F 90-22.1 on dreary old paper. Give money to DHL, FedEx, or UPS to deliver it to Detroit. But it is up to you.
By 15 October 2013: File Form 1040
After you have solved the immediate and urgent problems, your next step is to prepare the income tax returns for filing. This is Form 1040. This job is individual to you. Each person’s tax return is different. This is where you need individual help to prepare the tax return properly.
Oh. And if you cannot make the deadline of 15 October 2013, it is possible to apply for a further extension of time until 15 December 2013 to file your 2012 income tax returns. But that’s a story for another day.
Apartment security deposits and Form 8938
Consider a simple situation. An American living abroad rents an apartment. As is usual in these situations, the tenant gives the landlord a security deposit.
The intrepid authors of Section 6038D and the Temporary Regulations under that Section could not possibly mean to force you to list the security deposit on Form 8938. Could they?
Interestingly (for certain vanishingly small values of $INTERESTING), it requires a fair bit of analysis and a judgment call (using an English teacher’s brain, not a tax lawyer’s brain) in order to decide that the answer is “no.”
Form 8938 requires Americans abroad to tell the United States government about their “specified foreign financial assets.” Thus, the technically accurate question to ask is whether the security deposit you put down for the apartment you live in is a “specified foreign financial asset”.
Definition 1 – Specified Foreign Financial Asset
We start with the definition of “specified foreign financial asset” from Temp. Treas. Reg Section 1.6038D-3T.
The first definition says:
Except as otherwise provided in this section, a specified foreign financial asset includes any financial account maintained by a foreign financial institution. Temp. Treas. Regs. Section 1.6038D-3T(a)(1).
A “foreign financial institution” is described in the preamble to the Temporary Regulations:
A foreign financial institution is defined by reference to section 1471(d)(4). For this purpose, a foreign financial institution is a financial institution (as determined under section 1471(d)(5)) that is a foreign entity (as determined under section 1473(5)). Under section 1471(d)(5), a financial institution is any entity that –
(1) Accepts deposits in the ordinary course of a banking or similar business;
(2) Holds financial assets for the account of others as a substantial portion of its business; or
(3) Is engaged, or holds itself out as being engaged, primarily in the business of investing, reinvesting, or trading in securities (as defined in section 475(c)(2) without regard to the last sentence thereof), partnership interests, commodities (as defined in section 475(e)(2)), or any interest (including a futures or forward contract or option) in such securities, partnership interests, or commodities.
Self-evidently, a landlord is not a foreign financial institution. Therefore, your money sitting in the hands of a security deposit for an apartment rental cannot be a specified foreign financial asset under the first definition.
Definition 2 – Specified Foreign Financial Asset
But we have a problem. The first definition of “specified foreign financial asset” uses that deathless phrase found so often in tax law — “Except as otherwise provided.” And it uses an immensely useful weasel word — the word “include”.
The second definition of specified foreign financial account helps us resolve the ambiguities built into the first definition. Temp. Treas. Regs. Section 1.6038D-3T(b)(1) says:
(b) Other specified foreign financial assets — (1) In general. Except as otherwise provided in this section, a specified foreign financial asset includes any of the following assets that are held for investment and not held in an account maintained by a financial institution –
(i) Stock or securities issued by a person other than a United States person;
(ii) A financial instrument or contract that has an issuer or counterparty which is other than a United States person; and
(iii) An interest in a foreign entity.
There’s that deathless “except as otherwise provided” language again — that creates so many possibilities for giant mobius strips of never-resolving tax logic.
But I digress.
This definition says that if you have one of the three listed assets, and you hold it for investment, and it is not held in an account with a financial institution (hey! a landlord is not a financial institution!), then you have a “specified foreign financial asset” that must be reported on Form 8938.
Let’s look at the asset definitions.
We are pretty sure that a security deposit can’t be a stock or security. Knock (i) off the list.
We are pretty sure that a security deposit is not an interest in a foreign entity. That would mean a security deposit is like a partnership interest or a share of stock. Nope. Knock (iii) off the list.
That leaves (ii). Is a security deposit a “financial instrument or contract”? Well, it certainly is a contract, or a part of the larger rental agreement contract, anyway.
But what does the Regulation mean? I think the author of this Regulation means to describe certain technical types of financial instruments used in investments. But the Regulation is badly written. It is susceptible to two meanings:
- “A (financial instrument) or (contract) . . . “; or
- “A financial (instrument or contract) . . . “
In the first interpretation, any contract that has a foreign person on the other side of it will be a “specified foreign financial asset.” This means that every contract between a U.S. taxpayer and a non-U.S. person must be disclosed because of Temp. Treas. Reg. Section 1.6038D-3T(b)(1)(ii).
The IRS cannot possibly mean that. Can they? (Judgment call: no).
So there you have it. You go all of this way to find a sentence with bad syntax, and make a judgment call on what you think the IRS really means to do here. Then and only then do you decide that a security deposit on your personal apartment is not reported on Form 8938.
When a Toaster is Held for Investment
One more bit of badly-written tax law for your enjoyment. Remember that the second definition says that one of the three types of assets will be a “specified foreign financial asset” if it is “held for investment”:
Except as otherwise provided in this section, a specified foreign financial asset includes any of the following assets that are held for investment and not held in an account maintained by a financial institution –
Temp. Treas. Regs. Section 1.6038D-3T(b)(1), emphasis added.
That phrase — “held for investment” — means that an asset is not held for use in a trade or business. Temp. Treas. Regs. Section 1.6038D-3T(b)(3).
Think of it. You own a toaster and you use it to make toast for breakfast every morning. It is not used for business at all. According to this definition, you must be holding that toaster for investment.
Yet another FBAR minnow to the guillotine
I have permission to post this anonymously.
With regards to the US Government/IRS/FBAR/OVDI witchhunt/shakedown, I fit the mantle of victimhood at the hands of our so-called government for the people, of the people and by the people to a T.
Whether stupidly or not, I came forth this last March, because I did not disclose two or three of my [Country] savings accounts (I’ve lived in [Country] for almost 20 years) over my covered years (2003-2010).
I got a letter from the OVDI people in [recent month], to ask me to submit 1040X’s, submitted FBAR’s and their paperwork. The latter is essentially asking me to provide the rope to hang myself.
Tallying the results? I owe [under $200] in aggregate back taxes to the IRS, yet will very likely end up paying the 27.5% FBAR penalty of around $80-$90,000.
There isn’t much more I can say about the unfairness of all this. I am still reeling emotionally. My friend asked me to please control my anger, so I am doing it to keep this civil.
If there is a class action suit against the US Government, I would like to consider joining.
NB. Not our client. I don’t know his real name. The email is edited to disguise identifying facts. Why? Here’s my correspondent’s first followup email to me:
I am reluctant to use my real name at this time for fear of retribution. If they want to use any info I am to provide, as trailers for a witch-hunt, I am sure they will find things to make my life miserably – no matter how trivial or irrelevant to their supposedly mission of uncovering money laundering or unpaid tax [under a couple of hundred] dollars.
Then the second follow-up email:
I further changed it to say “under $200″ rather than an exact figure. I am that paranoid.
The paranoia is justified. A government speaker at the California State Bar Tax Section’s annual meeting said that Criminal Investigations is following up any inquiries they can to see if the taxpayer entered the Voluntary Disclosure Program. If not, expect a letter from Criminal Investigations.
From Tax Notes Today, 2012 TNT 215-1:
The IRS Criminal Investigation division monitors the information it receives under the Service’s offshore voluntary disclosure initiatives to ensure that taxpayers who inquire about the programs follow through, a CI official said November 3.
Rebecca Sparkman, CI director (operations policy and support), said that CI checks to ensure that taxpayers who undergo a pre-clearance check for acceptance into the voluntary disclosure programs follow through with disclosure. “Those [taxpayers] are suspect, and we are looking at those who decided not to continue to come through. Will it be Criminal Investigation? I don’t know; it could be a civil audit,” she said at the annual meeting of the California Tax Bar and California Tax Policy Conference in Coronado, Calif.
Sparkman warned that taxpayers who make only partial disclosures or don’t supply all the information about their offshore activity to the IRS will face severe consequences. “When [the taxpayer] is not truthful, yes, CI will come back in,” and the taxpayer may be criminally liable, she said, adding that the same is true if badges of fraud or lies are uncovered during an examination.
“I really believe that we are at the beginning of our work in the international offshore area,” Sparkman said, adding that the information received from the IRS’s offshore voluntary disclosure programs is fueling investigations into new banks and countries.
2011 filing extension until December 15, 2012? Here’s how
This is the second installment in what I expect to be an annual blog event for me. It is also something I promised to my friend M. in the Middle East who needs this information.
For those of you who are Americans living abroad and sweating the October 15 tax filing deadline, there is a possible piece of relief. You may be able to qualify for a further extension of time for filing your tax return — to December 15.
The IRS webpage which describes the extension request procedure is part of IRS Publication 54. The IRS website has some bitrot so if you come to this post in the future and you can’t find the IRS link, go look for Publication 54. In the 2011 version of Publication 54, this information was in Chapter 1.
Here is a far better explanation than the IRS will ever give you. You will end up with precise, useful information on what to do, and you will in fact get plenty of useless information along the way. Bear with me. The useful information is for you, and the useless information is for my own amusement.
American Citizens Abroad Dinner in Geneva
Last night (Thursday night) Mary and I were guests at a dinner and extended conversation hosted by American Citizens Abroad, in Geneva.
Perhaps not coincidentally, the dinner was at the restaurant of Le Musee des Suisses dans le Monde and as Anne Hornung-Soukup noted as we were walking in the Swiss tend to honor their citizens abroad rather than, well, ignore and/or pillory them. My words, not hers.
You can see Karl Jauch’s collection of photos (don’t I look fetching?). I am sitting between Jackie Bugnion (on my right) and Marylouise Serrato (on my left).
American Citizens Abroad
For those of you who do not know the people of American Citizens Abroad, let me tell you only one thing: this organization is the adult in the room when it comes to talking about (and understanding) the effect of U.S. tax policy on American citizens overseas, as well as the entirely predictable future effects of these policies on immigration to the United States, expatriations, and investment flows. I count myself as one of the adolescents because I sometime *ahem* rant a bit and I have a potty mouth.
I first came to know the organization about three years ago as the UBS bank hoo-hah was heating up in 2009. My initial contacts were with Dorothy van Schooneveld, Jackie Bugnion, and Anne Hornung-Soukup.
Anne Horning-Soukup told us on the drive back to the hotel that in her 30 years with the organization the activities have shifted from helping proud parents acquire U.S. citizenship for their foreign-born children (long ago) to dealing with the toxic tax landscape how which is increasingly driving people to relinquish U.S. citizenship. Again, my words, not hers.
Everything I know in my day job, the ACA members know because they live it. They are living inside the effects of the various voluntary disclosure programs, the entirely predictable (and unavoidable) exclusion from banking that is befalling U.S. persons living abroad, and just the general paperwork overhead that the citizenship-based tax system imposes.
What it’s like for a normal American abroad to deal with tax returns
For those of you living inside the USA and not quite understanding what Americans abroad live with, consider this simple example. Imagine you live in a high-tax country. Anywhere in Europe, for example. You pay your taxes in your country of residence. You pay a lot of income tax.
The IRS also asks that you file U.S. income tax returns. The USA requires its citizens to file tax returns and pay income tax, no matter where those citizens live.
For you, the American living overseas, tax return preparation is an order of magnitude more complicated than for someone living at home in the USA. There are extra forms to fill out. Extra stuff to report. Big, big penalties if you fluff things up. So you either spend an inordinate amount of your free time doing the tax returns yourself, or you pay a lot of money to an accountant to do the work for you. I don’t know what the people around the table last night spend, but it would be common to see tax bills of $3,000 – $4,000 in my experience. Let’s say you only spend $2,000. Lucky you.
The amount of tax that the IRS typically collects from people living in Europe and other high tax countries is ZERO. The foreign tax credit (PDF) ensures this. So does the foreign earned income exclusion (PDF).
Short story? You pay $2,000 or maybe much more to do a tax return that yields zero revenue for the U.S. government. And you burn up a lot of nights and weekends doing the paperwork.
Then you hear some Senator yammering about people like you and how you should be paying your “fair share” to the U.S. Treasury.
But it’s worse than that. A set of obscure tax rules (I’m looking at you, Mr. PFIC) (PDF) designed to short-circuit semi-clever multinational corporate tax planning tricks just happens to apply to the average American living abroad.
If you save a bit of money and decide to buy foreign mutual funds because this looks like a good investment strategy, you run afoul of Form 8621. Translation for the uninformed: add another $1,000 to your tax return preparation bill, AT LEAST.
Because Google and its worldwide empire (on the one hand) and you, the Average American Abroad (on the other hand) should live by the same set of tax rules and fill in the same paperwork. Right?
In short — excessive burdens on humans. Useless paperwork to be processed by the IRS (oh dear, we need to hire more staff at the IRS). Very low (many times zero) tax collections in the USA from these people.
The dinner discussion
This is what the ACA members around the table live with, and this is what we collectively discussed on Thursday night. There’s not much to report. Voluntary Disclosure Programs — resoundingly counterproductive. Expatriations and interest in expatriation on the rise. FATCA — a law that is impossible to apply but creates intolerable burdens on Americans abroad.
Oh. Marylouise Serrato told me that the Bern Embassy is now much quicker at processing expatriation appointments. This is welcome news.
ACA has an active effort to bring awareness of these issues to the elected officials in Washington.
I hope this works, but frankly it is a long shot because the ACA does not have hundreds of thousands of dollars to throw at lobbying and campaign contributions. So some type of low-budget but effective campaign is necessary and the ACA crew is working at this. The first phase is complete, I think. There is some awareness on Capitol Hill that ACA exists.
At the end of the evening Mary and I were presented with an enormous (!) bottle of wine and a small brick of Swiss chocolate. Yay. The bottle of wine will be saved for a future special event to be selected — probably a family wedding in August in Chicago. The brick of Swiss chocolate has already been savagely attacked and will probably not survive until the train ride tomorrow to Zurich.
This has been a great trip. I should be back to Switzerland in the autumn. If you would like to connect next time I am here, pop me an email and let me know.