Archive for 'Americans abroad'

Toronto Consulate Wait Times Have Ballooned

An email from Tim S. alerted me to an interesting article by Patrick Cain about getting the difficulty of getting an appointment for expatriation in Canada

Patrick reports that wait times at the Toronto consulate have ballooned.  Here we are in August, 2014.  The earliest date that can be booked in Toronto is January 22, 2015.

Reason #1: FATCA

While the article does not explicitly say so, it appears that expatriation has become more popular since the FATCA agreement between Canada and the United States was implemented on July 1.

The FATCA rules are designed to use foreign banks to rat out U.S. taxpayers to the IRS. Foreign banks face severe penalties if they do not play along with the U.S. government and set in place reporting mechanisms designed to identify their U.S. customers.

This means that sooner or later every U.S. person will get a letter from his or her bank asking the simple question: “are you a U.S. taxpayer?” If the answer is “Yes,” there will be one of two responses from the bank:

  • “Thank you for your answer, and we’re closing your account because we don’t want to spend $10 million upgrading our IT systems just to make a foreign government happy. You’re not a profitable customer; go away.”
  • “Thank you for your answer, and while we’re happy to keep you as a customer, we’re telling the U.S. government about you. (Oh by the way, there may be some increased bank fees in your future.)”

I predict that for Americans abroad their banking choices will become more and more limited. Eventually only the juggernaut multi-national banks will be willing to work with them–the Citibanks, the HSBCs, etc. Smaller banks will simply close their doors to Americans because the compliance costs are too high.

This is something I have seen here in the United States. I recall calling the President of a bank that specializes in banking for mid-sized privately-held businesses only. I have known him for 25 years. I had a foreign client establishing business operations in the United States. He rejected the business because it would require hiring more and new compliance officers. Interesting tidbit: he figured one compliance officer adds $250,000 per year of cost. Thank you Uncle Sam for making everyday life difficult.

Reason #2: Tax Returns Are Expensive

But FATCA is just pushing everyone to wake up to the primary disincentive for holding a U.S. passport: citizenship-based tax rules. If you are a U.S. citizen, you are required to file U.S. income tax returns every year and comply with a (potty-mouth word)-load of bizarre paperwork. This adds enormous complexity and cost to a regular person’s life. Preparing U.S. tax returns is not cheap.  From TFA: 

Until recently, appointments to renounce U.S. citizenship in Toronto could be made within three to six weeks, said Toronto-based cross-border tax accountant Kevyn Nightingale, who specializes in tax advice for people giving up U.S. citizenship.

His clients are driven to divorce Uncle Sam less because of actual U.S. taxes and more because of the costly demands of the tax bureaucracy, he says:

“Almost none of them have to pay any tax – it’s just the hassle and expense of dealing with the paperwork.”

Nightingale says he charges $1,000-$1,500 for “very simple” U.S. returns.

[Note: hyperlink to Kevyn's profile at MNP added by me; it was not in the original article. MNP is a very good cross-border accounting firm.]

What the article doesn’t say: for the Canadians that Kevyn is helping, there is probably a “zero payment due” tax bill from Uncle Sam on that U.S. income tax return.

Think of it. You pay $1,000 – $1,500 for accounting fees and Uncle Sam collects no revenue. Wouldn’t that annoy you just a tiny bit?

Reason #3: The Price of Salvation

The annual upkeep cost of filing U.S. tax paperwork is one thing.

What about those U.S. taxpayers living abroad and faithfully paying tax in their home country who suddenly find out that in some way or another they have run afoul of Uncle Sam’s weird paperwork rules? They face a Pain Factory: massive penalty risks or high professional fees to fix the problem. Or something both.

Yesterday I talked to a guy who had rental income from property outside the United States. He faithfully reported all of the income on his U.S. tax returns, but missed a couple of key pieces of paper that should have been filed. His penalty risks, at my guess, exceed $100,000.

Yes, there are IRS procedures to fix these situations. And yes, he probably–if he files all of the paperwork–will have zero penalties. But the cost of doing so (in professional fees) is likely to be in the $25,000 – $30,000 range.

This is insane.

The article mentions this point as well. Another quote from Kevyn Nightingale in the article:

“If somebody comes to us and says, ‘I’m a U.S. citizen, I’ve never filed tax returns, I’ve got a pretty ordinary life, but I’ve got an RRSP, an RESP, a TFSA and some mutual funds, and can you prepare all my returns and get me ready for expatriation?’, by the time we do all that, it’s not hard to spend $15,000 or $20,000 for a fairly ordinary person.”

This is a fair estimate. The particularly galling part of the expense is driven by mutual funds. It bugs everyone in our office more than anything else.

Buying mutual funds is a normal and recommended way to invest. But foreign mutual funds must be reported on Form 8621 and are taxed as Passive Foreign Investment Companies. The work needed to satisfy these requirements is staggering, driving professional fees through the roof. It’s simply unacceptable for ordinary people living ordinary lives.

The beatings will continue until morale improves.

When we tell people about the tax risks they face because of inadvertent paperwork failures in the past–and the cost to reduce or eliminate the risk–the response is often “How can I get away quickly, quietly, and permanently from this burden?”

The Backlog Solution

Many of you will want to renounce your U.S. citizenship before year-end. You can go anywhere in the world to do it. Start calling Consulates and Embassies to see what the wait time is.

Our experience is that the Caribbean and Central American countries are often good. Southeast Asia seems to be good as well.

Very Interesting: Back to One Appointment?

One of the interesting items in the article–by far the most interesting for me, in fact–is the transition back to a one-appointment expatriation process in Toronto.

When I started doing this work, renunciation required one appointment. Show up, do the paperwork, swear a mighty oath, and you were done.

Then the State Department started requiring two appointments. You had to show up, get lectured about the perils of renunciation, then go away and think for a while. Then you’d go back for a second appointment where they would take care of business. And maybe lecture you a bit more.

Forgive me for the analogy, but it’s almost like the State Department looked at the anti-abortion people who wanted to have a system where if you want an abortion you have to go in for a doctor’s appointment then go away to consider your choice before you can have the procedure. It is psychological warfare to tip the results in your favor.

But Toronto? The article says they are back to a one-appointment process, apparently in self-defense because they have so many expatriation appointments to process.

I hope this rolls out through the rest of the system. The two appointment requirement is silly and counterproductive for the government and the would-be expatriate.

2012 filing extension until December 15, 2013? Here’s how

For 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.


If you are an American living abroad, and you want to get a filing deadline of December 15, 2013 for your 2012 Form 1040, do this:

  1. On or before June 15, 2013, file Form 4868.
  2. On or before June 15, 2013, pay whatever tax you have to pay for 2012, along with that Form 4868 you are filing.
  3. On or before October 15, 2013, write a letter and mail it to the IRS using the procedures I describe below.
  4. File your 2012 Form 1040 on or before December 15, 2013 with all of the stuff attached to it that I describe below.

Basic filing deadline: April 17, 2013

Start with the basic rule. Everyone’s 2012 income tax return has a filing deadline of April 15, 2013.1 For the tax nerds among you, this is what the rule says:

In the case of returns under section 6012, 6013, 6017, or 6031 (relating to income tax under subtitle A), returns made on the basis of the calendar year shall be filed on or before the 15th day of April following the close of the calendar year and returns made on the basis of a fiscal year shall be filed on or before the 15th day of the fourth month following the close of the fiscal year, except as otherwise provided in the following subsections of this section.

Individuals are required to file income tax returns by the requirements of Internal Revenue Code Section 6012. It doesn’t matter where you live.

Americans living abroad: automatic extension to June 15, 2013

Americans living abroad have an automatic extension to file their income tax returns. They get an extra two months. No work is needed and no paperwork required:2).

An extension of time for filing returns of income and for paying any tax shown on the return is hereby granted to and including the fifteenth day of the sixth month following the close of the taxable year in the case of . . . United States citizens or residents whose tax homes and abodes, in a real and substantial sense, are outside the United States and Puerto Rico[.]

The sixth month after the closing of the tax year (December 31, 2012) is June. The fifteenth day of June is your deadline. You get this extension automatically if your tax home is outside the United States or Puerto Rico.

Note that this automatic extension only applies to people who have their “tax home” outside the United States and Puerto Rico, or to military personnel posted outside the United States and Puerto Rico. If you are abroad temporarily (on vacation or for work), you do not get the automatic extension.

The way you get this extension is simple. If you are filing your 2012 Form 1040 on or before June 15, 2013, all you need to do is write “Taxpayer Abroad” at the top of Page 1 of Form 1040 when you file it. The Instructions to Form 1040 give you this piece of information.

If you plan to file your 2012 income tax returns on or before June 15, 2013, stop here. No further reading is necessary.

Payment deadline for Americans abroad: June 15, 2013

A slight digression here. Getting an extension of time to file a tax return is not the same as getting an extension of time to pay the tax due. Ordinarily, your tax return is due on April 15, and the IRS expects you to send in a check on or before April 15, 2013 to settle up any tax due for 2012.

But Americans abroad not only get an automatic two month extension of time to file their 2012 income tax returns, they get a two month extension of time to pay their 2012 income tax liabilities.3

Form 4868 extension to October 15, 2013

Everyone–living in the USA or abroad–can use Form 4868 to get an extension of time to file tax returns. The extension is good for six months from the default filing deadline of April 15, 2013. That puts the filing deadline at October 15, 2013 for filing your tax returns.

You get this extension to October 15, 2013 by filing Form 4868 before the filing deadline that applies to you.

So for an American living in the USA, the April 15, 2013 deadline applies and Form 4868 must be filed before April 15, 2013.  Otherwise you’re too late in applying for an extension.

If you are an American living abroad, your automatically extended filing deadline is June 15, 2013. You have to get your Form 4868 filed before June 15, 2013. But filing on or before June 15, 2013 doesn’t get you (the American living abroad) six months of extension. It only gets you four months of extension. From the instructions to Form 4868:

Taxpayers who are out of the country. If, on the regular due date of your return, you are out of the country and a U.S. citizen or resident, you are allowed 2 extra months to file your return and pay any amount due without requesting an extension. For a calendar year return, this is June 15, 2013. File this form and be sure to check the box on line 8 if you need an additional 4 months to file your return.

So your deadline as an American living abroad, too, is October 15, 2013 based on filing Form 4868.

And yes. I know what you’re saying. You’re saying,

“Hey Phil, the Treasury Regulations say that you get the automatic deadline to June 15, 2013 only if your home is really, truly outside the USA but the Form 4868 instructions just say you have to be out of the country on the regular due date, so doesn’t that mean if I’m a tourist abroad on April 15 I get this automatic extension?”

My response? “Welcome to TaxLogic, which is not the same as real logic. (Heavy sigh). Rely on the Instructions.”

Relying on the Instructions is like getting your religion from the guy wearing the robe and the funny hat instead of getting it from the Good Book. We do it, but we feel weird about doing it.

Concurrent extensions

The two-month extension (to June 15) that applies to Americans abroad runs concurrently with the automatic six-month extension (to October 15) that applies to everyone. Treasury Regulations Section 1.6084-1(a) says:

An individual who is required to file an individual income tax return will be allowed an automatic 6-month extension of time to file the return after the date prescribed for filing the return if the individual files an application under this section in accordance with paragraph (b) of this section. In the case of an individual described in §1.6081-5(a)(5) or (6), the automatic 6-month extension will run concurrently with the extension of time to file granted pursuant to §1.6081-5.

An American living abroad is an “individual described in §1.6081-5(a)(5)” who gets the automatic six-month extension. So an American living abroad has two filing extensions running concurrently. Both start with the default filing deadline of April 15, 2013. One of them runs for two months and doesn’t require any paperwork. The other one runs for six months, and requires paperwork–Form 4868.

Extending to December 15, 2013

All of that was the unnecessary excess information I promised.  But good stuff, right?  Now you understand how you arrived at October 15, 2013, with a valid extension of time.  You, the American abroad, filed a Form 4868 on or before June 15, 2013, and you paid up your 2012 tax liability at the same time.

To get yourself an extra two months of time to file your 2012 income tax return, you have to write a letter.  Yes, we are off the fairway and into the rough.  We are outside the scope of published tax forms for invoking tax procedures.

First, let’s look at the law so you can see what it requires.

Treasury Regulations Section 1.6081-1 (Extension of Time for Filing Returns) is where you look in the Holy Tax Scriptures for the answer. Section 1.6081-1(a) gives the IRS the authority–in its discretion–to grant you an additional extension of time. Section 1.6081-1(b) tells you how to do it, and what to put in the letter.

For your late-night reading pleasure, here is the entire Section:

1.6081-1(a) In General.

The Commissioner is authorized to grant a reasonable extension of time for filing any return, declaration, statement, or other document which relates to any tax imposed by subtitle A of the Code and which is required under the provisions of subtitle A or F of the Code or the regulations thereunder. However, other than in the case of taxpayers who are abroad, such extensions of time shall not be granted for more than 6 months, and the extension of time for filing the return of a DISC (as defined in section 992(a)), as specified in section 6072(b), shall not be granted. Except in the case of an extension of time pursuant to Section 1.6081-5, an extension of time for filing an income tax return shall not operate to extend the time for the payment of the tax unless specified to the contrary in the extension. For rules relating to extensions of time for paying tax, see Section 1.6161-1.

1.6081-1(b) Application For Extension Of Time—

1.6081-1(b)(1) In General.

Under other sections in this chapter, certain taxpayers may request an automatic extension of time to file certain returns. Except in undue hardship cases, no extension of time to file a return will be allowed under this section until an automatic extension of time to file the return has been allowed under the applicable section. No extension of time to file a return will be granted under this section for a period of time greater than that provided for by automatic extension. A taxpayer desiring an extension of the time for filing a return, statement, or other document shall submit an application for extension on or before the due date of such return, statement, or other document. If a form exists for the application for an extension, the taxpayer should use the form; however, taxpayers may apply for an extension in a letter that includes the information required by this paragraph. Except as provided in § 301.6091-1(b) of this chapter (relating to hand-carried documents), the taxpayer should make the application for extension to the Internal Revenue Service office where such return, statement, or other document is required to be filed. Except for requests for automatic extensions of time to file certain returns provided for elsewhere in this chapter, the application must be in writing, signed by the taxpayer or his duly authorized agent, and must clearly set forth—


The particular tax return, information return, statement, or other document, including the taxable year or period thereof, for which the taxpayer requests an extension; and


An explanation of the reasons for requesting the extension to aid the internal revenue officer in determining whether to grant the request.

1.6081-1(b)(2) Taxpayer Unable To Sign.

In any case in which a taxpayer is unable, by reason of illness, absence, or other good cause, to sign a request for an extension, any person standing in close personal or business relationship to the taxpayer may sign the request on his behalf, and shall be considered as a duly authorized agent for this purpose, provided the request sets forth the reasons for a signature other than the taxpayer’s and the relationship existing between the taxpayer and the signer.

1.6081-1(c) Effective/Applicability Dates.

This section applies to requests for extension of time filed after July 1, 2008.

Write a letter

Write a letter to the Internal Revenue Service. The key ingredients are (1) the specific tax return that you’re attempting to get an extension for; and (2) the reason you need the extension. Quoting from above:

A taxpayer desiring an extension of the time for filing a return, statement, or other document shall submit an application for extension on or before the due date of such return, statement, or other document. If a form exists for the application for an extension, the taxpayer should use the form; however, taxpayers may apply for an extension in a letter that includes the information required by this paragraph.

They’ve told you to write a letter (because a form does not exist), and they’ve told you to provide the information required by “this paragraph.” That information is:


The particular tax return, information return, statement, or other document, including the taxable year or period thereof, for which the taxpayer requests an extension; and


An explanation of the reasons for requesting the extension to aid the internal revenue officer in determining whether to grant the request.

The particular tax return that you need to extend is the “2012 Form 1040″. If indeed that is the tax return you’re working with.

The reasons you need an extension are usually along the lines of “I need more time to gather income and expense information necessary to accurately prepare my 2012 income tax returns. I live outside the United States and this takes additional time to accomplish successfully due to communication and mailing delays.” Or something like that, right?

Where to send the letter

You send the letter to the IRS Service Center where you ordinarily file your income tax returns. See Treasury Regulations Section 1.6081-1(b), which says, in relevant part:

Except as provided in §301.6091-1(b) of this chapter (relating to hand-carried documents), the taxpayer should make the application for extension to the Internal Revenue Service office where such return, statement, or other document is required to be filed.

For an American abroad, this is:

Department of the Treasury
Internal Revenue Service Center
Austin, TX 73301-0045

How to send it

Do every conceivable proof of mailing that you can do. If you do not hear from the IRS, you win.

Do not wait until October 15 to mail that letter from a foreign country. MAIL IT NOW. Everyone thinks “If I have it postmarked on that date I have filed my IRS stuff on that date.” Ain’t necessarily so, Bucky.

“Postmarked by the loving Postal Service in [INSERT COUNTRY] on October 15″ does not mean, necessarily, that the IRS will treat you as having timely filed your request on or before October 15.

Mail it way, way early. Be smart.

You won’t hear from the IRS

If you do this, you won’t hear from the IRS. No file-stamped copy. Just silence.

Filing your tax return

Attach a copy of that letter (festooned with copies of all of the various proofs of mailing that you can muster) to your tax return when you file.

Also attach a copy of that Form 4868 that you filed on or before June 15, 2013.

Also write “Taxpayer Abroad” on the top of Form 1040, Page 1.

Merry Christmas

Congratulations. If you’ve read this far, it is December 15, 2013, and you just finished your 2012 income tax returns. It’s almost 2014, and time for you to start thinking about your 2013 income tax returns.

  1. IRC Section 6072(a). []
  2. Treasury Regulations Section 1.6081-5(a)(5 []
  3. Treasury Regulations Section 1.6081-5(a). []

Is an ISA a foreign trust?

Yesterday and today I have had an interesting email exchange with three tax practitioners about Individual Savings Accounts from the U.K. I will call this type of account an ISA (pronounced “Ice-uh”), because that’s how I say it out loud. I won’t identify them by name unless they want to be identified. (Email me and I’ll give you credit for inspiring this post.)

I stated the title of this blog post as a question, fully cognizant of Betteridge’s Law of Headlines.


The emails flying back and forth told me: (1) my 2011 post on the topic is DFW1; and (2) I should tell the world what I think is the correct answer. So this post is just me looking at the question and coming to a conclusion. The IRS may well come to a contrary conclusion. Them’s the risks. The IRS has opinions, keeps them close to its bureaucratic vest, and chooses to brandish them (or not) at the most inopportune of times.

That’s the disclaimer. Plus the usual disclaimer: don’t rely on anything you read, especially on the internet. Go hire a tax advisor and get advice. Especially don’t rely on me. It’s late afternoon as I’m writing this and I’m hungry.

How an ISA Works in the U.K.

Here’s the TL;DR on how an ISA works in the U.K. (Go to that website. It’s the official HMRC home page for ISAs).

You set one up. There are two different types, and there are limits on how many you can set up every year. You put money in. There are limits on that, too.

An ISA can hold cash. That’s a “cash ISA”. An ISA can hold stocks and shares. That is called a “stocks and shares ISA”. Your ISA can hold life insurance. A convoluted and confusing (to me) set of rules tells you whether your life insurance policy should be held in a “cash ISA” or a “stocks and shares ISA”. I mean really. Why would anyone want to keep things simple and have a “life insurance ISA”?

Interest, dividends, and capital gain are tax-free. (Well, interest on cash in one special type of ISA is subject to a 20% charge. Tax rules always have exceptions, right?)

But that’s the basic idea: save money in the form of cash, stocks and shares, or life insurance, and let it grow tax-free in the U.K.

What Happens When an ISA Touches the United States

Bad things happen when an ISA touches the United States, or more precisely when an individual who owns an ISA touches the United States. This can happen because a U.S. taxpayer (citizen or green card holder) qualifies to open an ISA, and does so. Or perhaps a U.K. citizen or resident moves to the United States to live, and becomes a U.S. taxpayer. In either event, we have problems to solve.

The first problem is the taxation of the ISA’s income. The IRS doesn’t care that the U.K. treats all of the ISA’s income as tax-free. You’ll be taxed on the income in the ISA under Internal Revenue Code rules that I will describe in a while.

The second problem is the scary one. Penalties. The question is simple: “Is an ISA a foreign trust?” If it is, the Internal Revenue Code has a set of paperwork requirements (Form 3520 and Form 3520-A) and some “death penalty for parking violations”-level penalties (Section 6677) if you muff up the paperwork.

Income Taxation of ISA Income in the United States

The income derived on ISA investments is taxable in the United States. This is true whether or not an ISA is considered to be a foreign trust.

If the ISA is not a foreign trust, it is just a regular investment account, owned by you, dear taxpayer. You pay U.S. income tax on all income you received, worldwide, and so if you have an ISA and you are a U.S. taxpayer, you must pay income tax on the ISA income.

If the ISA is a foreign trust, it will be a foreign grantor trust. Either the rules of Internal Revenue Code Section 679 will make it so, or the rules of Internal Revenue Code Section 672(f)(2)(A)(i) will apply. In either event, you, dear taxpayer, will be considered to be the owner of the ISA’s assets for income tax purposes (see Internal Revenue Code Section 671). Therefore you’re the owner of the income derived from them.

Here’s the problem that we see with ISAs again and again. Stocks and shares ISAs specifically. The classic asset held there is a unit trust. Translation: a mutual fund. Since the mutual fund is issued by a U.K. financial institution of one type or another, the mutual fund will be a Passive Foreign Investment Company in the eyes of the IRS. I’ll call this a “PFIC” because that’s what everyone calls it. Pronounce that acronym “PEE-fck”. And yes.

As a result, a U.S. taxpayer who owns a stocks and shares ISA with PFICs inside it will have a PFIC problem. Go look at Form 8621. And as they said in the saloons of the Old West when the outlaws were playing poker, “Read ‘em and weep.” You are going to pay a lot of U.S. income tax (even though everything is tax-free in the U.K.) and your accountant is going to charge you a lot of money to prepare your tax return.

In brief: interest and dividends from your ISAs will go to Schedule B. Capital gain will go to Schedule D. Everything driven by your unit trust shares will go to Form 8621.

An ISA is not a Foreign Trust

Jeez. I should be charging the big bucks for this write-up. I’m weeping when I think of what a saint I am for giving this all away for free. I might even break my arm patting myself on the back.

But I digress.

The income taxation of ISA income is uncontroversial. The bigger issue is whether an ISA is a foreign trust or not. If it is, you, dear taxpayer, have Form 3520 and Form 3520-A to contend with. And massive penalties if you don’t do the paperwork.

I think an ISA is not a foreign trust. One of the correspondents on our four-way email exchange thought that the IRS would disagree with me, if asked. So fair warning to you. Tread lightly, and carry a clove of garlic.

Trust Defined

The definition of an “ordinary trust” — for tax purposes, anyway — is in Treasury Regulations Section 301.7701-4(a):

In general, the term “trust” as used in the Internal Revenue Code refers to an arrangement created either by a will or by an inter vivos declaration whereby trustees take title to property for the purpose of protecting or conserving it for the beneficiaries under the ordinary rules applied in chancery or probate courts. Usually the beneficiaries of such a trust do no more than accept the benefits thereof and are not the voluntary planners or creators of the trust arrangement. However, the beneficiaries of such a trust may be the persons who create it and it will be recognized as a trust under the Internal Revenue Code if it was created for the purpose of protecting or conserving the trust property for beneficiaries who stand in the same relation to the trust as they would if the trust had been created by others for them. Generally speaking, an arrangement will be treated as a trust under the Internal Revenue Code if it can be shown that the purpose of the arrangement is to vest in trustees responsibility for the protection and conservation of property for beneficiaries who cannot share in the discharge of this responsibility and, therefore, are not associates in a joint enterprise for the conduct of business for profit.2.

There are two other types of trusts defined in the Treasury Regulations. Section 301.7701-4(b) defines “business trusts” and this definition will not apply to an ISA because these are trusts used, well, run an operating business. Hence the name. And Section 301-7701-4(c) defines “investment trusts” which, if you squint at it with the light shining in the right direction, tells you that this is for things like mutual funds. An ISA may contain investments that look like an “investment trust” under this definition, but an ISA itself won’t be one. At least, not on a planet with gravity.

So we are only looking at the definition of an “ordinary trust” in the Treasury Regulations. It has a few key requirements:

  • A trustee takes title to property;
  • For the purpose of protecting it or conserving it
  • For the beneficiaries
  • Under the ordinary rules applied in chancery or probate courts.

Here is the money phrase, which was helpfully highlighted above:

Generally speaking, an arrangement will be treated as a trust under the Internal Revenue Code if it can be shown that the purpose of the arrangement is to vest in trustees responsibility for the protection and conservation of property for beneficiaries who cannot share in the discharge of this responsibility and, therefore, are not associates in a joint enterprise for the conduct of business for profit.

Our quest is to determine whether–under U.K. law–an ISA manager is charged with the solemn duty to “protect and conserve” property for people “who cannot share in the discharge of this responsibility”. If the ISA manager has this responsibility, then the ISA arrangement is a trust in the eyes of the IRS. If the ISA manager does not have this responsibility, then the ISA is not a witch trust.3

An ISA Manager Is Not Responsible

My opinion is that an ISA manager does not have that responsibility. Even without reading anything (stand by, we will do that), you and I know that all financial institutions worldwide are risk-averse in the extreme and will do anything at all to avoid being at fault. Hence, I would be floored if the U.K. financial institutions that act as ISA managers would ever agree to a level of standard of care that is imposed on trustees. Fiduciary responsibilities are taken really %#$%@#^ seriously in the U.K.

But let’s not make up stuff. Let’s look at what HM Revenue & Customs says (I’m using the American custom of treating an entity as singular, so sorry) about ISA Managers. Helpfully there is a massive PDF titled “ISAs: Guidance Notes for ISA Managers” (warning: massive PDF, so don’t open that link on your mobile phone) that is authored by someone at HM Revenue & Customs, so presumably we can rely on it.

I looked at it and cannot find anything that tells the ISA manager that it will be put in the position of a fiduciary. Maybe you want to look and see what you find.

There are all sorts of other rules for the care and feeding of ISAs. But nothing about the ISA manager’s responsibility to the account holder. I’m not saying that no such rules exist. I’m just saying I see nothing here that would even hint at any role for an ISA manager that is greater than a custodian and possibly investment advisor (“You opened a stocks and shares ISA, so why don’t you buy these shares? The decision is yours, however.”)

The Account Holder Is In Control

The other part of the definition of an ordinary trust is that a trustee is in place to hold and conserve assets for the beneficiaries because they cannot share in the discharge of this responsibility. In other words, the trustee is there because the beneficiaries are not able to do the job themselves for whatever reason.

One thing is abundantly clear with ISAs: the account holder is in full control at all times.

Conclusion: It’s Not a Trust

The ISA is not a trust for two reasons: the ISA manager (the would-be trustee) does not have a fiduciary duty, and the account holder (the would-be beneficiary) has full control over the assets in the ISA.

  • Because the ISA manager (who would be the “trustee”) does not have a fiduciary duty, an ISA is not a trust. The normal “I gave my bank some money and they promised not to steal it from me” duty is not sufficient. That’s a custodian’s obligation not to take someone else’s stuff. And if the ISA manager gives investment advice (“Buy stock A, not stock B”), this is nonbonding stuff and the ISA manager does not have the power to force the account holder what to do. So the basic trustee’s administrative power of management is missing.
  • The account holder’s ability to designate investments and terminate the ISA at any time defeats the second arm of the IRS’s definition of a trust. Not only does the account holder “share” that responsibility of management, in fact the account holder is the only person who can exercise that management power.

Since I conclude that an ISA cannot be a trust, it follows that an ISA cannot be a foreign trust. If so, then Form 3520 and Form 3520-A are not required for a U.S. taxpayer who owns an ISA.

What Do You Think?

This is just my ranting, of course. The only opinion that matters will belong to someone in the IRS’s Chief Counsel’s office in Washington DC.

So. What does the internet think? Is an ISA a “trust” or not? I am indebted to one of my correspondents today for dredging up the old blog post and pointing out that I was wrong there. Does anyone agree/disgree with this blog post? Comment anonymously if you want.

  1. There is a swear word in that acronym, and the “W” stands for WRONG []
  2. Emphasis helpfully added by mygoodself []
  3. As I was writing that sentence I imagined a very Monty Pythonesque voice shrieking “I am not a witch!” []

Webinar Registration Open — Limited Spots Left

We have only a couple spots left for each webinar session next week.

To register:

August 15 session at 6:00 PM (GMT-0700)

August 16 session at 9:00 AM (GMT-0700)

The webinar sessions are open to individuals and to CPAs who would benefit from learning more on the topic of U.S. tax solutions for nonfilers abroad.

If you have questions, please contact our office at +1-626-689-0060 or submit your questions here.

Webinar for Nonfiler Americans Abroad

(This is a copy of Jell-O Shot 24 that will be going out today to all of you on the list. We are having problems with Mailchimp getting the test emails and into our inboxes successfully, but it will go out as soon as that’s resolved. Don’t miss out on the fun, though. If you want to get monthly updates from Phil, subscribe!)


We are doing a webinar for regular Americans living abroad. If you haven’t filed U.S. tax returns in years, this 90 minute session is for you. It will help you know the real story about your risks (tax liability and penalties) and your options. Hint: we don’t blindly pimp the Voluntary Disclosure Program.

Ten people only. $100 each. (It’s a test run so you won’t see this price again). August 15, 2013 at 6:00 p.m. – 7:30 p.m. This is August 16, 2013 in the morning for those of you in the Asia-Pacific region. August 16, 2013 at 9:00 a.m. – 10:30 a.m. PDT (16:00 GMT) for those of you in Europe and the Middle East. Sign up at the links.

Nonfilers. We know them.

We get emails and calls. Lots of them, every week. From regular, ordinary Americans living abroad, earning regular, ordinary incomes and living regular, ordinary lives.

They haven’t filed U.S. tax returns, sometimes for decades. Frequently, the cause is bad information. Other times, it is because—despite their best intentions—life got in the way of doing the paperwork. Especially if you’re living in a high-tax country and paying tax and filing tax returns already.

They are afraid. They know they have a problem, but they don’t know what to do about it.
They are afraid of what will happen when they travel to the United States.
Or what will happen when they renew their U.S. passport. The State Department tells the IRS.
Or what will happen when FATCA eventually rolls out and their local bank contacts them—will their accounts be closed?

“Go to Voluntary Disclosure” (SRSLY???)

Usually we get a call after the person has contacted someone else. The advice is “Go to the Voluntary Disclosure Program”. The tax lawyer is unwilling to talk about other options except in a theoretical fashion.

The full financial impact of the Voluntary Disclosure Program starts to dawn on the person. Tens of thousands of dollars in legal and accounting fees to make the IRS happy. Unknown back taxes, interest, and penalties, but it’s probably huge, right? (That’s what fear does for you: magnifies the unknown). Worst of all, a 27.5% slice of your net worth is at risk as a one-time penalty.

This is life-altering. In a bad way.

Your three cleanup options

There are only three ways to clean up a tax mess:

  • Voluntary Disclosure Program;
  • Streamlined Procedure Program (a relatively new IRS program for Americans abroad who are “low risk” in the eyes of the IRS, and this is a kind of squidgy definition); or
  • Just file your tax returns (what people call “quiet disclosure” but it’s nothing special, because you’re just doing what you were supposed do to, except late).

Our firm has advised many, many, many such people. We have cleaned up the messes for those who have chosen to hire us. The Voluntary Disclosure Program is not the only way for an ordinary American abroad to fix IRS problems. In fact, it is quite often the wrong way to do it.

The Nonfiler’s Fear

Our experience, when dealing with nonfilers, is that there is an enormous fog of fear that is caused by lack of information. When solving these problems, the first thing to do is get accurate information. What, exactly, are the risks facing you? Then put dollar signs on them.

When you go from “I’m afraid, but I’m not sure of what” to “I’m afraid, and the fear has a known price tag of $________”, you’ll feel better. Sometimes, when we dig through the mess the total financial exposure ends up being pretty small. It’s like switching on the light to scare the bogeyman out of your kid’s bedroom when she’s afraid at night. The next step is obvious.

Other times, the price tag on fixing the tax problem is laughably large. “The IRS thinks I should pay THIS?” Those situations point themselves to appropriate strategies, too.

True Confessions

I was a nonfiler for three years during the late 1980’s. Yes. A tax lawyer. And yes, to say this bothered me is an understatement. What if I was representing a client in an audit and the Revenue Agent ran my social security number through the system and found out I hadn’t filed? I saw lawyers disbarred for failing to file tax returns. Yet I couldn’t get my butt in gear to solve the problem. The recursive cycle of fear and shame had me, and I couldn’t move. Years went by.

It was only when another friend (hi, Sandy) admitted out loud that he too had a nonfiling problem that I summoned the courage to take action. And it was only with the help of a CPA friend (hi, Hal) that I was able to get the tax returns filed—years late. In my case, I owed the IRS $6,000. My “fear of the unknown” had told me it was 50x that amount. Sandy, by the way, was my pacing partner and he got his tax returns filed too. We both felt like we had lost about 30 pounds. We felt fabulous.

That is why I feel such empathy for people who haven’t filed tax returns. I have been there. I have walked through it. You should, too.

Specific Areas We Have Seen

Here are some of the things we have seen, again and again. Do any of these apply to you?
The foreign earned income exclusion. I would guess that a majority of people abroad think that if you earn below the threshold amount, you don’t have to file a U.S. tax return. No so. You have to file to claim the exclusion.

  • Pensions. Oh, man. What a problem. Most of you have pensions. Maybe they are employer-administered plans. Maybe they are self-funded plans, much like the American IRA. These get inconsistent treatment. Will the employer’s contribution to the plan on your behalf be taxable income to you? How will that self-funded plan (the Canadian RRSP, Australian superannuations, etc.) be taxed?
  • Mutual funds. Just don’t buy them. OK? If you buy mutual funds from a foreign company, you have consigned yourself to tax hell, also known as Form 8621. These are Passive Foreign Investment Companies (“PFIC”s) and the tax treatment is not good.
  • You formed a company abroad. Congratulations. You have a business or the custom in your country is to own real estate through a corporation. Form 5471. Have you done this form?
    Gifts and inheritances. Whether giving or receiving, these can trigger tax filing requirements. Receiving large gifts or inheritances from nonresidents can create severe penalties if not reported.
  • Form 8938. This is the human-facing by-product of the FATCA law. What must be reported here?
  • The dreaded FBAR. And don’t forget the dreaded FBAR form. Now it must be filed online. What to do about this? More to the point, what does the IRS do about late-filed FBARs?
  • It’s tax-exempt there but not in the USA. The U.K. has ISAs. Income is earned tax-free. Bad news for Americans in the U.K.—they’re not tax-free as far as the IRS is concerned. Or Taiwan (and many other places) won’t tax capital gains. Bad news again. The IRS wants you to pay.

What You’ll Get From the Webinar

This webinar will tell you—from our firm’s experience in advising clients like this—what your risks look like and what your choices are.

The presentation will last about 60 minutes. The remainder of the time (30 minutes) is reserved for questions. We are limiting attendance to 10 people per webinar in order to give time for questions.

Who Should Sign Up

This webinar is for someone who hasn’t filed tax returns and wants to. It is for people who consider themselves to be middle class taxpayers (whatever your definition of middle class is). If you’re making squillions of dollars, your tax problems are of a different magnitude and while you’re welcome to listen in, the solutions here will probably not be appropriate for you.

How to Sign Up

The session on August 16, 2013 at 9:00 a.m. PDT (14:00 GMT) is designed for people in Europe in the Middle East. If we get sufficient interest we will schedule one for people in Asia.

I hope this webinar ends up being useful for you. This is an experiment for us. We simply cannot help everyone who calls. There are too many. But we can share our experience so that you can make a better decision on what to do.


Email Elena Redko, CPA at or call the office to talk to her. I will be backpacking in New Mexico with a Boy Scout Troop for two weeks (yes, Philmont), with no email, cell phone, electricity, etc. etc. ☺

Thanks for listening. Talk to you next month.