This week’s question comes from someone who was flummoxed by ambiguity and the IRS’s inability to answer questions. I will quote the whole email because it make me happy.
Dear Phil H,
Thank you for helping me navigate through the murky waters of expatriation. Your writings have been both a ray of illumination and a catalyst for the fight or flight response. You have been infinitely clearer than the folks at the IRS, helplines, Embassies, etc.
Thinking that I was at last free from the unreasonable demands of a country I have not lived in for many decades, and relieved that my financial accounts/career/financial security/etc. have been saved from FATCA inspired oblivion, I was propelled into another few hours of frenzy by something you wrote in this week’s newsletter… about a FinCen 114 being due for the year of expatriation. To confirm your information, I sent an email to this IRS recommended address: FBARquestions@irs.gov. Here follows the reply I received. Its beauty might appeal to you. It is a record of incomprehension and increasing anxiety from both parties. I am being told that the FinCen 114 is not needed in the year of expatriation.
I’ve been left with the impression that my command of English is inadequate, and that I have seen ambiguity where none exists. Alas, it is the only language I speak with fluency. Perhaps, as a lawyer, you will be able to clearly see what I could not.
The question is whether, in the year of expatriation, you must file the dreaded FBAR, now named FinCen Form 114.
The short answer is yes. You must file the FBAR for your expatriation year.
I don’t know whether you report all activity for the full calendar year or just the portion of the year that you were (still) a U.S. citizen.
My email correspondent could not have been clearer in her questions to the IRS.
From: Name Removed
Sent: Day 1
To: *SBSE FBAR Form
Subject: filing requirements
I expatriated in 2014. I am no longer a US person. Am I required to file a FBAR in 2015 for 2014? If there is a requirement to report, please let me know where the regulation can be found so that I can give the information to others in my position.
Thank you for your help.
The answer comes back a day later:
On Day 2, IRSEmployeeName wrote:
If someone is no longer a U.S. citizen or resident at any time in 2014, then that person would have no obligation to file an FBAR to
report foreign accounts held during the 2014 calendar year.
Tax Law Specialist
Voice (123) 456-7890
My correspondent answers more or less immediately:
On Day 2, Taxpayer wrote:
Thank you, IRSEmployeeName.
This sentence could be read either way…can you be clearer for me? I was not a citizen at the end of 2014, therefore I do not need to file OR I was a citizen at the beginning of 2014, so I do need to file.
That’s it exactly. IRSEmployeeName did not answer the question. My correspondent’s question is the accurate one: does the fact that she was a citizen for some (but not all) of the days in 2014 create a filing requirement for the FBAR?
The filing requirement is clear. The way the rules are written, the filing requirement is triggered if a U.S. person, at any time in the year, had certain types of foreign financial accounts. An expatriate would satisfy those rules, so the FBAR (FinCen Form 114) is technically required.
So the short answer to the question is yes, you should file a 2014 FinCen Form 114.
The next logical question is whether you have to report information to the U.S. government that occurred after you renounced your U.S. citizenship. Let’s say you open a new bank account the week after expatriation. Is that bank account listed on the FBAR for 2014? It seems kind of dumb and pointless, doesn’t it?
Form 8938 is another form that requires you to report foreign financial assets. In this case, the IRS has made it clear that if you are a part-year resident, you only report on Form 8938 for January 1 until the date that you cease residency. Thus, an expatriate would only complete Form 8938 with information through the renunciation date. Anything after that date can be left off.
There is no similar declaration of simplicity by the IRS for FinCen Form 114. The triggering conditions for filing (a U.S. person with foreign financial assets) exist, but there is silence (so far as I know, at least) on whether the reporting requirement covers only the days in which you are a U.S. citizen or resident.
At some point you should expect the IRS to issue some type of edict that is consistent with the Form 8938 philosophy of life. But it hasn’t done so yet.
This leaves you in an uncomfortable position:
I will leave it to my correspondent to explain why this is a problem:
The IRS has all of my personal information on the invasive 8938, so filing my personal information is only a time commitment, whatever I might think of the obligation…I’ll spare you my detailed thoughts on the matter. There is, however, a difficult position with a clutch of accounts in trust for vulnerable people for which I am a signatory: British settlor, British trust paying British tax, British investments, British accounts, British beneficiaries…. all under British law which has rather a lot to say about privacy. There was a certain amount of surprise when I explained the situation to my fellow trustees. Oh, well. I shall negotiate. Not, obviously, with the US Treasury.
This is consistent with our experience. People generally fill in the FBAR form in full for the whole year of expatriation, and just layer one more epithet on those previously hurled at the IRS.
But sometimes there are problems created for other people, or problems created for the expatriate under the other country’s laws.
Until the IRS comes out and says something clear about the FBAR reporting time frame for expatriates (unlike Ms. IRSEmployeeName who dodged the question entirely), we think the safer path is to fill out the FBAR form for the whole year of expatriation. Have a cocktail, fill it in, and file. Yeah it’s wrong. Yeah it’s dumb. Just do it.
I am not your lawyer, and this is not legal advice to you. If you need help, please hire someone who can advise you.
Next week I will answer another question about expatriation. Send me an email!