Have you checked your tax status lately? Non-resident Americans listen up
If you’re a non-resident American (NRA) living in the UAE, you may think paying tax in the US is no longer relevant to you. But think again.
Here, Andrew Prince, a financial planner at Acuma Independent Financial Advice, offers advice for NRA’s trying to manage their tax status to ensure they stay on the right, and not the wrong, side of the taxman.
The Foreign Account Tax Compliance Act (FATCA) is legislation enacted in March 2010 by the US Government. The purpose of FATCA is to stop American citizens from evading US tax. So who exactly are the IRS (taxman / bogeyman – delete as appropriate!) targeting? Well, if you fall into one of the categories below, you ought to start paying serious attention right now. There are three main types of NRA:
1. Non-resident US Citizen.
· Born & bred American. US passport holder living outside USA.
2. Accidental American.
· Married a US passport holder
· One or more American parents
· Born in the US (irrespective of parents’ status)
3. Green card holder
FATCA requires certain US taxpayers holding foreign financial assets with an aggregate value exceeding $50,000 to report these assets on the new IRS form 8938 and this must be attached to the tax payer’s annual tax return.
Ah ha, but what if I don’t tell them?
For those familiar with a Monopoly Board game, you will recognise the card which states “do not pass go, do not collect $200 and go straight to jail.”
Failure to report a form 8938 will result in a penalty of $10,000 and $50,000 for continued failure, plus up to 40 per cent penalty for non-reporting of foreign assets. The IRS has given NRA’s plenty of notice about these changes and will certainly be looking to make one or two high profile examples wherever possible.
Ah ha, but they won’t find me.
The IRS sent 104 million messages to whistle-blowers around the world – that there is now a safe and secure way to report evasion. You may recall a couple of years ago, Bradley Birkenfeld, the ex UBS banker secured a whistle-blower award of $104 million from the IRS.
In addition to the above, when you now renew your passport, you will be required to evidence that you have filed tax returns for the previous five years.
However arguably, the biggest issue affecting ALL US taxpayers is PFIC’s (Passive Foreign Investment Companies.) Generally, all non US investment funds are PFICs - including traditional insurance bonds and without getting bogged down in the detail, these companies are going to report directly to the IRS details of their account holders. Failure to comply will result in onerous penalties on them.
“I give up, they can keep the passport!”
Unfortunately, as easy as the words are to speak, the actions are somewhat harder and the following will apply:
• Proposed exit tax of 30 per cent if renouncing for tax purposes
• Must ensure last 5 years of filings are up to date before going to embassy
• Must have new citizenship and passport
• Prevents individual getting US passport again
• Estate Tax continues
OK, we have explored the doom and gloom, what are the options?
1) File your tax returns on time
2) Consult with a qualified accountant and possibly a tax lawyer
3) Be honest and use all of the investment tools and tax shelters that are available legitimately
4) Seek independent and qualified independent financial advice from a company specialising in this area who have USA offices.