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Five US expat tax nightmares and how to avoid them

It’s no secret that filing US expat taxes can be intimidating. There are many nuances to consider and myriad of forms to sort through – not to mention the prospect of stiff penalties if you do things wrong – willingly or not.

Five US expat tax nightmares and how to avoid them
Photo: Pixabay

However, knowing where the pitfalls lie can be the first step toward staying out of trouble, and with that in mind we caught up with David McKeegan, Co-Founder of Greenback Expat Tax Service for insights on five common “nightmare scenarios” for US expats – and what you can do to avoid them.

Not filing your US federal tax return

It’s a common scenario: you’ve left the US more or less permanently, lived abroad for years and dutifully filed your foreign tax return each year. All good, right? Not so fast. A few years down the line, you learn you still have tax filing obligations in the US. Yikes! Surely this can’t be true, right?

“It’s true: you are required to file your federal tax return annually and report all worldwide income,” McKeegan warns.

If you’ve forgotten to file due to “unfamiliarity” with the law, the IRS offers the Streamlined Procedures Program that allows ignorant taxpayers to catch up (this being the IRS, there’s even a special form for certifying your lack of filing was “non-wilful”).

And what if you knew the rules but did “wilfully” ignore them, perhaps because you didn’t want to disclose foreign accounts or have to deal with reporting on foreign investments?

“Those who didn’t file after knowing their obligations may consider the Offshore Voluntary Disclosure Program (OVDP),” advises McKeegan.

The OVDP, besides giving you yet another memorable IRS abbreviation, lets you come clean and avoid the risk of and IRS investigation or (gulp) criminal prosecution. However, the IRS has recently announced that the OVDP will be ending on September 28, 2018, so those who need to utilize this program should do so as soon as possible.

Not filing the Statement of Specified Foreign Financial Assets (Form 8938)

Be warned! This nightmare scenario can result in a $10,000 penalty – with further penalties up to $50,000 if don’t file your Form 8938 following IRS warnings.

But who exactly needs to file this Statement of Specified Foreign Financial Assets?

“You are meant to file this form along with your federal tax return if your specified financial assets at the end of the calendar year are over $200,000 living abroad or $50,000 if living in the US,” McKeegan explains.

“This is the big one – so much so that the US government enacted it under the Foreign Account Tax Compliance Act (FATCA) with the intent of preventing tax evasion.”

FATCA imposes reporting requirements on US expats as well as banks, foreign investment companies, brokers, and insurance companies, all of which must report to the IRS directly on financial accounts or foreign entities owned by US persons.

“If the income relating to these foreign assets is not declared on the tax return, you are penalized at 40 percent on the attributable tax,” McKeegan adds.

Non-compliance with FBAR (Foreign Bank Account Reporting)

This is another doozy of a nightmare. Indeed, non-compliance on your FBAR can leave your financial life FUBAR.

“Those who are required and do not file may be looking at civil monetary penalties,” says McKeegan. “Up to $12,459 per violation judged to be non-wilful. And for wilful violations, the penalty may be $124,588 or 50 percent of the balance in the account – whichever is higher.”

Ouch! And what exactly is FBAR?

“As a US person you are required to file an FBAR if you had ownership or signature authority on one or more financial accounts outside of the US and if the aggregate balance of all the accounts was more than $10,000 at any time during the year – for even a day,” he explains.

And just to make things trickier, the FBAR filing procedure is a bit different. Rather than filing with your federal tax return, the FBAR is filed online via the BSA E-Filing System – although it should still be filed by the April 15th tax filing deadline, although it is possible to get an automatic six-month extension until October 15th.

Getting lost trying to navigate PFIC rules

Do you own any foreign mutual funds? If so, you’d better pay attention to this additional gem of an IRS abbreviation.

PFIC stands for Passive Foreign Investment Companies and refers to non-US registered funds. Reporting rules for them were originally aimed to discourage taxpayers living in the US from investing in foreign tax havens. And getting the reporting right is no easy task.

“The IRS estimates over forty hours are required to research the law, record keep, and prepare the form for one mutual fund,” says McKeegan. “In addition, each PFIC needs to be reported separately on separate 8621 forms, which can be both expensive and time-consuming.”

Indeed, sorting out the proper reporting and calculations for Form 8621 is so complex that your best option is getting help from a tax professional.

“And even if you’re not required to file Form 8621, you still need to confirm if you are required to report it on Form 8938,” he adds.

Complex foreign company investments

Having more than a 10 percent ownership stake in a foreign company can also result in a nightmare scenario when it comes to correctly filing US tax returns.

In such cases, you may need to file Form 5471 – Information Return of US Persons With Respect to Certain Foreign Corporations.

“Be warned that you will need to delve into the four categories of individual filers and understand what a public officer or directorship may entail, as well as the surrounding intricacies. Each category filer has specific forms to be completed and must be accurate to be considered compliant,” says McKeegan.

Things get even more complex if a company in which you own more than a 10 percent is incorporated in a foreign country.

“Like the other scenarios, the penalties can be harsh. Even if the company is reporting losses or not trading it is very important to file,” McKeegan adds.

And if you have expatriated or are contemplating doing so, you really need to make sure you file Form 5471 – not doing so may jeopardize the certification that you have been compliant for the preceding five years or, worse yet, classify you as a covered expat, and leave you subject to hefty expatriation tax penalties.

Bottom line? Speak with a tax professional experienced in this area who can help make sure you comply with all the requirements.

One option is tuning in to this video from a recent free webinar with Greenback Expat Tax Services.

For further information about these scenarios and others, or to speak with an expert on expat tax requirements, contact Greenback Expat Tax Services today!

 This article was produced by The Local Client Studio and sponsored by Greenback Expat Tax Services.

For members

WORKING IN SWEDEN

CHECKLIST: Here’s what you need to do if you move away from Sweden

What authorities do you need to inform before you leave, are you liable to Swedish tax and how can you access your Swedish pension? Here's a checklist.

CHECKLIST: Here's what you need to do if you move away from Sweden

Tell the relevant authorities if you’re leaving for more than a year

If you’re planning on leaving Sweden for more than a year, you will have to let the authorities know. The main authorities in question are Skatteverket (the Tax Agency) and Försäkringskassan (the Social Insurance Agency).

Försäkringskassan

You have to tell Försäkringskassan when you leave so they can assess whether or not you still qualify for Swedish social insurance. As a general rule, you aren’t eligible for Swedish social insurance if you move away from Sweden, but there are exceptions, such as maternity or paternity benefits if you’re moving to another EU country.

This also applies to any family members who move with you – any over-18’s should send in their own documentation to Försäkingskassan about their move abroad. If you’re moving abroad with anyone under 18, you can include them in your own report to Försäkringskassan.

If both legal guardians are moving abroad together, both need to include any children in their application. If one legal guardian is moving abroad and the other is staying in Sweden, you need the guardian staying in Sweden to co-sign your application. If you are the sole legal guardian of any under-18’s travelling with you, you don’t need any documentation from the other parent.

You can register a move abroad with Försäkringskassan on the Mina sidor service on their website, here (log in with BankID).

Skatteverket

If you are moving abroad for a year or longer, you also need to tell the Tax Agency. This also applies if you were planning on moving abroad for less than a year but ended up staying for longer.

If you move to another Nordic country, you will also need to register your move with that country’s authorities if you will be there for six months or more. You’ll be deregistered from the Swedish population register the same day you become registered in another Nordic country’s register.

This doesn’t mean that you’ll lose your personnummer – you’ll still be able to use it if you ever move back to Sweden – but you will no longer be registered as resident in Sweden.

Similarly to Försäkringskassan, you will also need to report any children you are bringing with you, and both legal guardians must sign the form, whether or not both guardians are moving abroad or not.

In some cases, you may still be liable to pay tax in Sweden even if you live abroad – particularly if you are a Swedish citizen or have lived in Sweden for at least ten years. This could be due to owning or renting out property in Sweden, having family in Sweden, or owning a business in Sweden.

You can tell the tax agency of your plans to move abroad here.

Contact your a-kassa, if relevant

If you are member of a Swedish a-kassa (unemployment insurance), make sure you tell them that you’re leaving the country. As a general rule, you have unemployment insurance in the country you work in, so you will most likely have to cancel your a-kassa subscription.

If you are moving to another country with the a-kassa system, such as Denmark or Finland, it may pay to wait until you have joined a new a-kassa in that country before you cancel your membership in Sweden.

This is due to the fact, in some countries, you only qualify for benefits once you fulfil a membership and employment requirement. In Sweden and Denmark, you must have been a member for 12 months before you qualify. In Finland, the membership requirement is 26 weeks.

If you qualify for a-kassa in Sweden before you leave the country, you may be able to transfer your a-kassa membership period over to your new a-kassa abroad and qualify there straight away, but this usually only applies if your period of a-kassa membership is unbroken.

Check what applies in your new country before you cancel your membership in Sweden – your a-kassa should be able to help you with this.

Contact your union, if relevant

Similarly, if you are a member of a Swedish union or fackförbund, let them know you’re moving abroad.

If you’re moving to another Nordic country, they might be able to point you in the direction of the relevant union in that country, if you want to remain a member of a union in your new country.

If you’re moving to another EU country, you may be able to remain a member of your Swedish union as a foreign worker with the status utlandsvistelse.

If you chose to do this, you will usually pay a lower monthly fee than you do in Sweden, and they can still provide assistance with work related issues – although it may make more sense to join a local union in your field with more knowledge of the labout market.

If you don’t want to be a member of a union in your new country and don’t want to be a member of a Swedish union, you should contact your  union and ask them to cancel your membership.

Collect relevant documents regarding your Swedish pension

If you have worked in Sweden and paid tax for any length of time, you will have paid in to a Swedish pension. You retain this pension wherever you move, but you must apply for it yourself.

To do so, you will need to give details of when you lived and worked in Sweden, as well as providing copies of work contracts, if you have them. If you have these documents before you leave Sweden, make copies so that you can provide them when asked.

If you move to the EU/EES or Switzerland, you may also have the right to other, non-work based pensions, such as guarantee pension for low- or no-income earners, or the income pension complement (inkomstpensionstillägg).

Currently, you can receive your Swedish pension once you turn 62 – although there is a proposal in parliament due to raise pension age to 63 for those born after 1961 from 2023, so this may change.

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