What’s this, Paul – another tax article so soon after April 15?
Well, yes and no. This article doesn’t directly address the topic of taxes. It delves into a little “preventive” action, however, regarding some required Department of the Treasury report filings.
While this article focuses on an issue facing a U.S. citizen/taxpayer, it may very well apply to those of you who have ties with other countries. My best advice, dear readers, is to check with the governmental agencies having jurisdiction over your current situation.
As many of you may have guessed (and others are finding out), the different agencies of the U.S. federal (and most other) government(s) love to share information that is stated in dollars and cents. Information sharing between the different offices and departments of each agency is more intense than inter-agency sharing.
There is no finer example than the Department of the Treasury and its Internal Revenue Service. They do talk to each other – continuously – and for some functions, they share the same networks and one or two databases. It’s no wonder. Better communications in that agency can provide increased tax revenues.
Geopolitical borders do not limit this information sharing. Various countries around the world now share their information with others in an effort to detect criminal activity, potential tax fraud and other activities that may be contrary to a country’s criminal and civil laws.
SO, WHAT’S THIS HAVE TO DO WITH ME?
This article is about a Department of the Treasury report that you may or may not have to submit. Participation depends on who you are, what you have, and whether you’ve exceeded a certain threshold during a specific time frame.
(* * * BOREDOM ALERT * * * the following may appear boring to some readers, however it covers information you’ll need to determine whether you must file a report. Please attempt to read it.)
AUTHORITY: Statutes & Rules & Regulations, Oh MY!
The U.S. Department of the Treasury Regulations, in 31CFR 103, provides the basis for “U.S. persons” to report a financial interest in, signature authority, or other authority over one or more financial accounts in foreign countries.
Interpreting these Regulations:
Each United States person who has a financial interest in or signature or other authority over any foreign financial accounts, including bank, securities, or other types of financial accounts, in a foreign country, if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year, must report that relationship each calendar year by filing this report with the Department of the Treasury on or before June 30, of the succeeding year.
The vehicle for reporting these relationships is Treasury Department Form TD F 90-22.1 (shown below). Before discussing the form, let’s talk about those highlighted words and phrases, and their meanings.
WHO –
A United States person, while completely defined in 31CFR103.11z, means a citizen or resident of the United States, or a person in and doing business in the United States. For this article, we will narrow that to U.S. citizens, resident aliens (green card holders) and businesses chartered in one of the United States – the same folks who may be required to pay income taxes and file the appropriate tax returns to the United States regardless of where they live or, in the case of businesses, where they operate.
WHAT –
A financial interest means:
- An interest in each account for which the U.S. person is the owner of record or has legal title, whether the account is maintained for his/her own benefit or for the benefit of others including non-U,S. persons.
- An interest in each account for which the owner of record or holder of legal title is
- a person acting as an agent, nominee, attorney, or in some other capacity on behalf of a U.S. person;
- a corporation in which the U.S. person owns directly or indirectly more than 50% of the total value of shares of stock or more that 50% of the voting power for all shares of stock;
- a partnership in which the U.S. person owns an interest in more that 50% of the profits or more than 50% of the capital of the partnership; or
- a trust in which the U.S. person has a present beneficial interest, either directly or indirectly, in more that 50% of the assets or from which the U.S. person receives more than 50% of the current income.
- An interest in each account for which the owner of record or holder of legal title is a trust, or a person acting on behalf of a trust, that was established by the U.S. person and for which a trust protector has been appointed.
A signature or other authority means:
- A person has signature authority over an account if that person can control the disposition of money or other property in it via a document containing his/her signature (or his/her signature and that of one or more other persons) to the bank or other person with whom the account is maintained.
- Other authority exists in a person who can exercise comparable power over an account by communication with the bank or other person with whom the account is maintained, either directly or through an agent, nominee, attorney, or in some other capacity on behalf of a U.S. person, either orally or by some other means.
A financial account means:
- Any bank, securities, securities derivatives or other financial instrument account;
- Any account having its assets held in a commingled fund, and the account owner holds an equity interest in the fund (including mutual funds);
- Any savings, demand, checking, deposit, time deposit, or any other account (including debit card and prepaid credit card accounts) maintained with a financial institution or other person engaged in the business of a financial institution. (Note: these would include foreign PayPal and similar accounts.)
(Note: individual bonds, notes, or stock certificates held by the filer are not a financial account nor is an unsecured loan to a foreign trade or business that is not a financial institution. Likewise, correspondent or “nostro” accounts [international interbank transfer accounts] maintained by banks that are used solely for the purpose of bank-to-bank settlement need not be reported with the above defined accounts, but are subject to other Bank Secrecy Act filing requirements.)
WHETHER
The aggregate value means the total value of all foreign financial accounts (as defined above) at a specific point in time. (Example: the dollar values of a foreign checking account, savings account and debit card account added together.)
At any time during the calendar year means at any time on one or more days during a single calendar year that begins on January 1 and ends on December 31.
THE REPORT TO BE FILED
Summarizing the above:
If you own or have authority over foreign financial accounts in foreign banks or other foreign financial institutions, and their aggregate value exceeds $10,000 during a calendar year, you’ll need to file Treasury Department Form TD F 90-22.1. An interactive form, complete with instructions for completing and filing, is available on the IRS website.
The form isn’t as difficult as it appears. Many expats file the form themselves as the instructions provide direction as well as answers to questions you may have. The form itself consists of five pages and it is a five-part form – one part per page.
Of major note – DO NOT FILE THIS FORM WITH YOUR TAX RETURN and DO NOT MAIL IT TO THE SAME ADDRESS AS YOUR TAX RETURN. File it separately with the Department of the Treasury, mailed to the address provided in the instructions. Unfortunately, you cannot file this form electronically. Mailing the form or hand carrying it to the address stipulated are the only options available.
Also of note – there is NO EXTENSION TO FILE this return available. It is due on June 30 of the year following the calendar year reported. (E.g., for the reporting calendar year of 2009, the filing due date is June 30, 2010.) Reports received with a postmark later than the due date will be delinquent. If you believe your filing will be delinquent, you will need to attach a statement to your report explaining the reasons for late filing.
A final note – if you are required to file and you do file this return, you are required to keep a copy of the form and supporting documentation for five (5) years. The Department of the Treasury can go back five years and check on your submission.
THAT’S IT, RIGHT? THERE’S NO MORE, IS THERE?
For now, yes that’s it. There is mischief afoot in the government, however. There will be increasing scrutiny over foreign financial accounts in the near future. Laws recently passed and laws “in the works” will make obtaining accounts, holding accounts, and using accounts in a foreign country a lot more difficult. It’s all in the name of “closing the tax gap” – the gap between what the IRS receives in tax revenue and what the IRS believes it should be receiving in tax revenue.
I’ll provide more on all of that in a later article when some of the dust settles. For now, check all of your foreign account balances, determine whether you need to file the report, and if so, do it!
U – P – D – A – T – E
Everyone – Here’s an update about financial accounts in foreign financial and foreign non-financial institutions. While it may not affect you directly, it could do so indirectly.
“Hidden” on page 27 of the “Hiring Incentives to Restore Employment Act” (H.I.R.E. Act) signed into law last March 18 is a seldom reported provision known as the “Foreign Account Tax Compliance Act” (FATCA). This law could have severely negative affect on those of us with financial accounts in Philippine (or other foreign) banks.
This act comes into force in 2013.
Briefly, FACTA will require foreign financial institutions and foreign non-financial institutions (e.g., a business that is not a bank but transacting bank-like business) to report accounts and security trades by U.S. persons with an aggregate value exceeding $50,000. If they don’t, the IRS will require them to institute a 30% withhold tax on those transactions.
Some banks, it’s reported, have already taken a very negative view on these new requirements and, instead of moving toward compliance, resolve their dilemma by closing accounts held by U.S. persons.
News website swissinfo.ch article “New US tax law could have ‘disastrous effects’” (available at http://www.swissinfo.ch/eng/Specials/Swiss_banking_secrecy_under_fire/News/New_US_tax_law_could_have_disasterous_effects.html?cid=8520476 ) provides this viewpoint:
“FATCA is another example of the US government bullying its nationals living overseas, according to Andy Sundberg of the Swiss chapter of the American Citizens Abroad group. Members have been complaining for some time about the increasing difficulty of opening a bank account abroad as a result of the US government tax evasion offensive.
“What started out as legislation aimed at those with the specific intent of hiding money abroad has become a lot more draconian and is scaring US people living abroad,” he told swissinfo.ch.
“It is reasonable to assume that thousands of US citizens may not want to go home again. We appear to be labelled as bad people by default and we are faced with nothing but threats and denunciations.”
Searching Google, Yahoo or other engines for more articles about FATCA and the H.I.R.E. Act that will give more information.
Hi Paul,
Anything new on this? My asawa is a dual citizen and has property and assets in PI. She does not think we need to report this since she pays taxes in PI and says she doesn’t owe the US anything. Currently we reside in PI. Is this a concern?
Gary
Hi Gary – So long as you don’t meet the requirements for reporting, you should not have any concerns. Dual citizenship makes your asawa a “U.S. person” for reporting purposes, so if requirements are met, she’d be involved with reporting.
The key to which property/assets to look at would be bank accounts and similar financial accounts. Owning physical property is not included.
The reality is the U.S. Government has no jurisdiction over foreign banks. This process is entirely voluntary despite any amount of posturing by the U.S. government. If foreign banks don’t have substantial U.S. investments they can and will ignore both the Treasury Department and the IRS. The only reason UBS finally capitulated to U.S. demands was there substantial exposure in the U.S. Note that a number of smaller Swiss banks have yet to give any data to the U.S. Government. As they have little or no U.S. exposure what do they have to worry about?
Hi David – Well, those smaller Swiss banks don’t have nearly the number of U.S. depositors, either, which is a prerequisite for the reporting. Too, if the IRS deems not to be concerned with a specific bank, they exempt the bank from the reporting process.
While it is true that the Department of the Treasury and the IRS are stepping on sovereignty toes with their latest program, they can still make things difficult for those they are asking to comply via any U.S. branches of that bank, or with that bank’s U.S. trading partners, exchanges, clearance houses, etc. Never underestimate the power of a government, especially a money-hungry government!
While all of that is not really a concern – sovereignty issues are settled in international court – the major concern for those of us outside of the U.S. is that foreign banks may just get peeved enough and say, “That’s it. Close the accounts. No more American account holders here.”
You may have question as to whether this would happen. Your answer is: it already has in some European countries. I’d hate to offend or make a Philippine bank “lose face” – “tampo” would be the least of our problems. Taken to higher levels, U.S. banks branches here could lose their charter and be forced to close. Worst case scenario – Americans with dollars in their mattresses.
😉
Paul, thanks so much for this update. I had heard of the reporting requirement months ago, but somehow got confused and thought it was part of the filing process. Since I didn’t see it back in April when I filed I kind of placed it out of my mind. Now that I have the story straight, I shall comply.
And for David S. — while it is true that US authority over foreign banks is indeed very limited, it’s rather a “stretch” to envision most commercial banks failing to comply. World commerce still revolves around the US dollar and banks of any stature that expect to do any business internationally are going to be pretty much obligated to comply.
Example, suppose someone decides to move their assets into gold bullion. The world precious metals market is in New York and bullion purchases are US Dollar denominated.
As a banker, you would pass this market up? I expect the majority of banks will comply … of course, I don’t deal in bullion nor do I move more than $50k a year in any reportable manner, so I’m just a bystander.
Hi Dave – You’re most welcome. I figured that I could time the article for just about now, and leave enough time prior to the deadline for collecting info & completing the form. Also, it’s close enough to the deadline to light a fire under those who procrastinate. Since snail mail is the only way of getting it there (unless you know someone headed for Detroit in the next few weeks, or someone willing to take your letter and mail it once they’re in the U.S.), it’s time to get hopping!
There are even more changes afoot – but they’re still in the “debate the bill” stage of legislation. I’ll try to keep everyone posted as things develop.
🙁
Paul:
This is precisely why the US has to simplify the tax code into a flat tax and ensure that everyone pays the same. Close the loopholes and stop the penny ante type crap like this.
The big fish have multiple ways to hide income: Who will they catch with this? The little guys, retirees, and people who forget to fill out the bloody form! Ostensibly these rules were put into place to catch terrorists and drug dealers… I’m betting that they haven’t caught one terrorist yet. No, it is to catch tax cheats.
It’s not just in the US, though… I have colleagues in the EU bemoaning the fact that Switzerland is no longer a safe haven. The logic goes that if they report Americans, then they will report Germans too. Same applies to Jersey, Guernsey, and other notorious havens. Whereas it is bad for Americans, imagine being from Scandinavia where tax rates in the 60% to 70% range are not uncommon.
The big international banks all rely on the US dollar, and most have substantial assets in the States. Even something as seemingly minor as being able to issue a Visa or Mastercard (both US based) to their customers could be impacted… So the big banks will bitch and moan about it, and eventually cave in. So, the big fish will just move to smaller regional banks that are less secure and unencumbered as much by te rules. Does anyone really think that the Philippine government would want to risk remittances from OFW’s, economic aid, and military aid in order to benefit an insignificant number of exats, most of whom are retirees? The banks will comply.
The best policy is just to suck it up, report what you owe, and deal with it… Honestly, most expats don’t have the resources to even begin making elaborate offshore strategies worth the effort. The days of being able to easily hide funds are long over.
Hi John – Personally, I have two separate views on the matter of taxation.
The first is my Professional View, as amply stated by Judge B. Learned Hand:
“Anyone may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.” Helvering v. Gregory, 69 F.2d 809, 810 (CA2 1934) (citations omitted), aff’d, 293 U.S. 465 (1935).
Judge Hand was quite correct in his pronouncement. No one should be required to pay one penny more in taxes than is legally determined, and anyone can arrange his finances so as to minimize those taxes. Of course, the operative word is “legally.” If, say, a retiree decided to place all of his assets into tax-exempt instruments so that any income derived from them is not taxable, so be it. If someone else performs some “accounting magic” to lower the tax bill, then the full weight of the law should be placed on his assets. This is the difference between “tax avoidance” and “tax evasion” – the former perfectly legal, the latter not.
The second is my personal view:
Since taxation is the primary power held by Congress, don’t look for very much change in the tax code in our lifetime. Oh, there will be posturing and political sloganeering, as well as campaign promises that, somehow, never are kept. The status quo will only be changed as a “payback” to whomever contributed to the successful candidate’s campaign coffers.
That being said, I will add that it took Congress over 100 years to eliminate the federal telephone excise tax it created at the turn of the 20th Century to finance the Spanish-American War. I fear that any major changes to the tax code would provide additional taxation without eliminating the taxes the change was meant to replace. Regardless of political stripe, no Congressman has ever encountered a “bad” tax.
The reporting issues in this article wouldn’t be affected by a change in tax structure. A simple “penny on a dollar” tax wouldn’t stop the Department of the Treasury from looking for those dollars, and requiring “U.S. Persons” from reporting their off-shore wealth.
I will state that the Homeland Security took its cue from the IRS and Treasury when setting up it’s passenger screening at ports of embarkation. Everyone’s suspect; cherry-pick the easy ones; don’t offend or profile. Just like the 80 year old grandmother pulled aside for secondary searching or worse, the expat with one day’s aggregate value of assets in a foreign financial institution exceeding the threshold will get a good look-over, too.
There is legislation in the works that will raise aggregate amounts for reporting in the various instances of financial transactions, but a change in law remains to be seen. Remember, the vast majority of people writing this legislation are staff members with law degrees or political science degrees. Not many economists or accountants among them. That’s why their products require so much repair once it’s passed into law, and the results predicted by economists are realized.
BTW, there are plenty of other tax havens out there that the super wealthy use: Cook Islands, Virgin Islands, Belize, Nevis, Bermuda, Luxembourg, Gibraltar, Andorra, and Campione d’Italia. Only the “almost-super wealthy” are getting picked on in the better known havens.
Sorry all, long-winded again, but that’s the view from here. 😉
Paul, why wouldn’t the Philippines be a pretty good have, too? We have some of the strictest bank secrecy laws here, and one only has to look at the bank’s performance here over the past two years vice the “big name” US banks to see that they are run conmservatively.
Incidentally, FDIC and PDIC are big topics for retirees here, but the majority of the popular off shore “money magnet” locations have no form of depositor insurance .. yet they are very popular with the billionaire investors ….
Hi Dave – Over the past ten or so years, the amount of reporting and data sharing between the Philippines and the USA has increased significantly. Some believe the increased “assistance” may be connected with State Department and Defense Department issues – sort of a “scratch my back and I’ll scratch yours” situation. Some believe its corruption connected. Some believe it’s business as usual. No one knows for sure the reasons AND the level or amount of reporting involved.
It’s this uncertainty and rumor mongering that keeps the Philippines from being a tax haven. Those with money don’t feel comfortable bringing their money here, and those who believe in rumors are looking for ways to help bring that money here, for a commission. It’s so much easier and safer to use other, little known havens.
Then, again, there’s the “bamboo grapevine” and “coconut wireless” to deal with here. 😉