The sun always rises somewhere.
Sometimes I have to work hard remembering that every new problem creates an opportunity… especially when there is some added form of really ridiculous government intrusion. Therefore, I spent extra time watching the sunrise this morning to rebalance my thoughts as I pondered government intrusion in the form of 8938.
What a pain!
An Ecuador Living Club member recently sent me this note: Gary, Can you help on this one? Is Real Estate considered a Foriegn Financial Asset for reporting purposes on the new form 8938? Also, I have a construction deal going on where the builder takes payments and a fiduciary holds funds in escrow until completion. Would this be considered a Foreign Financial Asset while being held in escrow? I know you are not a tax expert but probably have been asked this question before.
If you don’t know, could you refer me to someone that can answer? I called the IRS directly and they have not been trained on that one and did not know the answer! Can you believe it? Thanks for your help.
I did not know and referred this to my friend and tax attorney of decades, Joe Cox. Joe when it comes to tax attorneys is as good as it gets. He has specialized in the areas of estate planning, insurance, trusts and taxation for over 40 years and is Board Certified in Estate Planning and Administration and in Taxation by the Florida Bar.
In addition to the Board Certifications, Joe is a Fellow in the American College of Trust and Estate Counsel. He is a member of the American and Florida Bar Associations, and is admitted to the Federal Appellate Courts and the United States Tax Court. Joe is a frequent speaker on tax planning topics such as income taxes, insurance trusts, irrevocable trusts and offshore asset protection trusts. He has also written numerous articles and books regarding income tax and irrevocable trusts. Joe is listed in “Who’s Who in America” and “Who ‘s Who in American Law”. He was selected by Florida Trend Magazine as “One of the Top 1.6% of Lawyers in Florida,” and “One of the Top 34 Wills, Trusts, & Estate Planning Lawyers,” and was chosen by Worth Magazine as “One of the Top 100 Attorneys in the Nation.”
Among his community commitments, Joe has served many organizations in a leadership position. These include: Naples Community Hospital, Community Foundation of Collier County, YMCA of Collier County, Community School of Naples, Alzheimer’s Association, Forum Club, and Senior Friendship Centers, Inc. He was also named the Child Advocate of the Year.
Joe replied: Gary/Al: The rules are still not that clear. But, the penalties are so great we are erring on the side of caution and filing and disclosing. Real Estate in your own name, no filing is required. Real Estate in a corporate entity, you should file the 8938.
Foreign financial account that you have an interest in that exceeds $10,000-then you must file TDF 90-22.1 (FBAR/Foreign Bank Account Reporting).
Have your accountant file both forms. To be safe and big penalty free. Joe
This is the height of government intrusion… an IRS requirement that carries heavy penalties yet even the IRS nor one of the best tax attorneys in the country understands all the rules.
This is just plain nuts.
A New York Times article of two days ago entitled “For Americans Abroad, Taxes Just Got More Complicated” by David Jolly agrees. Here is an excerpt: As income tax filing deadline rolls around, spare a thought for the millions of Americans overseas who have been singled out by Congress for special treatment, with a new form that will add to the hassle of tax time for many and, critics say, set up the unwary for penalties.
“It’s a monstrosity,” Steven R. Horton, whose tax practice in Paris advises American expatriates, said of the new demand from the U.S. Internal Revenue Service: Form 8938, the Statement of Specified Foreign Financial Assets. “It compels every taxpayer to try to find a way that they’re guilty of some kind of omission.”
The new requirement comes courtesy of the Foreign Account Tax Compliance Act, or Fatca, an effort to crack down on offshore tax evasion by U.S. citizens.
The new form requires taxpayers to provide detailed information on their overseas financial accounts, including income derived from them. The penalties for failing to file start at $10,000. Significantly, tax experts warn, filers are subject to major penalties for underreporting — and even where innocent errors are made, they say, it will be up to the taxpayer to convince the I.R.S. examiner of their innocence. The statute of limitations does not expire until after a corrected form is filed.
Proponents say Fatca will bring the U.S. Treasury huge sums each year once the I.R.S. is able to compare individual tax data with reports from foreign financial institutions.
In the United States, financial institutions furnish taxpayers’ account information directly to the I.R.S. Under Fatca, filers overseas have in effect been commanded by Congress to do that themselves, turning over every bit of financial information to the government, something that has never been required before.
Asked how long it would take the average filer to complete the Fatca form, Mr. Ruchelman laughed. “Forever,” he said.
Mr. Horton, who has already helped a few clients fill out Form 8938, said that for most individual filers, “even if we’re talking about a modest set of accounts, it’s going to take a full Saturday to do it.”
And that’s just the new form.
Alone among the citizens of the developed world, Americans have the same tax-filing and tax-payment responsibilities whether or not they reside in the United States. American expatriates still have to file the annual Form 1040, and all the documentation that goes with it — even though most already pay taxes in their countries of residence. (The burden of taxation is softened by a $92,900 exclusion that allows many expatriates to avoid any U.S. liability.)
Expatriates don’t have the same clout in Washington, and beginning this year a single American residing overseas with financial assets of more than $200,000 on Dec. 31, or $300,000 at any point during 2011, must file Form 8938; for a married couple filing jointly, the thresholds are $400,000 and $600,000. (For U.S. residents with accounts overseas, the thresholds are much lower.) Homes are generally outside the remit of the law, pensions and deferred compensation are not.
Not even the I.R.S. is certain how many of the estimated four million to six million Americans living abroad will be affected, but the dollar doesn’t go as far as it once did. Tax experts say far more than just the storied “one percent” will be affected. Failure to file Form 8938 exposes a taxpayer to hefty fines — $10,000 if they do not file within 90 days of I.R.S. notification. That is in addition to FBAR penalties ranging from $500 to 50 percent of the value of the accounts in question.
Some have wondered why U.S. expatriates should have to file both the FBAR and the Fatca, as they gather essentially the same information, though — confusingly — with different language. Why not just one form?
The information gathered by FBAR, it happens, is used by the U.S. Treasury in its efforts under the Banking Secrecy Act to identify crimes like money laundering and terrorist financing. But that information is not shared with the I.R.S. When Congress decided the I.R.S. should have the tools to find foreign accounts and impose penalties in the audit process, it simply ordained that Americans fill out another form: Form 8938.
International tax experts worry that even accidental discrepancies on the new form will expose filers to big penalties. And if examiners do end up comparing information on the FBAR and Fatca forms, which have different filing deadlines and are sent to different offices, they say, it could open the door to more trouble. “It’s going to be a mass of confusion, at least for the first year,” said Edward Tanenbaum, an international tax lawyer at Alston & Bird in New York.
I was having to work hard to find a silver living in this new regulation. “Maybe it will outrage the public enough to finally put their foot down”, I thought. Naah, I doubt this will happen since so few Americans have assets abroad… even fewer live abroad and even fewer who do live abroad,actually vote.
Excessive government spending… pork barrel and over 5,000 pages of tax code that make US taxation unequal are the problem, not Americans hiding money abroad.
I was fiddling with these thoughts when a reader when a reader sent a response to Chapter III of this government intrusion report about coyotes. She wrote: When there are that many coyotes around, there is one message you should be receiving. Get a donkey. They won’t come around to kill cats, dogs or even horses when there is a donkey around. All coyotes know that donkeys stomp coyotes and will stomp them to death and the coyotes will just move on to somewhere else where there are no donkeys. And then the donkey has a story to tell you – about being little but powerful, about projecting image, about being free within boundaries and about responsibilities and relationships. Wishing you and Merri a wonderful day in the Garden! Kind regards
That supplied the answer to this government intrusion. Get a really good tax preparer and work with them to learn how to accurately fill in the 8938. The silver lining in this… if you are like me is that it forces me to be better organized in my accounts. We may be small… but we can when dealing with the IRS beth powerful by simply being properly prepared. This allows us to be free within the boundaries imposed on us as US citizens. The IRS hates nothing more than to waste its time with a well prepared tax payer and right now the IRS is pinched. Having accounts in order means that they usually leave those alone.
That can provide many benefits. In fact I had been working on this myself and have made an agreement with a tax preparer to refer him to readers (who request) if he will learn all the forms required… work with banks overseas to make sure accounts are coordinated and give readers a good price.
This terrible regulation can force us to be better and this makes the IRS even more overworked and less effective. This means that those who adapt and prepare our tax forms better may be bothered even less.
An excerpt from the article at AccountingToday.com entitled “The IRS’s burden-Taxypayer advocate sees a threat in the increased IRS workload” by Roger Russell says: National Taxpayer Advocate Nina E. Olson’s annual report to Congress highlighted the combination of an expanding IRS workload and declining resources as the most serious problem facing taxpayers and recommended that Congress enact a comprehensive Taxpayer Bill of Rights. “The overriding challenge facing the IRS is that its workload has grown significantly in recent years, while its funding is being cut,” Olson said in releasing the report. “This is causing the IRS to resort to shortcuts that undermine fundamental taxpayer rights and harm taxpayers – and at the same time reduces the IRS’s ability to deliver on its core mission of raising revenue.”
Perhaps the 8938 will be the straw that breaks the camel’s back and leads to true tax reform… now wouldn’t that be a platinum lining to this dark cloud of government intrusion? I sincerely hope this happens… but until it does… I’ll be using my extra accounting to help my business as I comply with even more red tape. I’m going proactive and working aggressively with my tax preparer to assure that he knows what to do so he can help me and readers.
Subscribers of our multi currency report and Ecuador Living Club can get in touch with our tax preparer to learn more about the 8938. He’s straight thinking, clear talking and not expensive…a man I trust and admire.
Join an Ecuador real estate tour. According to the NYT article the 8938 does not apply to homes overseas.