The time is nigh for U.S. taxpayers
It's almost spring (at last) and U.S. citizens and green-card holders all over the world should again be thinking about their U.S. tax return filings. With the vagaries of a semimonthly publication date and an April 15 filing deadline, this may be a little early, but better early than never. Therefore, "Tax Watch" presents its usual annual feature on U.S. returns, in conjunction with our regular guest contributor, Abigail Greef, from the U.S. tax group in our Brussels office. Abi is in danger of becoming more popular and famous than me these days, if her recent visit to Warsaw is anything to go by. So without further ado I will get out of the way and let Abi tell you something useful.
And no this is not the same as last year this time we've added some relevant points that seem to affect many expat business types in Warsaw (you know who you are, guys), particularly if you own a company here.
The U.S. is unique in obliging its citizens and green-card holders to continue filing tax returns even if no longer residing in the U.S. and tax them on income derived from sources outside its borders. Here are some of the points to consider if you are a U.S. citizen or green-card holder living abroad.
Many U.S. expatriates can take advantage of foreign-earned income exclusions and tax credits available under the U.S. tax system and therefore reduce much, if not all, of their U.S. tax liability while working overseas. However, if they earn U.S.-source income or have a low host-country tax burden such as the Polish limited-liability taxation at 20% then a more significant U.S. tax liability may result. U.S. expatriates with moderate- to high-income levels can also generate a U.S. tax liability through the alternative minimum tax (AMT) system, regardless of the other factors mentioned above. Some items to watch out for that may trigger AMT are a qualifying exercise of incentive stock options, or the limitation on claiming foreign tax credits against the AMT liability.
For U.S. citizens and green-card holders living abroad, the initial filing deadline for their U.S. return is June 15 of the following year. It is possible to extend the filing date of the tax return by requesting an extension to Aug. 15 by using Form 4868. For this to be granted, the form must be sent to the Internal Revenue Service (IRS) by June 15 at the latest. The IRS will grant additional filing extensions beyond Aug. 15 if sufficient cause is provided. The date for paying any income tax due is April 15 following the tax year. Interest will accrue on any balance that has not been paid during that time, so even if you have the extended filing deadline, you still need to pay come April 15.
Even if no U.S. tax liability exists, the IRS expects all U.S. citizens and green-card holders living and working abroad to report their earnings on an annual income tax return. The gross income thresholds that require the filing of a return are very low. Even if a large portion of income is excluded or reduced by tax credits, the IRS still requires that the documentation proving that fact is supplied to them on a timely basis and does have significant power to enforce compliance with these rules. As such, U.S. taxpayers are advised to make every effort to meet their filing obligations. The failure to respect these rules can result in costly future problems. The IRS can track down delinquent tax filers at any time; There is no statute of limitations associated with these rules. If a return is required (whether or not tax is due), the obligation to file will not simply disappear with time. In addition, the foreign earned-income exclusion can be lost to delinquent filers in some circumstances. It is, therefore, important for U.S. taxpayers to make every effort to file their returns in a timely, correct manner.
The IRS has made it tougher in recent years to get around paying U.S. tax by relinquishing citizenship or a green card. Those deemed to be expatriating for tax avoidance purposes will be subject to special U.S. taxation rules for up to 10 years after the date of expatriation. Anyone who wants to give up their citizenship or green card should seek professional advice before doing so.
U.S. citizens and residents abroad who have investments in non-U.S. businesses must also consider potential reporting requirements. If a U.S. person (or persons) owns part or all of a foreign company, he or she may be subject to the Controlled Foreign Corp. (CFC) or Passive Foreign Investment Co. (PFIC) rules. Which rules are applicable depends upon the U.S. ownership of the company. Designed to combat offshore sheltering of income from U.S. taxation, the rules are stringent and can give the unwary a nasty surprise. There are certain tax forms that must generally be filed along with the taxpayer's U.S. income tax return to report company ownership and financial activity. Not only shareholders, but also U.S. officers and directors of foreign corporations in which a U.S. person has acquired a 10% interest must consider reporting requirements.
The rules for reporting investments in non-U.S. companies are quite involved and are overlooked by many. Failure to file such returns can result in large penalties being assessed against the individual and against any unreported earnings and profit, whether or not they have been distributed. Depending on the filing requirements of the taxpayer, the complexity of the reporting can vary wildly and therefore, those taxpayers who think they may have such a filing requirement may wish to seek professional advice.
Finally, a couple of practical items that may assist overseas filers: Firstly, taxpayers who owe taxes may pay by check, money order or credit card. The approved credit cards are currently American Express, Mastercard, and Discover Card. To pay by credit card, taxpayers can call 1-888-2PAY-TAX (1-888-272-9829) and follow the instructions. A convenience fee will be charged by the credit card processor based on the amount the taxpayer is paying. Details of payment by credit card can also be found on the Internet at www.8882paytax.com. If a taxpayer pays by credit card, the confirmation number of the call should be indicated on page 1 of Form 1040 in the upper left corner when filing the return.
Also, overseas filers who maintain a U.S. bank account may wish to have the IRS pay refunds directly into their account, rather than risk checks going astray or being delayed (by being routed overseas then having to go back to the U.S. for cashing). The bank account details can be entered on the Form 1040, and hopefully those refunds will get to you that little bit faster.
Abigail V. Greef is a tax manager in the Brussels office of Arthur Andersen. Peter Ferrigno is a partner in the Warsaw office.
