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Archive for John Richardson

Recent Economic Upheaval Creates Expatriation Opportunities For “US Persons” Living Abroad

JOHN RICHARDSON

As you know the US Section 877A Expatriation Tax applies to U.S. citizens and “Long Term Residents”. A “Long Term Resident” is an individual who has had a Green Card (as defined by the rules in Internal Revenue Code Section 7701(b)(6) for at least eight of the fifteen years prior to expatriation). This has become a serious problem for Green Card holders who simply move from the United States and and don’t take formal steps to sever their U.S. tax residency. (They must either file the I-407 or use a tax treaty tie breaker election to expatriate. Otherwise they may be in a situation where they have no right to live in the United States (having lost the immigration status) but are taxable on their worldwide income (still being tax citizens).

That said, whether you are a U.S. citizen wishing to renounce U.S. citizenship or a Long Term Resident wishing to sever U.S. tax residency, you do NOT want to be a “covered expatriate“. Generally, (unless one is subject to two exceptions – dual citizen from birth or expatriation between 18 and 181/2 – that are beyond the scope of this post), one is treated as a “covered expatriate” if one meets any one of these three tests:
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Why Are These Senators Attempting To Reverse Treasury Regulations That Affect Americans Abroad?

John Richardson on GILTI

Prologue

Americans abroad who are individual shareholders of small business corporations in their country of residence have been very negatively impacted by the Section 951A GILTI and Section 965 TCJA amendments. In June of 2019, by regulation, Treasury interpreted the 951A GILTI rules to NOT apply to active business income when the effective foreign corporate tax rate was at a rate of 18.9% or higher. Treasury’s interpretation was reasonable, consistent with the history of Subpart F and consistent with the purpose of the GILTI rules. Now, Senators Wyden and Brown are attempting to reverse Treasury’s regulation through legislation. This is a direct attack on Americans abroad.

Introduction

As many readers will know the 2017 US Tax Reform, referred to as the Tax Cuts and Jobs Act (TCJA), contained provisions which have made it difficult for Americans abroad to run small businesses outside the United States. In the common law world a corporation is treated as a separate legal entity for tax purposes. In other words the corporation and the shareholders are separate for tax purposes, file separate tax returns and pay tax on different streams of income. The 2017 TCJA contained two provisions that basically ended the separation of the company and the individual for U.S. tax purposes. In other words: there is now a presumption (at least how the Internal Revenue Code applies to small business owners) that active business income earned by the corporation will be deemed to have been earned by the individual “U.S. Shareholders”. To put it another way: individual shareholders are now presumptively taxed on income earned by the corporation, whether the income is paid out to the shareholders or not!
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A Thoughtful Proposal Regarding Expatriates Foreign Trusts And Retirement Savings: Will Treasury Listen?

Foreign Trusts - John Richardson

TaxConnections is posting this thoughtfully written comment on an article titled “Treasury Exempts Applicable “Tax-Favored Foreign Trusts” From The Form 3520… And Therefore Form 3520A Requirement” written by John Richardson. Here is a recommendation for Treasury to consider as posted by a David Johnstone.

John,
Excellent post. Based on my reading of the Revenue Procedure, as well as feedback from practitioners in the UK or Australia, I have grave reservations about the claim that this Revenue Procedure will help “many” Americans abroad. Perhaps this is an example of an attempt to simplify things from a legal perspective that in practice – once one does the math – may lead to greater complexity and help a very small number of people at best.
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Treasury Exempts Applicable “Tax-Favored Foreign Trusts” From The Form 3520… And Therefore Form 3520A Requirement

Form 3520 And Form 3520A

Introduction – A small step for forms, one giant leap for “formkind”

It’s true. Many Americans abroad will no longer have to file Form 3520 and Form 3520A to report their lives abroad! Early indications appear that many Americans will (assume their retirement vehicle does qualify as a trust) be required to report on Form 3520. This new initiative from Treasury a positive step in the right direction.

I have long thought that Treasury could solve many of the problems experienced by Americans abroad. Here is a wonderful example of Treasury taking the initiative to clarify the obvious:

Americans abroad do NOT use non-U.S. pension plans and non-U.S. tax-advantaged investing accounts to evade U.S. taxes. Hence, there is NO reason for the Form 3520 reporting requirement. This is an example of the tax compliance industry sitting down with Treasury, explaining a problem and getting a resolution. I suggest (and hope) that the same can be done for PFIC (Form 8621), Small Business Corporations (Form 5471) and other penalty-laden forms.

Yes, this announcement from Treasury in the form of RP 20-17 is a great achievement. Although it certainly doesn’t solve all the problems, it’s:

A small step for forms, one giant leap for “formkind”

The background to this problem – It starts in 1996 (same year as the beginning of the Exit Tax)…

Since 1996 Internal Revenue Code 6048 has required extensive reporting of almost any interaction with a foreign trust. Treasury has required that the reporting take place on Forms 3520 and 3520A. The forms are complex and subject to the draconian penalty regime described in Internal Revenue Code Section 6677. In order for an entity to be a foreign trust, it must be a trust. A “trust” for IRS purposes is defined by the Treasury Regulations as:

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Understanding United States Tax Residency

United States Tax Residency

The United States uses a form of “deemed tax residency“.
The Internal Revenue of the United States deems that all “individuals” (wherever they live in the world – including citizens and residents of other countries) except “nonresident aliens” are subject to taxation in the United States on their world wide income.

One qualifies as a “nonresident alien” unless one is a:
1. A U.S. citizen
2. A U.S. resident as defined by Internal Revenue Code Sec. 7701(b)

Interestingly, the Internal Revenue Code neither defines citizenship, nor specifically mandates “citizenship-based taxation“. (By imposing taxation on all individuals, the United States imposes taxation on all citizens.)

Internal Revenue Code S. 7701(b)
Section 7701(b) describes the conditions under which one who is NOT a U.S. citizen becomes a “resident” of the United States for tax purposes. It defines the degree of physical connection one must have with the United States to become a “tax resident”. At the risk of oversimplification, a “non-citizen” becomes a “resident” and subject to “worldwide taxation” if he/she:

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Exercising Broad Regulatory Authority, US Treasury Has Clarified The Meaning Of “Resident” For FBAR Purposes

John Richardson On FBAR

Introduction – Looking For Mr. FBAR

What’s new?

I haven’t written a post about Mr. FBAR for quite some time. But, a post about the recent Boyd Case at Tax Connections, by Darlene Hart got me thinking about FBAR again. For those interested – where the IRS successfully argued that it was appropriate to impose penalties on each individual account – here is the case:

Those who know little about Mr. FBAR might find this introduction to FBAR – although written in 2012 – helpful. Incidentally, it’s pretty obvious that Russia’s Foreign Bank account reporting laws were based on an admiration of Treasury’s success with the FBAR rules.

The purpose of this post
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TaxConnections Member John Richardson Interviews Monte Silver: On Confiscatory Taxation On U.S. Citizen Shareholders Of Small Business Corporations

Gilti Tax - John Richardson

In December 2017 the U.S. Tax Cuts and Jobs Act imposed confiscatory taxation on the U.S. citizen shareholders of many small business corporations located outside the United States. Canadian residents have been severely impacted by this. Monte Silver is a U.S. citizen tax lawyer based in Israel who has been very active in both tax advocacy on behalf of Americans abroad and litigation.

On December 24, 2019 his lawsuit against U.S. treasury achieved a major victory in the ongoing quest for “tax justice” for individuals living outside the United States who are also U.S. citizens. This is the fourth time that John Richardson has interviewed Monte Silver on these issues. This story is far from over!

Watch This You Tube Video

You Should Also Read This Blog By John Richardson.

Coming to America? Welcome To The Land of FBARs

Green Cards And Taxes

Thoughts From A Conversation About Green Cards And Taxes

The purpose of this is to reinforce some very simple points. I find that people always have more trouble remembering what’s simple.

Moving to America

1. Taxation of income from your remaining “non-U.S. assets”
You will be shocked to find that many of your “foreign assets” will be subject to particularly punitive U.S. taxation.

2. Reporting of your “non-U.S. assets”
If you are moving to America, you are moving from another country. You will very likely retain financial assets and bank accounts in that country. From a U.S. perspective, these assets are “foreign” and therefore a “fertile ground” for taxation and penalties.

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Treasury Fails To Prevent Lawsuit Against US Transition Tax From Proceeding

JOHN RICHARDSON - US Transition Tax

What Happened: The Judgement Is Here And Taxpayers Win!

About The Transition Tax

As part of the 2017 TCJA, Congress imposed a retroactive tax, without any realization event, on the retained earnings of Controlled Foreign Corporations. Although intended to be the the “trade off” for lowering the Corporate Tax rate from 35% to 21%, it was interpreted to apply to the small business corporations owned by Americans abroad. (The tax compliance industry aggressively promoted this damaging interpretation of the law.)

In any event, this imposed significant and life altering consequences on Americans abroad (particularly in Canada) for whom their small business corporations were really their pension plans. I documented the history, damage and madness of this in a series of posts about the transition tax. The law was interpreted (in various ways) and the regulations were drafted in an extremely punitive manner. What needs to be most understood is that a law intended for the Apples, Googles, etc. was interpreted to apply in the same way to individuals (your friends and neighbors) who owned small business corporations.

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IRS Relief Procedures For Former Citizens Update – Relief For Former Green Card Holders Coming!

JOHN RICHARDSON - Relief For Former Green Card Holders

Introduction

On December 17, 2019 Gary Carter published a post on Tax Connections, which outlined the “Options Available For U.S. Taxpayers With Undisclosed Foreign Financial Assets“. It contained an excellent overview and analysis which included a discussion of the IRS definition of “non-willfulness” under the Streamlined Program. In commenting on the definiton of “non-willful” he noted that:

The IRS definition of non-willful covers a lot of territory. Negligence, for example, includes “any failure to make a reasonable attempt to comply with the provisions of the Code” (IRC Sec. 6662(c)) or “to exercise ordinary and reasonable care in the preparation of a tax return” (Reg. Sec. 1.6662-3(b)(1)). Further, “negligence is a lack of due care in failing to do what a reasonable and ordinarily prudent person would have done under the particular circumstances.” (Kelly, Paul J., (1970) TC Memo 1970-250). The court also stated that a person may be guilty of negligence even though he is not guilty of bad faith. So the fact that you ignored the FBAR filing requirements for many years, and failed to report your foreign income, might be negligent behavior, but it’s probably not willful. That means you likely qualify for one of the new streamlined procedures. On the other hand, if you loaded piles of cash into a suitcase and lugged it over to Switzerland to conceal it from the IRS, you don’t qualify, because that is willful conduct. If you believe your behavior may have been willful under these guidelines, consult with an attorney before submitting returns through one of the streamlined procedures. We work with attorneys who are experts in this field and we would be happy to provide a referral, free of charge or obligation.

Notably, the definition of “non-willfulness” for the Streamlined Program is the same as the definition for the new “IRS Relief For Former Citizens Program”.

Part A – IRS Relief For Former Citizens Who Relinquished U.S. Citizenship After March 18, 2010 (the date FATCA became law)

The program was announced on September 6, 2019.

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The USA Of The 21st Century Is Like Britain In The 19th Century

John Richardson And FATCA

(Reposted as a top blog on TaxConnections during 2019)

In 2018 Professor Lucy Salyer of the University of New Hampshire published “Under the Starry Flag” – a book largely about the 1868 Expatriation Act. The book describes a period in American history where Britain treated its “subjects” as having perpetual loyalty to the British Crown. To put it simply: One could NOT emigrate to America and expatriate. No matter what one did, those who were born British Subjects were destined to die British Subjects.

The above tweet links to an interview of Professor Lucy Salyer conducted on February 9, 2019. The interview is about Professor Salyer’s new book “Under the Starry Flag”. It is a fascinating (brilliantly researched) work. The publisher describes the book as:

The riveting story of forty Irish Americans who set off to fight for Irish independence, only to be arrested by Queen Victoria’s authorities and accused of treason: a tale of idealism and justice with profound implications for future conceptions of citizenship and immigration.

In 1867 forty Irish American freedom fighters, outfitted with guns and ammunition, sailed to Ireland to join the effort to end British rule. Yet they never got a chance to fight. British authorities arrested them for treason as soon as they landed, sparking an international conflict that dragged the United States and Britain to the brink of war. Under the Starry Flag recounts this gripping legal saga, a prelude to today’s immigration battles.

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Revenue Neutrality And A Move To Residence-based Taxation: Open Letter To Democrats Abroad

JOHN RICHARDSON

(This blog reposted due to its popularity and commentary)

OPEN LETTER TO DEMOCRATS ABROAD

Democrats Abroad (DA) recently reached out to the Democratic presidential candidates to ask them about issues relevant to Americans living overseas. The questions DA posed and the responses it received can be accessed at this link:

https://www.democratsabroad.org/democrats_abroad_talks_with_the_candidates?fbclid=IwAR0TKNlkqnxPjdhQz22tUsnnBDotPiSR7NaRVm430LXvlZHma8FWF1HuhQs

We strongly applaud DA for this valuable initiative. But we believe that it is important—indeed, vital—to call out the framing of this question:

“Most Americans living abroad think that the time has come for Residency-Based Taxation, the principle guiding all other countries’ tax systems and a fix for numerous unjust burdens on Americans living and working abroad. There are bi-partisan, revenue-neutral proposals to implement RBT that include robust provisions to protect the law from abuse by tax evaders. All we need is a moment of leadership to get this done. Will you be that leader?”

We believe that it is a grave error to condition a move to residency-based taxation (RBT) upon a demonstration of revenue neutrality. Doing so would serve to perpetuate the immoral and unjust system in place today.

These are the reasons why:

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