Forms required by #Americansabroad 101 – The Explanation

The above tweet references a comment that I left on a medium.com post written by Rachel Heller titled “Why I renounced my US citizenship” (Hint: It’s not because I’m avoiding taxes!“.

The article was well written, interesting and attracted responses from Homeland Americans. (It was reproduced here and attracted even more comments.) The comments from U.S. residents demonstrated again that they do NOT understand the problems experienced by Americans abroad. Although Rachel DID mention the problem of “forms” as a contributing factor to her renunciation, at least one comment – ” indicated “disbelief” that “forms” could be a contributing factor to the renunciation of U.S. citizenship.

It is clear that this person, well intentioned as he/she may be simply does NOT understand what forms mean in the lives of Americans abroad. It’s as though he/she thinks that filling out a form is akin to completing a customer satisfaction survey.

As I result, I wrote a reply in the hopes of inviting him/her to understand what forms really mean in the lives of Americans abroad. (This post is a modified version of that “reply”.)

Not sure Rachel said that she was renouncing because of “too many forms”. That said, your comment suggests that you don’t understand what “forms” actually mean in the lives of Americans abroad. If you would permit me, I would like to offer a little more information about:

– where the requirements for these forms are found

– what they represent to Americans abroad

– the complexity and cost of completing the forms

– the potential penalties for not completing them properly

So, let’s settle in for: “U.S. Forms 101 — The Explanation”

Where the requirements for the forms are found

Title 31: The Bank Secrecy Act

The first form that is known to most Americans abroad is the “Foreign Bank Account Report” (FBAR) and this is not in found in the Internal Revenue Code. It is found in the Bank Secrecy Act (Title 31 of US laws). A primer on the FBAR is here. This form requires that Americans abroad, who at any point in the year have balances in their “foreign” bank accounts, in excess of $10,000 USD, report these bank accounts to FINCEN (which is U.S. Financial Crimes). Understand that these bank accounts, that the United States calls “foreign”, are actually local to Americans abroad. They are the accounts that they use for day-to-day life to pay bills and buy groceries. The failure to file this FBAR return will subject one to massive penalties which (when assessed) are likely to start at $10,000.

No homeland American is required to report his or her local day-to-day bank accounts to the U.S. government, much less to FINCEN (financial crimes) – yes, “the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN)“. Why should Americans abroad be required to do this? Is it reasonable that Americans abroad should be presumed to be criminals.

What follows is the acknowledgement that one receives after having filed the FBAR:

This is an important message from the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) regarding the status of your FBAR (FinCEN Form 114) submission:

Congratulations! Your FBAR submission has been accepted for processing by FinCEN’s BSA E-Filing System. You will be notified via email when processing is complete in 1-2 business days. Please review the information below and retain for your records.

Your submission was received at **************** EDT
Type: FFBAR
Receipt No.: **********
Filing Name: John Smith

PLEASE NOTE: This email is for notification purposes only. Please do not reply to this email for any purpose. Questions may be routed to the BSA E-Filing Help Desk at 866-346-9478, or BSAEFilingHelp@fincen.gov.

FinCEN’s Privacy Policy can be accessed at http://www.fincen.gov/privacy_policy.html

By the way, if you are one of the millions of Americans abroad who has not filed your FBAR, the “Delinquent FBAR Submission Procedures” are here.

So, the FBAR is the first of your “too many forms”.

Title 26: The Internal Revenue Code

Understand that although Americans abroad are deemed to actually live in the United States (for income tax purposes), their assets (which are local to them) are considered to be “foreign” to the U.S. Government. Because their assets local assets are considered to be “foreign” from a U.S. perspective, they are subject to special reporting provisions, under threats of draconian penalties (in most cases the penalties start at $10,000 for a single omission). I assume that you must read (only kidding) the Internal Revenue Code. If you did (or do) you would find Sections 6031–6040 which are described as:

“26 U.S. Code Subpart A – Information Concerning Persons Subject to Special Provisions”.

§ 6031 – Return of partnership income
§ 6032 – Returns of banks with respect to common trust funds
§ 6033 – Returns by exempt organizations
§ 6034 – Returns by certain trusts
§ 6034A – Information to beneficiaries of estates and trusts
§ 6035 – Basis information to persons acquiring property from decedent
§ 6036 – Notice of qualification as executor or receiver
§ 6037 – Return of S corporation
§ 6038 – Information reporting with respect to certain foreign corporations and partnerships
§ 6038A – Information with respect to certain foreign-owned corporations
§ 6038B – Notice of certain transfers to foreign persons
§ 6038C – Information with respect to foreign corporations engaged in U.S. business
§ 6038D – Information with respect to foreign financial assets
§ 6039 – Returns required in connection with certain options
§ 6039A – Repealed. Pub. L. 96–223, title IV, § 401(a), Apr. 2, 1980, 94 Stat. 299]
§ 6039B – Repealed. Pub. L. 99–514, title XIII, § 1303(b)(5), Oct. 22, 1986, 100 Stat. 2658]
§ 6039C – Returns with respect to foreign persons holding direct investments in United States real property interests
§ 6039D – Returns and records with respect to certain fringe benefit plans
§ 6039E – Information concerning resident status
§ 6039F – Notice of large gifts received from foreign persons
§ 6039G – Information on individuals losing United States citizenship
§ 6039H – Information with respect to Alaska Native Settlement Trusts and sponsoring Native Corporations
§ 6039I – Returns and records with respect to employer-owned life insurance contracts
§ 6039J – Information reporting with respect to Commodity Credit Corporation transactions
§ 6040 – Cross references

These sections impose the statutory requirements for the “information returns” (forms). Notice how many of these are related to transactions involving “foreign entities”. These sections of the Internal Revenue Code are responsible for the “International Information Returns” (Forms 8938, 5471, 8865, 3520, etc.) The point is that Americans abroad are disproportionately subject to “special reporting provisions”.

Yes, Americans abroad are most definitely subject to special provisions. What are they doing living outside the United States anyway? Remember their assets are foreign. The Internal Revenue Code (is this a reflection of America?) is extremely hostile to anything “foreign”.

The cumulative effect of these provisions is that many (I would argue most) of the business, retirement planning and investment activities of Americans abroad are required to be reported (because they are “foreign” and are therefore subject to special tax and penalty provisions) to the U.S. Government.

Examples include:

– most retirement planning and investment vehicles are considered “foreign” under U.S. law and are therefore subject to special reporting and penalty requirements. The required forms are Forms 3520 and 3520A

– foreign corporations and partnerships required by Internal Revenue Code S. 6038 which leads to Forms 5471 (a complete corporate tax return with various schedules) and Form 8865 (Foreign Partnership)

– Statement of their local (sorry foreign financial assets) as required by S. 6038D (the infamous Form 8938 which can easily lead to a $50,000 penalty for failure to file. Oh and before leaving this paragraph a separate information return is required by those who advance money to these businesses (see S. 6038B of the Internal Revenue Code)

– what if a U.S. citizen abroad is married to a “foreign spouse” and receives a gift of more than 100,000 from that foreign spouse? Yes, it must be reported to the U.S. Government under threat of penalty. (By the way, while we are on the topic of a marriage between a U.S. citizen and “foreign” person, understand that the U.S. person does NOT have the unlimited marital deduction enjoyed by “pure U.S. to U.S.marriages.) Why should an American abroad be penalized for NOT marrying another U.S. citizen?

– Ever invest in a mutual fund? That’s a normal thing to do. Well, if you are an American abroad who invests in a mutual fund in your country of residence (Good God — A Foreign Mutual Fund) not only is there required reporting, but it’s taxed at punitive rates. The idea is to: Buy American and ONLY Buy American. But, we are talking about forms — Yes, it’s form 8621.

2. What these forms mean for Americans abroad once they are filed

By filing these forms the poor American abroad (his accountant somehow fails to tell him this) has agreed that his activities are subject to the “special provisions” they deserve because they are foreign. Basically, it’s so punitive that those who understand what the forms represent, will avoid the activity that generates the requirement to file the form. So, avoiding the activity that generates the requirement to file the form, means that Americans abroad must be careful to NOT: have foreign businesses or partnerships, invest in non-U.S. retirement planning (absent a treaty pensions are included) vehicles, and avoid non-U.S. spouses. That is if they follow the law. In other words, the forms are a “form” (pun intended) of life control. By avoiding all things foreign Americans abroad are required to live as “tourists” in their country of residence.

When in Rome, Live as a Homelander!

3. Cost and complexity of the forms

With the exception of the FBAR and possibly the Form 8938, the average American abroad will NOT be able to complete these forms without expensive help. Actually, the above average American abroad will NOT be able to complete these forms without expensive help. In fact, the average U.S. CPA would have NO idea how to complete these forms if their lives depended on it (they would deny it, but …)

4. The potential penalties for not complying with the “form requirements”

Draconian (starting at $10,000 per form except the 8621) and very expensive to complete.

By the way, the effect of all the forms is that it is very common for Americans abroad to file U.S. tax returns that exceed 100 pages. No problem at all. Ever notice that CPAs seem to charge by the page — can easily be in the thousands of dollars.

Anyway, Rachel didn’t say specifically that her renunciation decision was based on too many forms. That said, the renunciation decision of many Americans abroad is based on the forms, the compliance cost of the forms and what the forms represent to them.

Homeland Americans don’t have to complete these “forms”. Why should Americans abroad?

This completes:

“U.S. Forms 101 — The Explanation”