This week we list the first five considerations before contacting a tax professional by John Richardson, a Canadian based lawyer and contributor to Americans Overseas.
Incredibly all bank accounts outside the U.S. are considered to be “offshore accounts“. U.S. law requires U.S. citizens to enter the U.S. with a U.S. passport. Those renewing their passports are now required to provide information relevant to tax compliance.
Many are inclined to simply renounce their U.S. citizenship. Even renouncing citizenship has tax implications. Yet, all indications are, that the vast majority of U.S. citizens abroad are NOT tax compliant.
What to consider before consulting a tax or compliance professional …
The first five out of ten:
1. Investigate the “State” (no pun intended) of your U.S. citizenship.
U.S. Citizens born or naturalized in the U.S.:
You may have committed a “relinquishing act”. If so, you may have lost your citizenship. Many who became dual citizens prior to 1986 may have a strong claim that they are longer a U.S. citizens.
Some who became dual citizens after 1986 (depending on the facts may have relinquished their U.S. citizenship.) Those who relinquished their U.S. citizenship by becoming a citizen of another country may be entitled to a “backdated CLN” – (backdated Certificate of Loss of Nationality).
Those born outside the U.S. to one or more U.S. parents and those born abroad to U.S. citizen parent(s) should seek a professional opinion on your citizenship. Under no circumstances should you simply presume/accept that you are a U.S. citizen.
Sounds ridiculous, but remember it is only “U.S persons” (at least so far) who are under assault. Take the appropriate steps to determine whether you are a U.S. person.
2. Emotional considerations are as important as tax considerations.
If you are reading this post the chances are that you are worried. People find themselves at different points on the “anxiety spectrum”. This spectrum ranges from “annoyed curiosity” at the one extreme to “incapacitating trauma” at the other extreme. You need to choose the route that best allows you to live your life as a U.S. citizen abroad. You need to be able to sleep at night and move on …
3. It is important that you respond and NOT react!
As the above quote says, tax compliance is designed to make you anxious. The IRS, the lawyers, and accountants are happy to exploit your anxiety. Do NOT react!
You must respond. A response requires a calm, deliberate state of mind. Therefore, a “response” requires you to: Take your time in coming to a decision.
4. A “response” requires that you investigate your possible U.S. tax liability.
You should NOT involve a lawyer or accountant until you reach the point where one is required. There is a difference between consulting a lawyer and consulting an accountant. A consultation with a lawyer will give you the benefit of “lawyer client privilege”.
This means that, for the most part, conservations with your lawyer will stay with your lawyer. This is NOT the case with conversations with accountants.
You should first take steps to determine whether there may be any tax liability. (This is NOT the same as determining how much the tax liability may be.) This involves recognizing areas where the U.S. and your country of residence have different tax rules.
Remember that the existence of PFICs, Foreign Trusts or Controlled Foreign Corporations. The sale of your principal residence is NOT tax-free under U.S. tax law. Having you been reporting your RRSP properly? Did you know that TFSAs are not tax exempt under U.S. law? What about your non-U.S. pension plan? Remember, at this stage you are in “fact finding” mode.
Those with simple situations might consider using a tax preparation program (Geithner used TurboTax). Remember that all transactions and valuations must be converted to U.S. dollars.
To reiterate: You must do as much homework as you can prior to a professional consultation.
5. A response requires that you understand your U.S. tax compliance options.
What are the vehicles for coming into compliance? What options are available to you? There are three general categories of options for coming into compliance.
(i) Using OVDP or Streamlined Compliance. This implies direct IRS involvement. These options will necessitate higher professional fees. (OVDP is designed for criminals and not for honest U.S. citizens abroad.) If anybody tells you to enter OVDP please contact me to discuss this.
(ii) Simply file or refile (amend) your past returns. There is no requirement of IRS involvement. But, they may “audit you” later. (In this regard see the December 2011 IRS FS for U.S. citizens abroad.)
(iii) Simply file properly on a “going forward” basis. If the IRS wants to reopen the past, let them.
Note: The real decision is whether or not to involve the IRS into your coming into compliance.
6. Click here to read part 2: ‘what you should consider before hiring a tax professional or lawyer’
Do you have questions or need help? Please feel free to contact us. Free of charge and free of any obligation.
John Richardson is a Toronto based lawyer with a clear understanding of the legal, tax, Retirement Planning and investment climate in Canada. He also has a good understanding of the obligations of U.S. citizens abroad. He provides “citizenship counselling” for U.S. citizens abroad. Quote: The truth is that citizenship counselling is a form of life counselling.