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The TaxBarron Report
July 2007

Anyone who filed Form 4868 - Application for Automatic Extension of Time to File US Individual Income Tax Return - has until 15 October 2007 to file a tax return. In prior years, this extension was only good until 15 August. Form 4868 does not extend the time to pay taxes, which should have been done by 16 April this year. At least 90% of the tax should have been paid by that date to avoid the probability of late payment penalty.

The TaxBarron Report will not be published in August due to the holidays. We thank you for your continuing interest in this publication. For previous issues of the TaxBarron Report, click here.

In This Issue

Non-filer Could Face Criminal Charges

WEP Under Assault

Taxpayer Advocate Service

Tax Quiz

Around the EU

IRS International Service Centers

Recommended

 

Non-filer Could Face Criminal Charges

A medical practitioner - let's call him Stan Lewisky - has resided in the United Kingdom for 35 years. He is a US citizen but in all these years has not filed a US tax return. He has been earning between £160,000 and £210,000, and as British resident files an annual tax return with Inland Revenue and faithfully pays his taxes.

This year he contacted our offices to find out what, if any, tax filing requirements might be due in his home country, the US of A. Often American expatriates are under the mistaken assumption that as they file and pay taxes abroad on foreign earned income, they have no filing requirement stateside. We informed Dr Lewisky that he did indeed have a filing requirement. Under normal circumstances, any non-filing American can become complaint with the US tax law by simply filing his or her last 3 years tax returns. In fact, at the US Embassy website in London, the IRS states plainly: 'Generally, you should file returns for the past three years, taking the foreign earned income exclusion, the foreign tax credit, or both. It would be extremely unlikely that there would be any late penalties assessed, since penalties are computed as a percentage of tax owed, and only the rare taxpayer would actually owe tax in this situation.'

It turns out that even though Dr Lewisky pays approximately 44% of his net income to Inland Revenue, he must also pay Alternative Minimum Tax for 2004. Although 90% of this tax is eliminatedf by applying the AMT Foreign Tax Credit, he still owes $3,200 plus any penalties and interest IRS will assess. For tax years beginning after 31 December 2004, a 100% AMTFTC applies; hence the good doctor's tax liability for 2004 only.

The possibility now exists that IRS could initiate a criminal investigation against Dr Lewisky for persistent non-filing, regardless of whether the doctor's failure to file prior years tax returns was an oversight or intentional. Criminal sanctions can include penalties and incarceration. Regardless, Dr Lewisky may have to file tax returns to 2001 (six years). Where there is the possibility of criminal exposure, the taxpayer should seek counsel and have the attorney prepare a Kovel Letter for the Accountant. - taxpro, Tom Spott CPA (Spott, Lucey & Wall, Inc., San Francisco)

 

WEP Under Assault

In 2005, Social Security was adjusted by the Windfall Elimination Provision (WEP). This provision states that Americans working abroad may be eligible for a pension not covered by Social Security. Consequently, based on their number of years of substantial earnings stateside, their Social Security pensions can be reduced; reasoning being that the reduction is made up from the foreign pension.

American Citizens Abroad reports that earlier this year, Congressman Howard Berman and Senator Diane Feinstein introduced in Congress the Social Security Fairness Act of 2007. If successful, the bill will eliminate this pension offset. Part of the thinking in correcting this offset is that expatriate retirees often stopped contributing to Social Security years ago when their earnings were less and their contributions smaller. Social Security determines the amount of a retiree's pension on his or her highest 10 working years. Thereafter this same retiree's foreign pension may well be lower than what Social Security would have otherwise paid the pensioner had he or she continued contributing stateside. American Citizens Abroad is asking that concerned Americans write their Congressman and Senators to encourage endorsement of the bill.

 

Taxpayer Advocate Service

A married couple terminated a partnership by selling their share to the partner. Afterward the partner failed to pay to IRS any withholding taxes on the business that he now exclusively owned. IRS seized the couple's bank accounts and garnished their wages. Frantic they hired a lawyer. He charged them $5,000 but produced nothing substantial. Next, acting on the advice of a tax accountant, they contacted the Taxpayer Advocate Service (TAS). They wrote TAS that they had sold their business. They included a copy of the sales agreement, garnishment notice, and bank seizure notice. Subsequently the matter was speedily resolved. The couple's bank accounts were released and their wages ungarnished.

 

Tax Quiz

ANSWER TO LAST MONTH'S QUIZ: Yes. Taxpayers can claim the mortgage interest expense on the second home in Pau, France as long as it is qualified residence interest. Because the loan is secured by the residence and the amount of acquisition indebtedness between both the principal residence and the second residence is under one million dollars, the couple can claim the mortgage interest, including international locations. (NATP)

THIS MONTH'S QUIZ:  An estate becomes the partner in a partnership upon the death of one of the partners. The partnership makes a charitable contribution, which passes through to the estate via its Schedule K-1. Is the estate allowed to take a charitable contribution deduction?

 

Around the EU

A foreign resident in Portugal ordered $87 in books from a US publisher that charged him $33 to ship for a total $120 cost. The Portuguese alfandega (customs) would not allow the release of this order without compelling the resident to pay €28 ($37), which included VAT and shipping. When the resident sent a letter protesting that he should not have to pay VAT to a US entity and that he had already paid for shipping, customs claimed he was buying inventory.

 

IRS International Service Centers

Those Americans who reside in a European country can receive tax help at the following locations:

US Consulate
Geissener Str. 30
60435 Frankfurt am
Main
Tel: (49)(69) 7535-3834

Internal Revenue Service
United States Embassy
24/31 Grosvenor Square
London W1A 1AE
United Kingdom
Tel: (44)(207) 894-0476

United States Embassy/IRS
2 Avenue Gabriel
75382 Paris Cedex 08
France
Tel: (33)(01) 4312-2555

 

Recommended

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Tax Return Fees Could Increase

Bush Claims Tax Cuts Shrinking Deficit

International Tax Notes

Civil and Criminal Penalties