TaxBarron Report
March-May 2009

The 2008 tax return filing deadline for American expatriates is fast approaching: 15 June 2009. But don't be too worried. This date can be extended to 15 October by filing Form 4868. On 15 April, US citizens and deemed residents residing abroad were obliged to pay any 2008 taxes owed to the UNITED STATES TREASURY as well as that first quarter 2009 estimated tax payment. The second quarter estimated tax payment is also due 15 June. Tax returns are filed at the IRS SERVICE CENTER/ Austin, TX 73301-0215. Estimated tax payments go to INTERNAL REVENUE SERVICE, PO Box 1300, Charlotte, NC 28201-1300. For previous issues of the TaxBarron Report, click here.

In This Issue:

Crackdown on Overseas Taxpayers

Stimulus Payment Backlash

US Tax Filing Imposed on Nonresidents

Tax Quiz

FBAR Filing Deadline

A Little Tax Humor

PONDERABLES

Recommended

Crackdown on Overseas Taxpayers

President Barack Obama plans a two-part tax reform aimed at targeting corporations with international divisions and individuals in tax havens. The president is proposing to eliminate certain tax deductions for companies earning profits in countries with low tax rates. They will no longer be allowed to write off domestic expenses for generating profits offshore, which will discourage companies sending jobs overseas.

If Obama's proposal becomes law by 2011, Americans will have to prove they are in compliance with US tax laws in cases where they send money to foreign banks that do not cooperate with tax officials. Americans will only be free to invest with foreign financial institutions that cooperate with Washington by disclosing details when asked.

Companies sheltering profits in international accounts could lose billions if Obama's plan is enacted. At present, they pay taxes only when profits are brought back to the United States. Otherwise by keeping profits offshore, they can defer paying taxes indefintely. This is an incentive for them to invest overseas where jobs are created outside the U.S.

Political thinking is that $210b in extra tax revenues could be raised over the next 10 years. Meanwhile to create more difficulties for financial institutions that help wealthy individuals evade taxes in overseas accounts, the government is hiring some 800 new federal agents to enforce the tax code.

Representative Charles Rangel, chairman of the tax-writing House Ways and Means Committee, commented on Obama's plan: 'For too long, our tax laws have rewarded companies that invest and keep their money overseas and turned a blind eye to the use of tax havens by the wealthy.'

 

Stimulus Payment Backlash

Last year, tax filers had the unique opportunity to receive between $300 and $1,200 as an economic stimulus payment. Anyone not receiving his or her fair share can still qualify by filing a 2008 tax return. The glitch is that IRS is in hot pursuit of overseas Americans.

Pursuit can mean targeting American expats for prior year tax returns where the revenuer expects a return on his auditing investment. So the Service is busying itself checking Social Security numbers of those overseas Americans who were stimulated enough to emerge from non-filing obscurity for a grab at the money.

 

US Tax Filing Imposed on Nonresidents

A nonresident alien is someone who meets the green card or substantial presence test. A green card holder may be described as an alien or foreign person who took no steps to revoke the card even though he or she is treated as a resident of a foreign country under a tax treaty. So according to this example, a nonresident alien can be treated as a resident alien for US tax purposes.

The substantial presence test applies to any foreign person who a) was physically present in the United States for at least 31 days during the calendar year, and b) 183 days during the previous three calendar years (2008, 2007 and 2006). This latter criterion may be waived if the foreign person establishes that during 2008 he or she had a tax home in a foreign country and had a closer connection to the foreign country of residence. It is possible while qualifying for substantial presence in a tax year to be considered both a resident and nonresident alien.

Residency status affects an alien person's US tax filing. If US source income is effectively connected with a US trade or business, then it may be reported on Form 1040NR and taxed at ordinary income tax rates. Otherwise it is reported on the same Form as income not effectively connected and taxed at 30%, unless superseded by a tax treaty rate. Generally effectively connected income is reported by payers on Form 1042-S. When the withholding rate is correctly applied and no other US source income has been received, the designated alien is not obliged to file Form 1040NR.

1040NR filing is required where foreign persons have a trade or business in the United States, income is exempt from US taxation under a tax treaty, a deceased person or estate/trust is represented, or withholding amounts are incorrect. Resident aliens may file Form 1040, and be taxed the same as US citizens.

Tax Quiz

ANSWER TO LAST REPORT'S QUIZ: No. Do not file an amended return, but instead file an original return. An SFR prepared by IRS constitutes a valid return but is not considered an original return filed by the taxpayer. Therefore, if the taxpayers have sufficient information that will reduce the tax liability, an original Form 1040 rather than a Form 1040X should be filed.

THIS REPORT'S QUIZ: A nonresident alien works for the United Nations in New York. Under Section 893, the income of a nonresident alien employee is exempt from US tax. If this nonresident alien marries a US citizen, and elects to file a joint return, does this constitute a waiver of the diplomatic privileges and force the nonresident alien to report her worldwide income on the joint Form 1040 she files with her US citizen spouse?

 

FBAR Filing Deadline

The Department of the Treasury wants to know where American expatriates do their overseas banking. As such the Treasury has created a Form TD F 90-22.1 - REPORT OF FOREIGN BANK AND FINANCIAL ACCOUNTS. This annual report, due 30 June for the previous calendar year, asks for basic but revealing information. After calling for the filer details, it requires the names and addresses of the filer's foreign financial accounts, account numbers, and maximum value of each account during the reporting period. A filer can be an individual, partnership, corporation or fiduciary. Any person or entity having a financial interest in or signature authority over one or more foreign financial accounts in which the aggregate value of these accounts exceeds $10,000 at any time during the calendar year must file this report. Failure to file this report carries substantial penalties.

 

A Little Tax Humor

John Jakes was called in for an audit of his business taxes. With trepidation he very carefully prepared his supporting documents for every deduction on the return. He took his bank statements for the calendar year under audit and scheduled each deposit in a way that separated income from non-income items. The day before the audit, he attended church for the first time in 12 years.

On the morning of the audit, he said goodbye to his wife and kids like a condemned man who has just been found guilty by a jury of his peers.

Several days after the audit, John was out, free and carefree. The audit had gone well. When his friend Carl asked him about it, John replied: 'Well I was terribly anxious as you might imagine! Two humorless suits showed me into a back office with no windows and sterile furnishings. They sat on either side of me. They started going over my papers like I was Al Capone or something. But then it came out that I knew you - probably that $1,000 I sent you. Anyway all at once everything changed for me. Of course I told them whatever I knew about you!'

PONDERABLES

We make a living by what we get, we make a life by what we give. - Sir Winston Churchill

Injustice anywhere is a threat to justice everywhere. - Martin Luther King

The old believe everything, the middle-aged suspect everything, the young know everything. - Oscar Wilde

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