Taxlinked (TL): What would be your number one tip during tax season to US taxpayers with foreign entities?
Mark Batcho (MB): My tax-planning tip would be to identify the entity classification of the entity for US tax purposes. There is an option in many cases to change the classification of the entity for US purposes. As an example, in Brazil a common form of ownership is a Ltda. The entity typically pays approximately 30% percent tax on its net income. Since the entity has a default classification of a corporation for US tax purposes, the distributions received by its US owners is received net of tax. Essentially, the owners are paying a double tax, once at the entity level and another tax on the dividends. If the owners elected partnership status, the Brazilian taxes paid by the Ltda would pass through to the owner in a form of a foreign tax credit on their US tax return.
TL: What options are available to US taxpayers who have not filed prior year returns but want to fall back into compliance?
MB: It really depends on the facts for non-filing. If the US taxpayers were non-willful in their lack of filing, they would have the option to file under the Streamlined Filing Procedure. It is very popular currently due to the avoidance of any penalties related to non-filing. There is a requirement to file three years of delinquent returns along with six years of FBARs. Prior year returns will be closed so long as the IRS cannot prove the taxpayer was non-willful. Another option would be to simply start to file back returns under a quiet disclosure.
TL: What are the steps required by a US citizen who wants to renounce his citizenship? How long does this process generally last and what are its costs?
MB: Actually, a US citizen can renounce rather quickly. All they need to do is to schedule an appointment at a local embassy or consulate. Typically, the citizens will be required to return for a second visit prior to the official renouncement. There are certain tax implications of becoming a “covered expat” for the person who renounces. Becoming a covered expat would result in the person being subject to an exit tax along with other consequences in the future relating to the transfer of assets to US persons. Essentially, a covered expat is anyone who has on the date of renouncing a net worth in excess of $2,000,000, has not certified to be in compliance with the last five years of tax filings, or their average tax liability over the last 5 years was higher than $161,000. Individuals wanting to renounce who have not been fully compliant with their tax filings have a decision to make if they want to avoid covered expat status. The exit tax is based on unrealized gains of the taxpayer. Their assets are mark-to-market as of the date of renouncing. Currently, the mark-to-market gains are reduced by $693,000 prior to the imposition of the exit tax.
TL: Since you are based in Brazil, have you seen a surge in the number of US citizens living in South America who for one reason or another have opted to give up their US citizenship? What are the main reasons behind this decision?
MB: Brazil does not have a large amount of persons currently giving up their US citizenship. Americans citizens in Brazil do not typically owe much US tax as a result of the foreign tax credits on their US return. Currently, there are many more Brazilians obtaining US citizenship rather than renouncing at this time.
TL: Could you please tell us a bit more about the IRS’ Offshore Voluntary Disclosure Program (OVDP) and the Streamlined Filing Compliance Procedures? How do they differ and whom are they best suited for?
MB: The main difference is related to the taxpayers being willful or non-willful in their lack of reporting offshore assets. Streamline Procedure is only available for persons who are non-willful with their lack of filing. Under the Streamline Procedure all the penalties related to non-filing are abated for taxpayers residing offshore. Taxpayers under the Streamlined Filing procedure are required to attach a non-willful statement to their filings and provide a detailed narrative of why the filing was omitted and when the oversight was discovered. OVDP is much more serious. This is for taxpayers who have willfully failed to report their foreign financial assets. Penalties can be extreme in such a case.
TL: Do you have any additional thoughts you’d like to share with our community?
MB: My main closing thought is that it will never be a better time to become current for US taxpayers who are delinquent with their filings. Being identified by the Internal Revenue Service (IRS) as a non-filer would not allow the person to take advantage of the Streamlined filing procedure. With FATCA and many other procedures in place, it is only a matter to time.