FAS CPA & CONSULTANTS

In this episode we will answer the questions our clients ask us about taxes for US expats.  

You will find the answers to the following questions:  

➡ Do expats have to pay US taxes? 

➡ How much tax do American expats pay? 

➡ Do US citizens pay taxes when working abroad? 

➡ Do US citizens living abroad get a stimulus check? 

➡ How can I avoid paying US taxes abroad? 

➡ Do dual citizens pay taxes in both countries? 

➡ What happens if you don't file taxes while living abroad? 

➡ How does IRS know about foreign income?  

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If you receive a letter from the IRS or any of the taxing authorities, call us immediately and we will help you. We will take your case and represent you in front of the IRS, the State or a Local Agency. You can rest assured we will always act in your best interest.

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In many occasions when you owe money to the IRS for unpaid tax, you may be unable to settle your debt at once. 

Having in mind that the total sums sometimes can exceed tens of thousands of dollars it’s understandable that most people won’t have that kind of extra cash to pay the owed amount in one go. In fact, statistics show that only 5% - 10% of tax debt cases are paid in full. What happens with the remaining? The most common scenario sees taxpayers applying for Installment Agreements.   

The IRS offers payment alternatives if you can’t pay in full. A short-term payment plan may be an option. You can ask for a short-term payment plan for up to 120 days. A user fee doesn’t apply to short-term payment plans.  

Why Should you Apply for an Installment Agreement?  Many people who can’t afford to pay their tax debt try to get an Offer in Compromise. 

However, as we’ve written before, this process is complex and you must cover specific requirements to be granted an OIC. In reality, the figure, which shows the number of cases resolved through an Offer in Compromise is very low, only 0.37%. In some other cases (15%) the tax debtors will be deemed Currently Non-Collectible (CNC) for your particular case. CNC is only awarded to taxpayers who are broke, living under the poverty line. After 10 years, their tax debt is extinguished.  

You can also ask for a longer term monthly payment plan or installment agreement. A $149 user fee applies to monthly payment plans or installment agreements that can be reduced to $31 if payments are made by direct debit.

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Real estate investment has been a flourishing business in the U.S. for the past few years. While there are many exemptions and deductions to take advantage of when selling a real estate property, if you are a foreign seller, you have to bear in mind one more thing. 

The FIRPTA. This is a dreaded tax by many and one of the most common questions we get asked by clients is “Can I avoid FIRPTA if have a Green Card?”. So let’s look at that.  

What is a FIRPTA?  

We have given a detailed explanation of what FIRPTA is in one of our older blog posts, but just to quickly recap - this is a 15% tax on the gain of the real estate property sale that the foreign seller owes to the IRS. Buyers are often required to withhold that amount and it can be a tedious experience.  How Can You Avoid FIRPTA withholding?  Good news! Even if you are not living in the U.S., you can still avoid FIRPTA if:  

1. You as a foreign seller have a Green Card AND Social Security Number. It is very important that the two are present. 

2. You don’t have a Green Card or SSN, but the property is priced up to $300,000. 

3. The real estate property is a foreign corporation. 

4. You can provide a legal notice from the IRS. 

5. The buyer signs an affidavit where he or she confirms that they will be using the real estate property as their main residence for at least 2 years after the purchase.  

To avoid FIRPTA withholding, you will have to fill in and submit Form 8288 as well as apply for a ITIN or tax ID. Upon the approval of your application, you will receive a certificate, which you can then present to the buyer and be free of the withholding.  

The most reliable way to deal with FIRPTA is through a consultation with a tax accountant. These professionals are well familiar with the tax laws, all of their updates and the legal loopholes you can use to minimize the amount of taxes you owe.

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As a rule the IRS audits the traditionally non-compliant taxpayers:  

1. Small Business Payers 

2. International Payers 

3. High-Wealth Payers 

4. Earned Income Tax Credit fraud schemes.  

Audits are not the only way the IRS scrutinize tax returns. Some algorithms employed result in automated checks on filings.  The automated underreporter program (IRS CP2000) matches income and IRS information, ad red flag discrepancies, for which explanations requests are automatically generated.  This system outnumbers audits by 3.1 to 1.  

The budgetary constraints have even impacted the automated checks. Despite these IRS CP2000’s not being audited, it enhances the IRS’s ability to challenge taxpayer’s returns. When combined (rates for CP2000 matching and returns challenge), the odds of the IRS challenges you come to 1/35 rather than the audit odds of 1/161!  What's The Damage?  It is costly to be audited.  

More than 90% of all taxpayers (individuals) who undergo and IRS audit, will face an additional payment; for an old fashioned field audit, this extra payment – and shock to the system – will come up at an average of $21,918.  The same average for a “mail audit” will be less, and averages out at $6,014.

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As you may be aware, offshore banking brings many benefits and it is completely legal when done correctly (i.e. not dodging tax or money laundering). But what’s more useful is to know what are the best jurisdictions in which you can get a license for a start-up bank abroad. Now, you may think you are well informed on that, but your information may be a little outdated as some major changes happened in the last one year and the list of top offshore banking license jurisdictions has changed. 

Belize  

In contrast to Puerto Rico, acquiring a banking license in Belize will cost you much more. If you just want to open a bank with an international license, you will need $1 million in the capital and if you decide to go for the full license, you must be ready to pay $3 million in the capital. Also, the process of license approval and issuing can take a long time, somewhere between 12 and 18 months. However, with all that said, we must point out the fact that Belize banks have the highest capital ratio rates worldwide - around 20%. This is the very reason why banks in this jurisdiction are considered extremely safe for those who want to deposit their money. 

Dominica 

Another  jurisdiction where the required capital for issuing an offshore banking license is Dominica. You would only need $1 million to get licensed. The even better news is that in this country fresh applicants are actively sought, which means the application process is easy and quick. To top it all, Dominica is one of the most preferred destinations for offshore banking because it also claims at the top of the second passport industries list, meaning that many of the people who start a banking venture also purchase a second Dominican passport. 

Panama 

Similarly to Belize, Panama is an offshore banking jurisdiction where getting licensed does not come cheap and you can have two types of license - international and full. Although in the law we see figures much lower, the reality is you may need to have up to $24 million in capital to receive both licenses. That can be too much for many, which is why there’s also an another option - setting up a credit union. Basically this is an institution for savings and loans where every depositor is also a stakeholder. Setting up a licensed credit union will only cost you between $1 and $3 million. 

Cayman Islands 

The Cayman Islands are the most expensive jurisdiction to get a full offshore banking license. The fees paid to the government for issuing the license can hike up to over half a million dollars and another half dedicated to legal fees. Of course, there are many other costs you will have to cover until you get that license. Also the application processing time is not too short and extends to over 12 months. Now, these may seem as all negatives, but really, they are just preventing measures to ensure that the institution getting licensed will be safe for depositors, will not commit any fraudulent actions and will not go into bankruptcy easily. This is the very reason why so many people and businesses choose offshore banking exactly in the Cayman Islands. As statistics have it, there are more than 70,000 companies registered there of which 350 are banks. 

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As the deadline for businesses to file their reports on unclaimed property approaches, many businesses are considering including information on misplaced cryptocurrency passwords or lost cryptocurrencies.  Unclaimed funds, of which unused gift cards may be an example, are often reported on by institutions such as retailers, banks, state government agencies, and insurers.  

Cryptocurrencies such as Bitcoin and Ethereum, being virtual in nature and growing in use and popularity.  The downside to these currencies is that the keys, passwords and digital wallets used to access them can be lost, which renders the currencies unclaimable.  This presents accountants with a distinct challenge in the businesses they serve.  

According to Robert Peters, director of Duff & Phelps Unclaimed Property and Tax Risk Advisory, some states have adopted rules where unused Bitcoin, as an example, could be included as a form of unclaimed property.  He goes on to say that more and more states are broadening their definition of unclaimed property to include unused or lost cryptocurrencies.  Many businesses are working towards completing their fall filings of accounts before November.  

All financial instruments that have gone dormant for the specified period of time, typically three to five years, would be valid for this type of reporting, but this may vary from one state to another.  As a result of these laws differing between states, the upcoming reporting season may entail re-organizing dollar thresholds, due diligence mailing dates, as well as the completion of electronic paper filing and payment requirements.

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By now the word is out: if you make a profit when you sell a cryptocurrency, your profits are taxable. To actually pay your taxes is easier said than done if you do not have a clear understanding of how to reflect these profits on your tax returns.   Before you jump in we advise that you instruct either your tax attorney or accountant to calculate your liability accurately.  

You have to pay tax for every year you made crypto profits, irrespective of the amount involved.  If you bought your cryptocurrency with U.S. dollars your tax liability remains void until you sell the crypto for a profit.   The IRS is now actively pursuing enforcement in cryptocurrency and it is precautious for investors to take note of the tax implications of their investments.  Four specific strategies are worth your while if you want to remain compliant at all times without overpaying your dues.  

One: Long term View  

Tax rates on capital gains go down over time, and it goes down after the first year.  The secret with cryptocurrency is to follow a long strategy. Do not buy and sell over the short-term.  Own, don’t “rent” is an advantageous mantra to follow.  

Two: Keep Some in Dollars  

Whenever you make a profit in cryptocurrency, set aside some of your takings in dollars to cover your taxes before you buy more cryptocurrency.  If you made substantial profits, DO NOT convert your cryptocurrency into another currency, and if you receive “bonus” currency through a fork, you have to set aside enough of money to cover your taxes on the fork-amount, which will be taxable as ordinary income and not capital gains tax, at the end of the tax period.  

Three: Keep Detailed Records  

It can be hard to keep records of your cryptocurrency transactions.  Most of the crypto companies provide no end-of-the-year tax statements, so it is up to you to keep a detailed spreadsheet with full details of when you bought, how much you bought and when you sold and for how much.  Sometimes it is possible to export the transactions from your crypto wallet or exchange website directly into a spreadsheet.  

Four: Crypto Gifts and Donations Are Not Taxable  

Crypto gifts and donations are treated very much like stocks in the same situation. The value of the crypto gift or donation is deemed to be the fair market value of the cryptocurrency at the time it is donated or gifted.

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