Recent media attention and political backlash directed at Facebook co-founder Eduardo Saverin’s renouncement of U.S. citizenship did not recognize the underlying IRS tax-compliance issues facing millions of U.S. citizens and their families who are internationally connected within U.S. borders and beyond.
CPAs, Personal Financial Specialist (PFS) practitioners, and wealth management advisers with U.S. domestic practices should review their client profiles with an updated focus on U.S. clients with possible international connections.
Below is a hypothetical case of a U.S. citizen with international connections that illustrates how client financial situations have a propensity to evolve over time. Tax compliance must be prioritized and achieved before comprehensive financial planning can be instituted.
Concluding that Saverin is just another international tax dodger understates the complexity of global executives’ personal financial positions, as well as their contributions to U.S. multinational firms’ international business environment. There are no borders, electronically or intellectually, as financial capital flows where it is wanted, needed, and flourishes. Recently, Procter & Gamble announced that its management was shifting top executives in its personal care, skin, and cosmetics unit from Cincinnati to Singapore to capitalize on new business opportunities in Asia.
U.S. citizens move abroad for many reasons: commerce, extended family ties, and migration. Families with multiple citizenships are the result, as individuals develop relationships and seek employment, military deployment, education, and business opportunities, temporarily or permanently, outside the United States. They are all exposed to, and affected by, the clash of tax laws between the world’s residence-based tax regimes versus the U.S. citizenship-based worldwide income tax structure.
Affluent families and their advisers may appropriately manage the practical aspects of U.S. international tax-compliance planning. However, many internationally connected U.S. citizens have had their tax compliance made unreasonably complicated and face significantly higher costs than domestically situated U.S. taxpayers.
According to Nina E. Olson, the national taxpayer advocate, in her report to Congress in December 2010, “the most serious problem facing taxpayers—and the IRS—is the complexity of the Internal Revenue Code” (2010 Annual Report to Congress, p. 3 (12/31/10)). The following December, the report stated:
The complexity of international tax law, combined with the administrative burden placed on these taxpayers, creates an environment where taxpayers who are trying their best to comply simply cannot. For some, this means paying more U.S. tax than is legally required, while others may be subject to steep civil and criminal penalties. For some U.S. taxpayers abroad, the tax requirements are so confusing and the compliance burden so great that they give up their U.S. citizenship. [2011 Annual Report to Congress, p. 129 (12/31/11)]
U.S. internationally connected citizen hypothetical case scenario:
The client, a U.S. citizen, and his foreign-born wife, also a U.S. citizen, reside in the United States with their two children.
The wife’s elderly parents, who live in a foreign jurisdiction, receive regular financial support from their daughter via wired funds to a joint account that she holds with them offshore. The client is providing venture financing for a new foreign business investment, incorporated with his brother-in-law, also a resident of the same foreign jurisdiction. They have ambitious plans for geographic expansion. The family is now moving abroad to provide elder care for the relatives and plans to purchase a multifamily home to accommodate the extended family.
The client, a self-made business owner in the United States, has generally prepared the family’s personal tax returns. The clients will leave an investment portfolio in the United States, along with a dormant U.S. corporation as a necessary contingency anchor in the event they return. In preparing for this move abroad, the clients decide to consult with a CPA/PFS practitioner.
After a preliminary overview of this international family’s financial profile, the following tax planning and compliance matters arise:
- Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR). The clients have offshore accounts and, possibly, signatory authority of a foreign corporation. Is the client aware of FBAR and the concomitant declaration on Form 1040, Schedule B, Part III, lines 7a and b?
- Form 8938, Statement of Specified Foreign Financial Assets. Quick estimates indicate that the family tax profile may be above the filing threshold for specified foreign financial assets with their foreign bank and investment accounts, the foreign company capital infusion, possible foreign pension accounts (from foreign employment), and foreign life insurance that they’ve purchased to protect the family.
- Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation. The client has transferred cash and financing to incorporate the foreign company. The corporate structure needs to be reviewed for strategic planning, and regulatory, legal, and tax compliance in both jurisdictions.
- Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations. The client, as a financier for the foreign corporation, may (or may not) own a majority stake. Controlled foreign corporation filing and reporting regulations may be required. Consideration as to foreign entity eligibility for Form 8832, Entity Classification Election, purposes may feature in forward planning.
- Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. It is common practice in the foreign jurisdiction to settle real property in trust. The clients will be settling a trust to hold their new multi-family home in their new country of residence. Will they possibly be subject to the rules treating uncompensated use of foreign trust property as a taxable distribution under Sec. 643(i)(1), as amended by the Foreign Account Tax Compliance Act (FATCA) provisions included in the Hiring Incentives to Restore Employment (HIRE) Act, P.L. 111-147?
- Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund. During their immigration resettlement planning, the clients’ long-term U.S. brokerage firm notified the clients that they would no longer handle the clients’ U.S. investment account. The clients alternatively invested with a foreign investment firm using predominately foreign mutual funds.
- The clients’ financial outbound transfers to the parents’ foreign accounts were ordinary, legitimate wire transfers. The clients also use foreign credit cards in their current country of residence to manage their personal affairs. Will these transactions incur additional oversight due to anti-money-laundering regulations?
- As FATCA deadlines loom for foreign financial institution compliance, the clients are concerned about whether their foreign banks will continue to do business with U.S. citizens. The clients understand that a number of their U.S. friends residing in the same foreign jurisdiction have had their bank accounts closed.
- The clients’ tax reporting and filing responsibilities to the tax authorities in the foreign jurisdiction tax regime have not been addressed here, but need to be included in their overall tax-compliance planning.
This general client composite highlights some of the planning and tax issues for this international family. While the composite case raises more questions than answers, it is clear that due to financial/demographic shifts in the family’s needs, tax planning and compliance is the most significant driver of their comprehensive cross-border financial plan.
U.S. citizens, dual U.S. citizens, and multinational families are challenged in complex family situations as never before, and they need CPAs’ help to negotiate the cross-border regulatory, tax, and financial maze. There is great opportunity for CPA/PFS practitioners who are uniquely positioned with internationally experienced multidisciplinary planning teams to provide the appropriate services for managing the affairs of globally mobile citizens.
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Martha Harris Myron, CPA/PFS, CFP, TEP, is director of tax services with Patterson Partners in Hamilton, Bermuda. She writes a weekly finance column for The Royal Gazette.