While foreign assets are reported on both of these forms, they differ in terms of asset type and reporting thresholds.

It’s important to understand the differences between the forms. Doing so ensures that you are in full compliance with your reporting obligations as a US expat. 

The Foreign Bank Account Report (FBAR), aka FinCEN Form 114, is used to report the balances of foreign banks and financial accounts. Form 8938 (i.e., the Statement of Specified Foreign Financial Assets), in addition to financial account balances, is used to report other types of foreign financial assets. 

When comparing these forms, it’s important to bear in mind that they are not an “either-or” scenario. That is, it is not uncommon to have both an FBAR and a FATCA filing requirement. 

Below, we’ll discuss each of these forms in depth. Topics covered include who needs to file them, which assets to disclose on them, what happens if you file them late, and more.

What gets reported on your income tax return?

Technically, neither the contents of the FBAR nor Form 8938 will be included on your main income tax return form (Form 1040). That form is primarily used to report the income you’ve earned, credits you’ll be claiming, and taxes you owe or refund you will receive.

Form 8938 is submitted along with your tax return as a separate attachment to Form 1040. The FBAR, however, is filed separately and with a different government agency altogether. 

FATCA vs FBAR

You may see the term “FATCA” appear in discussions about Form 8938 vs FBAR as well. FATCA is an acronym for the Foreign Account Tax Compliance Act, a piece of legislation passed in 2010. FATCA paved the way for the creation of Form 8938 as a way to help deter financial crime and offshore tax evasion.

The FBAR, on the other hand, has existed for much longer. It was first created in 1970 as part of the Bank Secrecy Act (BSA). This legislative act is designed to prevent money laundering in the US.

Who is required to file Form 8938?

The following groups of expats are required to file Form 8938:

• Single filers who have accumulated foreign financial assets worth over $200,000 USD on the last day of the year, or over $300,000 USD at any point during the year
• Joint filers who have accumulated foreign financial assets worth over $400,000 USD on the last day of the year, or over $600,000 USD at any point during the year

FATCA doesn’t just apply to US expats. Americans residing stateside may also need to file Form 8938, although the domestic reporting thresholds are significantly lower. The following groups of Americans living stateside must file Form 8938:

• Single filers or specified domestic entities who have accumulated foreign financial assets worth over $50,000 USD on the last day of the year, or over $75,000 USD at any point during the year
• Joint filers who have accumulated foreign financial assets worth over $100,000 USD on the last day of the year, or over $150,000 USD at any point during the year¹

FBAR reporting requirements

When looking at Form 8938 vs the FBAR, FBAR reporting requirements are more straightforward. Anyone with over $10,000 USD in foreign financial accounts at any point in the year must file an FBAR.

Note that this figure refers to the total of your foreign financial accounts, not just the individual accounts’ value.

Example FBAR reporting requirement scenario

Shauna is a single US expat living and working on a local contract in Barcelona, Spain. She opened two foreign bank accounts. One is a local Spanish account where she receives her salary, and the second is a Wise account (in euros).

She only uses the Wise account to convert euros to US dollars to send to her US brokerage account but over the course of the year. 

Over the 2023 tax year, the highest amount held in the local Spanish bank account was 7,000 euros. The highest amount in the Wise account was 4,000 euros. 

Did Shauna trigger the FBAR filing requirement? 

The answer is yes. 

Although neither account individually exceeded the equivalent of $10,000 USD at any point in the year, she still must file an FBAR. This is because the bank accounts’ total of 11,000 euros did exceed the $10,000 limit.

Related: FBAR Filing 2024: Clarifying FinCen Form 114 for Expats

FBAR vs Form 8938: Determining which assets to disclose 

So which assets do you need to report, and on which form should you report them? When in doubt, refer to this handy breakdown, courtesy of the IRS website:²

What assets are not required to be filed on either the FBAR or Form 8938?

The assets you don’t have to report on the FBAR or Form 8938 include:

Form 8938 vs FBAR late filing

Failing to file Form 8938 or the FBAR, or filing them late, can result in fines. In some particularly flagrant cases, criminal penalties may also apply. An example of a flagrant case would be if somebody intentionally hid large sums of foreign assets from the US government for years.

But for those who file late due to an honest misunderstanding, there are amnesty programs:

• Those who have fallen behind on filing Form 8938 may be able to catch up through the Streamlined Filing Procedures
• Those who have fallen behind on filing FBARs may be able to catch up through the Delinquent FBAR Submission Procedures

Finally, we encourage US expats to review our step-by-step guide to filing US expat taxes.

What if your US filing requirements could be met correctly, strategically, & effortlessly?

At Bright!Tax, our team of expat tax professionals has helped expats around the world file accurately and efficiently. Our clients benefit from a dedicated CPA with expertise in the areas you need most.

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References 

1. Do I need to file Form 8938, Statement of Specified Foreign Financial Assets?
2. FATCA and FBAR comparison chart source – IRS

The post FBAR vs 8938: Comparing Two Important Filing Requirements appeared first on Bright!Tax Expat Tax Services.

All US citizens and permanent residents are required to file a federal US tax return every year, even if they live and pay taxes outside the US. While this is a hassle, the right strategy and knowledge can oftentimes eliminate the risk of double taxation — and one of the most powerful tools at your disposal is the Foreign Housing Exclusion (FHE).

Below, we’ll go over what the FHE is, what it covers, who qualifies for it, how to claim it, and more.

What is the Foreign Housing Exclusion?

The Foreign Housing Exclusion is a tax exclusion that is claimed on IRS Form 2555. This exclusion enables US citizens or residents living abroad to exempt reasonable housing expenses from income that would otherwise be taxable, ultimately helping to minimize their tax liability.

What counts as a reasonable housing expense?

Several housing expenses qualify as deductible, including:

• Rent
• Utilities (e.g. water, electricity)
• Necessary repairs
• Property insurance
• Application fees
• Occupancy taxes
• Residential parking fees
• Rental of furniture and accessories

However, some expenses do not qualify as reasonable, such as:

• Purchased furniture
• Phone, internet, and TV/streaming services
• Mortgage payments
• Cleaning or housekeeping services
• Renovations designed to increase the value of the property
• Lavish expenses

Check with a tax professional to confirm your expense categorizations.

Who qualifies for the Foreign Housing Exclusion?

The qualifications for the FHE are the same as they are for the Foreign Earned Income Exclusion (FEIE) — you must pass either the Bona Fide Residence Test or the Physical Presence Test.

To pass the Bona Fide Residence Test, you need to provide evidence of being a tax resident in another country for at least one full tax year. Things like rental contracts, utility bills, employment contracts, visas, or foreign tax returns can all serve as proof that you are a bona fide resident outside of the US. 

Alternatively, to pass the Physical Presence Test, you must be able to prove that you spent a minimum of 330 days during any 365-day period outside of the US i.e. in a foreign country.

Claiming the Foreign Housing Exclusion on Form 2555

Like the Foreign Earned Income Exclusion (FEIE), you claim the Foreign Housing Exclusion using Form 2555. The key difference is that the FEIE applies to your total foreign earned income, like salary or wages, whereas the FHE applies to the housing expenses mentioned above.

One key difference between the two is that self-employed individuals may claim the FEIE, but not the FHE.

Related: The Foreign Earned Income Exclusion in 2024: An Expat Guide

What is the Foreign Housing Exclusion limit?

The Foreign Housing Exclusion limit is predicated on the FEIE. The FEIE limit is indexed annually for inflation, meaning that the amount typically increases. Since the FHE is calculated based on the FEIE, that amount typically increases, too.

How to Calculate the Foreign Housing Exclusion

In the 2023 tax year (return filing due in the year 2024), the FEIE limit is $120,000.

To calculate the FHE, use the following steps:

1. Multiply the FEIE limit by 16%. This will calculate the base housing amount. For the 2023 tax year, this looks like 120,000 x 0.16. So, the base amount is $19,200. The base amount is what the IRS assumes you would have paid for housing had you resided in the US.
2. Next, you’re going to calculate a figure referred to as the “general limit.” Multiply the FEIE limit by 30%. Again, for the 2023 tax year, this looks like 120,000 x 0.30. The general limit here is $36,000.
3. Now, you’re ready to calculate the maximum housing exclusion. Subtract the general limit from the base amount, which for the 2023 tax year is 36,000 – 19,200. The total here is $16,800, which amounts to the total you can exclude as a foreign housing expense.

You’re not quite done yet! 

To claim the maximum amount possible, you must justify your calculation for the final figure. So, take the general maximum housing exclusion we just calculated, 16,800, and divide that by 365 (for the total days in a year). 16,800 / 365 = 46.03.

$46.03 is the amount you’re eligible for per day spent outside the US. Now, to calculate how much of the maximum housing expense limit you’re allowed to claim, multiply that figure by the number of days you spent outside the US. If, hypothetically, you were outside the US for 326 days, that calculation would look like 46.03 x 326, giving you your FHE total: of $15,005.78. Again, hypothetically, if your total housing expenses for the year were $23,000, you could offset the difference and only be tax liable for $7,994.25.

Claiming the Foreign Housing Exclusion

To claim the FHE, you’ll have to claim the FEIE. You can do this by filing IRS Form 2555 along with your US tax return. The form consists of nine parts in total:

• Part I: Personal details like your name and full foreign address
• Part II: Start dates, end dates (if applicable), and other details of your Bona Fide Residence

OR 

• Part III: Log of the dates you spent in and outside of the US as part of your Physical Presence Test and other details related to your stays
• Part IV: Details of the income you earned outside of the US
• Part V: Indicate whether you plan to claim the FHE
• Part VI: Calculate your FHE
• Part VII: Calculate your FEIE
• Part VIII: Enter the total of your FEIE and FHE if you plan on claiming it
• Part IX: Calculate your Foreign Housing Deduction, if self-employed

Related: The Foreign Housing Deduction and US Taxes for Self-Employed Expats

Claiming the Foreign Housing Exclusion when married

This question applies when both partners have US tax-paying obligations. In cases where one spouse is a non-resident alien (NRA), then the FHE can be claimed by the spouse obliged to file with the IRS.

Alternatively, if you live in separate households, each partner can file separate claims, with each claiming the FHE for their respective household. For example, when a married couple is filing jointly and living in the same household, the FHE would only be applied to Form 2555 of one spouse within their joint tax return.

On the other hand, if you live in separate households, you can file separate claims with each partner claiming the FHE for their respective household. However, your households can’t be within commuting distance of one another. Furthermore, there are many benefits to filing jointly, so filing separate returns with independent FHE claims isn’t guaranteed to be a better option than filing jointly with one FHE claim.

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The post Foreign Housing Exclusion: Calculate and Offset Expenses appeared first on Bright!Tax Expat Tax Services.

On top of your standard paperwork, such as Form W-9, and confidentiality agreements, there’s another document many small business owners might also have to consider when thinking about taxes: Form 1099-K. 

Why the change now? The American Rescue Plan Act drastically reduced the minimum threshold for reporting. Today’s article lays out the groundwork for understanding Form 1099-K. From there, it outlines what the filing process looks like for small business owners who meet the requirements. 

Let’s dive in!

What is Form 1099-K? 

The 1099-K is a form that tracks the total payments processed through credit card companies and third-party services, such as PayPal, Stripe, and Venmo. It also tracks payments for freelancing platforms that hire contractors, such as Upwork and Fiverr.

Read more: Understanding Your Form 1099-K | The IRS

What is the 1099-K threshold for 2022? 

The previous threshold for filing a 1099-K was gross payments that exceed $20,000 (for a single freelancer/contractor) across a whole tax year. However, all of that changed when the US Congress passed the American Rescue Plan Act in 2021. This Act officially took effect on January 1st, 2022. 

According to the IRS, the users of third-party payment services will receive a 1099-K when:

• The individual/business receives their payments via card transactions (such as credit or debit cards), and/or
• The individual/business receives payment via third-party payment platforms (Paypal, Venmo, Stripe, Upwork, etc.) that are above the minimum reporting thresholds of:
  • $600 worth of payments across the entire tax year with no minimum amount of processed interactions that took place (prior to 2022, it was 200 transactions throughout the year). 

As a result of this act, more small business owners earning income via third-party payment options will receive a Form 1099-K than ever before.  

Read More: Earn More Than $600 As An Expat Gig Worker? Introduction, Form 1099-K

What’s being reported in Form 1099-K? 

Form 1099-K includes the following information:

• Box 1a — Gross Amount Of Payment Card/Third-party Network Transactions: Generally speaking, ‘gross’ means all of something. So in this instance, confirm this box includes the total amount of payments received throughout the tax year. 
• Box 1b — Card Not Present Transactions: This typically refers to payments that didn’t occur by card. Include all transactions in which a payment card wasn’t used in this section. Examples include phone or online sales.
• Box 2 — Merchant Category Code: Check the merchant category code here! Not sure what yours is or how to find it? Here’s a resource that explains the process.  
• Box 3 — Number Of Payment Transactions: This box must include the count of payment transactions processed throughout the year – not the total amount! Issued any refunds during the year? Do not include those in the final number!
• Box 4 — Federal Income Tax Withheld: Any federal state tax withheld is reported here (self-explanatory). 
• Box 5a – 5KI — Gross Amount Of Payment Card/Third-party Network Transactions Made: This box notates the gross amount of card and third-party payment options received for each month in the calendar year. 
• Boxes 6 – 8 — State Income Tax Withheld: Similar to Box 4! This box reports any state tax withheld. 

Must I send a Form 1099-K to contractors I hire? 

If you hire a contractor and pay them through a third-party payment processor or with credit cards, you won’t have to send them a Form 1099-K. The payment platform will have to send Form 1099-K to the contractor themselves once their earnings exceed $600 across the tax year.  

However, if you hired and paid a contractor more than $600 via other payment methods such as cash or checks, then you’ll have to send them a 1099-NEC. 

Form 1099-K vs. Form 1099-NEC: What’s the Difference? 

While both Form 1099-K and Form 1099-NEC report on gross earnings, they come into play depending on the source of the payments. 

Let’s bring an example to life… You’ve hired a freelancer to redesign your logo. Paying them via check versus credit card has different implications. 

In Scenario 1, you pay the freelancer via check. In this case, (assuming the cost of the redesign is more than $600), you’ll be required to issue a 1099-NEC. In Scenario 2, however, you pay them via credit card. Here, the payment processor is required to send them a 1099-K. 

Get the Help You Need to Stay Compliant With Tax Filing

Small business owners already manage a lot of paperwork! That’s why sometimes, it makes the most sense to let a team of professionals handle your taxes! Then, you can focus on what matters most: running your business and growing your team. 

Feel free to contact us if you have more questions about how Form 1099-K (or Form 1099-NEC) impacts your business! Our team is more than happy to help and find the best solution for you. 

The post Small Business Owners and Form 1099-K: Everything You Need to Know! appeared first on Bright!Tax Expat Tax Services.

Thankfully, the Foreign Earned Income Exclusion (FEIE) allows expats to exclude up to $108,700 of their foreign earned income from US taxes (2021). To claim it, however, expats must meet one of the tests the IRS uses to determine whether they’re living abroad and attach Form 2555 to Form 1040 when filing. 

Let’s take a look at the specific steps needed to complete both forms (while also reducing your US tax liability!).

Setting the stage: Meet John & Jane, expats in Singapore.

To help you better understand how to complete Form 1040, we’ll use the example of John Doe and Jane Doe. They’re a married, expat couple with an 8-year-old daughter named Laura, and they have lived in Singapore since January 2021. 

John works in Singapore as an IT Project Manager for a tech company. He earns an income of $100,000 per year from his job. 

Outside work, the Doe family also owns a house in Bali, Indonesia, which generates $6000 in rental income each year. In addition, they hold a savings account that generated $500 in interest last year. 

Let’s follow their journey in filing Form 1040.  

How to complete Form 1040: Four simple steps: 

Step 1: Fill out your personal information

The first half of Form 1040 focuses on your personal details. This information includes:

• You and your spouse’s names (if you decide to file jointly)
• Your mailing address
• You and your spouse’s social security number
• Dependents’ (children, grandparents, etc.) names & social security numbers
• Whether your dependents qualify for child tax credits.

In our case, John and Jane decide to file Form 1040 jointly and claim their daughter, Laura, as a dependent. John and Jane can claim the Child Tax Credit – even while living abroad! However, because they spent less than six months in the US last year, they cannot claim the advanced monthly payments or expanded version.

Step 2: Report your earned income

Next, you must report all income throughout the year. Some examples of different types of income you will need to include in Form 1040 are:

• Wages
• Retirement income from pensions, social security income, IRS, and 401(k)
• Taxable interest
• Rental income from properties
• Unemployment income
• Business or self-employment income (or loss)
• Capital gains (or losses)
• Other gains (or losses)

In our example, John will list his $100,000 per year salary on line 1 for “wages, salaries, tips, etc.” Because of the interest they earn from their savings account, The Doe family includes the $500 interest on Line 2b, “Taxable interest.” 

John and Jane will also have to declare the $6000 per year rental income they earn with their property in Bali. To do this, they also attach Schedule 1 to their Form 1040 to declare their earnings:

Step 3: Claim your deductions

Next, it’s time to claim your deductions on Form 1040 starting with the standard deduction, which is allowed for each taxpayer depending on their filing status. Some examples of other deductions include:

• Medical expenses
• Business expenses
• Educator expenses
• Paid alimony

Since John and Jane are filing jointly as a married couple, they automatically benefit from a standard deduction of $25,100. 

Step 4: Calculate how much you owe in taxes.

On the second page of Form 1040, you’ll have to calculate how much you owe in taxes. 

In the case of John, his total income amount, when considering his wage, rental income, and interest, adds up to $106,500. Since he makes more than $100,000 per year, he’ll have to use the worksheet on page 77 of the IRS’s Instructions for Form 1040. 

How to Complete Form 2555 to Claim the Foreign Earned Income

To claim the FEIE, you must attach Form 2555 to Form 1040. Here’s how to do it:

Step 1: Fill out your personal information

Like with Form 1040, you start by completing Form 2555 with your details. You must include your name and full foreign address, city or town, state or province, country, and ZIP or foreign postal code. 

Step 2: Pass the Bonafide Residence Test or Physical Presence Test

You must pass either of these two tests to qualify for the FEIE:

• – Bonafide Residence Test: US expats must prove their social and professional ties to their new country & more than 1 calendar year of presence outside the US.
• – Physical Presence Test: US expats must prove that they spent at least 330 days outside the US (during any consecutive 365-day period).  

If you want to use the Bona Fide Residence, you’ll have to enter the dates of when your Bona Fide Residence began and ended on Line 10 of Form 2555. If you’re still a bona fide resident, you must write “continues” on Line 10 instead. 

John and Jane decide to use the Physical Presence Test and will need to prove that they’ve spent at least 330 days in Singapore. To do so, they add all separate periods they were present in Singapore during the 12 months shown on line 16.

Step 3: Include your total amount of foreign-earned income 

Part IV of Form 2555 is where you can include all your total foreign earned income that you must convert into USD. If you get any other benefits from your work, such as lodging, meals, or cars, you must include them in this part IV. Your total amount of foreign income is going to be on Line 24.  

You can exclude a maximum of $108,700 of foreign-earned income per person (2021). As a result, both John and Jane Doe can exclude their wages from their tax return since they make less than the limit. 

Get the Help You Need With Your US Taxes with Bright!Tax

If you don’t have the time to file all the paperwork required to report your worldwide income while overseas, we’re here to help. To get started, you just have to register by answering a couple of (very quick) questions, and our CPA team will find the best solution for you. 

The post How to Complete Form 1040 With Foreign Earned Income (A Step-By-Step Guide!) appeared first on Bright!Tax Expat Tax Services.

The United States has tax treaties with 69 other countries. Thanks to these tax treaties, you can often reduce your income tax liability and avoid double taxation while living overseas. To claim your tax treaty benefits, you must file the IRS Form 8833 (also called the Treaty-Based Return Position Disclosure Under Section 6114 or 7701). 

In this article you’ll learn:

• – How tax treaties work
• – How to file Form 8833
• – The penalties involved if you don’t file Form 8833
• – Who is exempt from filing Form 8833

How do tax treaties work? 

Tax treaties between the United States and a foreign country outline the mutual agreement and understanding of how both countries define residency and how they will tax residents and nonresidents of each country. While they apply to individual taxpayers and companies, we’ll just focus on individual taxpayers in today’s article.

Under many of these treaty provisions, expats and foreigners living in the US (such as nonresident aliens or green card holders) may benefit from reduced tax liability and exemptions on various types of income. To view what the rules are in the tax treaty between the US and your country of residence or citizenship, check out the official IRS list of all US tax treaties from A to Z. 

It’s also important to note that not all US states recognize international tax treaties… meaning income the IRS excludes on your federal tax return may not be excluded on your state tax return. Alabama and Connecticut are just two examples of states where international tax treaties do not apply!

How do I file Form 8833? 

To claim treaty benefits on your tax return, you must file Form 8833 to the IRS each tax year with your annual filing. Here’s a quick look at the information you’ll need to include in Form 8833:

• – Reference ID number
• – Your country of tax residency
• – Address in the country of residence
• – The article of the treaty that you want to use
• – Which income qualifies for exemption, according to the tax treaty
• – An explanation of the treaty-based position that you are taking

(Here’s a link to download Form 8833 in PDF form for your convenience!). 

Are there penalties if I don’t file Form 8833? 

The short answer is yes (no surprise!). 

The penalty for not filing Form 8833 when taking a treaty-based position on your tax return is $1,000 for individual taxpayers. If you exclude income from your return because of something you’ve relied on within a tax treaty, it is essential to state that to the IRS on Form 8833 to avoid penalties. 

Just learning about this filing requirement? No worries – if you can provide a reasonable explanation why you didn’t file Form 8833, there’s a chance that you can qualify for an exemption from these fines.

Who is exempt from filing Form 8333? 

According to the IRS, US taxpayers that fall under the following circumstances don’t have to file Form 8333:

• – You claim a reduced withholding tax under a treaty on interest, dividends, rent, royalties, or any other fixed or determinable annual or periodic income typically subject to a rate of 30%
• – You claim a treaty exemption that results in reduction or modification of taxable income from:
  • – Dependent personal services
  • – Pensions
  • – Annuities
  • – Social security
• – You are a partner in a partnership or a beneficiary of an estate or trust, and that partnership, estate, or trust reports that required information on its return
• – You qualify to claim a reduction or modification of the taxes applied to income under an International Social Security Agreement or a Diplomatic or Consular Agreement
• – The payments or items of income you usually must declare don’t surpass $10,000

The Catch for US Citizens…

Now that you know the benefits that Form 8833 can bring to your tax return, there is some bad news to break for US citizens. 

Most tax treaties include a Savings Clause provision that states that the US can tax its citizens as if the treaty did not exist in the first place. The clause generally prevents the US citizen taxpayer living abroad from taking advantage of the treaty’s contents. 

That being said, some exceptions to this saving clause exist, providing a narrow but existent window of application of the tax treaty for US taxpayers living abroad. 

Don’t Get Double Taxed Overseas

No one wants to pay taxes twice on the same income. While Form 8833 allows you to claim tax treaty provisions and reduce what you owe to the IRS, it’s just one option. Other ‘tools’ to reduce US tax liability exist, such as the Foreign Earned Income Exclusion (FEIE) or the Foreign Tax Credit (FTC). 

If you have any questions about which tax treaty provision or relief program best benefits you, we can help. Not every US expat is the same, which is why our team of CPAs will assess your specific situation to find the best solution for you. 

The post Tax Treaty Benefits & Form 8833: What You Need to Know (From a CPA!)  appeared first on Bright!Tax Expat Tax Services.

Whether it’s to retire early or escape the current political climate, there are various reasons why people set their sights abroad. But this is an article about taxes, right? 

Let’s ground ourselves for a moment… As an American expat, you still have US tax obligations. And on top of filing a US tax return each year, you might also need to file the FBAR. 

In this guide, we go over everything US expats need to know about FinCEN Form 114, also known as the  FBAR. You’ll learn essential information such as who’s required to file the FBAR and the penalties in cases of non-compliance.

What is the FBAR? 

The Report of Foreign Bank and Financial Accounts (FBAR) is an IRS document that US expats must file to report their financial accounts held with banks located outside the US. Expats can ensure they are compliant with their FBAR filing requirements by submitting  FinCEN Form 114. 

Because of citizenship-based taxation, US expats must declare their worldwide income yearly to the IRS, regardless of where they live. The purpose of the FBAR is to fight tax evasion, illicit funds, and money laundering. 

When US taxpayers hold accounts in the US, the IRS is able to keep an eye on their financial activities because each taxpayer’s bank account is associated with their taxpayer ID (most commonly their social security number). That allows the IRS to monitor large financial transactions and know where each taxpayer holds their money stateside.

Now, you may wonder, how will the US know I hold foreign accounts that are located overseas? 

Since the introduction of the Foreign Account Tax Compliance Act (FATCA) in 2010, international banks must report the financial activities of US expats in their territory back to the US each year. This allows the US Treasury to gain a similar level of visibility to the financial activities of US taxpayers, even when they have bank accounts located abroad. This legislation has caused many inconveniences for US taxpayers who reside abroad, including, sometimes, the inability to open or hold a bank account outside the US. You can read more on that here.

Which US expats must file FinCEN Form 114? 

You don’t have to file FinCEN Form 114 unless you meet the requirements. The threshold to file states that you must file the FBAR if the amount you hold across foreign accounts surpasses $10,000 at any point during the calendar year. 

For example, let’s say you hold $4,000 in a Panamanian bank account and $6,000 in a Mexican mutual fund. In this case, you’ll have an obligation to file FinCEN Form 114 since the total amount of money you possess across your foreign accounts meets the FBAR threshold of $10,000. 

However, you don’t need to report foreign accounts to the IRS that fall into this list:

• – Correspondent or Nostro accounts
• – Accounts owned by governmental entities
• – Accounts owned by an international financial institution
• – Accounts maintained in a US military banking facility
• – Individual retirement accounts (IRAs)

What information do you need to file the FBAR? 

To file the FBAR, you need to complete FinCEN Form 114 with the following information:

• – Name on the foreign account
• – Foreign account number
• – The foreign bank’s name and address
• – Type of account
• – Maximum value on the account during the calendar year (that you must convert into US dollars)

What if my foreign account is jointly held with someone else?

If you hold a joint account with a spouse or someone else, you’ll also need to disclose that account on the FBAR.  

This causes some concern for non-US taxpayers who don’t want their information reported back to the IRS. That said, the FBAR disclosure does not drive any tax, so beyond the reporting of their account balances, the IRS has no further ability to tax or scrutinize them.

What about accounts that I can access, but are not mine?

Some people have access to financial accounts that they are not the owner of. Within the FBAR disclosure, this is called having signature authority. Believe it or not, even if you don’t own a bank account, but you do have signature authority over an account, it is subject to reporting on the FBAR.

An example of signature authority is if you have a minor child and the bank requires you to hold signature authority over their account until they reach age 18. Another example is if you are the treasurer at work, or in another organization, where you can write checks and manage the money within an account, but it is not your own.

How do I file FinCEN Form 114? 

You must file FinCEN Form 114 each year electronically through the BSA E-Filing System. You also have the option of letting a tax professional file the form for you as part of the tax preparation exercise. In doing so, your tax preparer will request Form 114a as documented authorization from you to submit the FBAR on your behalf. 

What is the FBAR deadline? 

You must file the FBAR to the IRS by April 15th of each tax year. However, if you fail to file the FBAR by April 15th, you will automatically benefit from an extension until October 15th. The extension is automatic, so it’s not something you need to request. 

Are there any penalties for not filing the FBAR? 

Non-compliance with your FBAR obligations can result in IRS penalties. How much you pay depends on whether you willingly or unwillingly failed to file FinCEN Form 114, with the IRS charging higher fines for the former. 

The standard penalty for failing to file the FBAR non-willfully is $10,000 for each that you don’t file. Willful non-filing, on the other hand, can cost you up to hundreds of thousands of dollars, depending on your situation.

I didn’t know I had to file an FBAR until now. How do I catch up? 

If you’ve been living overseas for some time and never knew about your FBAR obligations until now, there’s no need to worry. The IRS has a few different ways to get caught up penalty-free.

If you’ve been filing your US tax return each year, but didn’t know about the FBAR, the IRS offers the Delinquent FBAR Submission Procedure to catch up with FBAR filing penalty-free.

If you’ve failed to file FBARs because you didn’t know you had to file taxes from abroad, the IRS has a Streamlined Filing Program to help you catch up on both tax filing and FBAR disclosures.

Read more: IRS Streamlined Procedure | Bright!Tax

Let Bright!Tax Handle Your FBAR Filing

If you have more than $10,000 across foreign accounts but don’t want to go through the hassle of filing FinCEN Form 114, we can help. We’ve helped US expats worldwide with our FBAR Filing service to ensure they stay compliant and with minimal stress. Get started today by reaching out to one of our expat-expert CPAs.

The post FinCEN Form 114: How to File the FBAR appeared first on Bright!Tax Expat Tax Services.

If you work as a freelancer, independent contractor, gig worker, or are otherwise self-employed, the phrase “1099 form” is almost certainly familiar to you. That’s because any client from whom you’ve received at least $600 is obligated to send you a 1099-NEC, a tax form that is used to report payments made to non-employees.

But if you pay close attention to the news, or have received or transferred large payments through online platforms, you may also be familiar with the similarly-named (but different in function) Form 1099-K.

Form 1099-K has entered into the news cycle in a major way in recent years as reporting threshold updates were announced and recently, postponed. But, what exactly is Form 1099-K? Why is everyone talking about it? And, how might it affect you? 

What is Form 1099-K?

Form 1099-K, officially titled “Form 1099-K: Payment Card and Third Party Network Transactions,” is a form that is used to report payment transactions made through online platforms, apps, and other third-party payment processors. Examples of these include Venmo, PayPal, and Square, among others.

In recent years, third-party payment processors have been required to send 1099-K forms to anyone who has received more than 200 business-related payments totaling over $20,000 in one year. In turn, the 1099-K recipient must report the information included within it on Schedule 1 of Form 1040, “Additional Income and Adjustments to Income,” when filing their federal tax return.

Why has Form 1099-K been in the news?

The American Rescue Plan of 2021 — the legislative package signed into law by President Biden to stimulate the US economy in the wake of the COVID-19 pandemic — contained a number of changes to the US tax code. One of these changes (included under Section 9674) required payment processors to send a Form 1099-K to anyone who had received more than $600 in business-related payments during a particular tax year through their platform. This was an astounding change for those familiar with the previous $20,000 threshold.

The motivation behind this change to the tax code was primarily to implement more stringent regulations on third-party payment processors by obliging taxpayers to report their earnings at a lower threshold. This also ensured that both parties were subject to mandatory financial disclosures (and, subsequently, paying taxes on those disclosures). With the IRS missing out on billions of dollars in uncollected taxes each year, Biden’s administration has made closing the tax gap a key priority. The tax gap is the difference between what the IRS is truly owed and what they actually receive in on-time payments.

Originally, this change was supposed to go into effect for the 2022 tax year. Third-party payment processors were directed to send Form 1099-Ks reflecting the previous year’s payments by January 2023. However, the IRS announced in December 2022 that the Form 1099-K reporting threshold changes would be delayed in order to “facilitate an orderly transition” for taxpayers, third-party payment platforms, tax preparers, and others who would be affected by the changes.

So, when will the Form 1099-K changes take effect?

The IRS has not yet stated when the new changes will go into effect. However, they noted that “additional details on the delay will be available in the near future along with additional information to help taxpayers and the industry.”

Who will receive 1099-Ks in the future?

Whenever the 1099-K reporting threshold changes go into effect, they will be sent to those who have received $600 or more from third-party payment processors for goods provided or services rendered. This could include:

• Small business owners who sell or flip goods through eBay, Etsy, Amazon, Shopify, etc.
• Property owners who rent out their properties on Airbnb, Vrbo, etc. 
• Gig workers who earn money through gig economy apps like Uber, Lyft, TaskRabbit, Instacart, etc.
• Freelancers, consultants, and independent contractors who are paid for professional services through platforms like Square, Stripe, PayPal, Bill.com, Venmo, etc.

The law is not intended to track personal transactions such as sharing the cost of a car ride or meal, birthday or holiday gifts, or paying a family member, partner, or roommate for a household bill.

How does the 1099-K affect US Americans living abroad?

With the 1099-K reporting threshold changes postponed for this tax season, US expats will largely not be impacted just yet. However, they may still receive a 1099-K because of the last-minute communications from the IRS about the delay in implementing the lowered threshold. While the IRS has not yet issued specific guidelines for such taxpayers, they stated that they are “working rapidly to provide instructions and clarity so that [those] taxpayers understand what to do.” 

In general, it’s always good practice to keep official tax paperwork organized and readily accessible. If you receive a 1099-K form, save it to a secure, easily accessible location so that you can produce it at a later date if needed.

Living or moving abroad can sometimes complicate how to file certain forms – read more about how a mid-year move abroad could affect your tax planning.

Once the Form 1099-K reporting thresholds are officially updated, anyone who receives the form must report the relevant information found within it on their tax return. Tip: make sure to use a reliable currency calculator if the payments received were in a foreign currency. In theory, you shouldn’t have to pay additional taxes as long as you already properly report this income. However, it will add an additional step in the filing process.

Rest assured: Ensuring that you have the most up-to-date information is our top priority, so if there are any status changes regarding the Form 1099-K updates, we’ll be sure to update this article accordingly.

In need of US-tax filing services for Americans abroad?

Taxes are confusing enough as it is, especially for expats. In addition to many long, confusing forms, you have to consider things like avoiding double taxation, filing additional reports. It’s not uncommon to spend hours of time researching and learning about tax deductions and credits that only apply to US taxpayers residing abroad. However, these must must be correctly claimed in order to be applied. Add to that the ever-changing nature of the tax code, and filing expat taxes can begin to feel downright overwhelming.

Fortunately, our Bright!Tax team makes it possible for you to hand off your expat tax filing responsibilities to an expert CPA. With years of experience helping US citizens and permanent residents navigate their tax returns, we’re confident in our ability to help you get and stay compliant, minimize your tax liability, and save you time and stress. And of course, our team of CPAs frequently monitors any changes in tax law, so our expat tax projects are always completed to the best advantage for our clients.

If you have any more questions about Form 1099-K or expat taxes in general, we’re here to help! Just share some details about your situation and one of our CPAs will reach out within one business day.

The post <strong>Form 1099-K: Everything US Expats Need to Know</strong> appeared first on Bright!Tax Expat Tax Services.

US taxes are based on citizenship status, not residency. Therefore, Americans living abroad who own businesses (even sole proprietorships) have to report their business income on their US tax returns, in many cases on Form 8858.

You’re required to complete Form 8858¹, which the IRS calls the “Information Return of US Persons With Respect To Foreign Disregarded Entities,” along with your tax return if you own a Foreign Disregarded Entity (FDE). 

But what is a Foreign Disregarded Entity? And how do you even know if you own one? Don’t worry. We’ll walk you through everything you need to know about Foreign Disregarded Entities and Form 8858 in this article. 

What is a foreign disregarded entity?

By US law, an FDE is a company formed outside of the United States that is separate from the individual who formed it. Essentially, if you own a company outside of the US such as a single-member limited company (similar to a US LLC), sole proprietorship, or partnership, and it is not taxed as a corporation, there is a good chance it qualifies as an FDE.

The US treats both the owner and the FDE as a single taxpayer entity. This means the IRS considers the income your FDE makes as your own taxable income. So, if you made $40,000 outside of your FDE in 2021 and your FDE brought in $60,000, the IRS would view your taxable income as $100,000.

How to report a foreign disregarded entity

If you have a foreign disregarded entity, you will need to report it to the IRS using Form 8858. This form is used to provide information about the entity, its activities, and its ownership. You will also need to attach any required schedules to the form, such as the balance sheet, income statement, and tax reconciliation schedules. 

What is Form 8858?

Owners of FDEs must submit Form 8858 along with their US tax returns each year. Tax day for US expats typically falls on June 15th, unless you file for an additional extension. The purpose of Form 8858 is to disclose the ownership of an FDE and provide the US with financial information about your foreign company.

Who’s required to fill out Form 8858?

Americans living abroad who own an FDE will submit Form 8858 with their US tax return every year. But there are other instances when you may need to submit this form:

• If you own or operate a Foreign Branch (FB), which refers to a company that is US-based but conducts business through a foreign legal entity or branch
• If you have an interest in a Foreign Branch (FB) through another foreign entity that you own (ex. an entity for which you file Form 5471, Information Return of US Persons with Respect to Certain Foreign Corporations, or Form 8865, Return of US Persons with Respect to Certain Foreign Partnerships)

When is Form 8858 due?

Typically, Form 8858 is due on the same date as the taxpayer’s annual income tax return, including extensions. For most individual taxpayers, the deadline to file Form 8858 for the 2022 tax year will be April 18, 2023. However, if you are living abroad on the due date of your tax return, you may be eligible for an automatic two-month extension to file your tax return and Form 8858 by June 15, 2023. 

Form 8858 Instructions: How to File a Foreign Disregarded Entity

Form 8858 is a fairly straightforward four-page document, particularly if you’ve got a handle on the accounting details of your FDE. The first page of the form deals with identifying information. 

In addition, Form 8858 contains an additional eight sections, also called schedules. This is where it can get tricky for an individual taxpayer to ascertain their obligations – depending on your circumstances, you may not need to complete every section.

Read on for a guided overview of how to fill out Form 8858.

Page 1: Identifying Information

In this section, you’ll provide key information about your FDE. This includes

• Name and address of the person filing the return
• Name and address of the FDE and its EIN (Employer Identification Number) 
• Filer’s tax year
• Country where the FDE is incorporated
• Functional currency of the FDE
• Direct and tax owner of the FDE

If the person filing Form 8858 isn’t the FDE’s owner, its owner(s) must include their personal information. 

For clarity, a tax owner may or may not be the legal owner of an FDE, but they are the person responsible for reporting and paying taxes on the FDE’s income.

The direct owner is the person who’s the legal owner of the FDE and is responsible for the management and the FDE’s legal obligations.

To illustrate this, consider the following example:

Emma is a US citizen living in Canada. Caleb is the owner of Ottawa Inc., a Canadian sole proprietorship. 

A contract between Caleb and Emma allows Emma to operate Ottawa Inc. fully and, in return, receive 100% of the profits, losses, and tax reporting. 

In this case, Emma is the tax owner, and Caleb is the direct owner.

Below is a complete example of Form 8858 based on this hypothetical example, which we break down fully throughout the rest of the article. If it’s helpful, you can print out the following document to cross-reference with the different section explanations.

🚨 It’s important to note that you must complete Form 8858 in English.

Schedule C of Form 8858

Schedule C² is the income statement of the Foreign Disregarded Entity. In this section, you’ll summarize the FDE’s income and expenses for the tax year, include the foreign income tax expense, and indicate the net income or loss.

You must enter the income statement accounts in your functional currency and translate them into US dollars. For translating currency, you should follow US GAAP (generally accepted accounting principals) translation rules or an acceptable exchange rate like published rates from major banks or financial institutions, rates provided by the US Federal Reserve, or rates published by the IRS³.

A little later, you’ll include your chosen exchange rate on Schedule H.

Our example assumes that Emma’s Ottawa, Inc. earned CAD 800,000 in revenue, CAD 50,000 as other income and that the FDE incurred CAD 350,000 as expenses.  

Schedule C-1 of Form 8858

If this section applies, you must report foreign currency gains or losses on certain payments to the owner. Known as Section 987 gains or losses, these calculations can be complicated. Consult with your expat tax professional for assistance with this section.
Schedule F of Form 8858

Schedule F⁴ is a summary of the balance sheet of the FDE at the beginning of the year and the end of the year. Total assets will be the sum of the FDE’S cash and other assets. And you only need to show total liabilities and total owner’s equity. 

Here’s a snapshot using the same example from above.

Note: You need to report amounts in US Dollars in Schedule F. Functional currency reporting is not allowed. 

(Functional currency reporting means to report financial transactions and financial statements in the currency that is considered the primary economic environment in which an entity operates and generates cash flows. This is usually the currency of the country where the entity is located or conducts its primary business operations. In our example, the functional currency would be Canadian dollars.)

Schedule G of Form 8858

Entitled “Other Information,” Schedule G⁵ asks several questions about the FDE. Most of these are simple Yes/No questions for which financial information may only be required if your answer is “Yes.”

Schedule H⁶ of Form 8858

You use this section to report the FDE’s earnings and profits in its functional currency. 

You’ll enter the FDE income on line 1. You can pick this figure up from line 14 on Schedule C you already prepared.  You’ll then incorporate certain tax adjustments on lines 2 and 3, such as depreciation, amortization, and capital gains. 

You’ll make the US Dollar translation on lines 7 and 8.

Schedule I of Form 8858

Note: Schedule I⁷ is only required if a US corporation directly or indirectly owns the FDE.

Schedule J⁸ of Form 8858

Here’s where you finally report foreign taxes paid or accrued by the FDE. Information in this section may help you claim any foreign tax credit you’re eligible for.

Remember, there’s also Schedule M⁹ you should separately attach with Form 8858 if you’re the tax owner of the FDE.

IRS penalties for failure to file Form 8858

If you do not submit Form 8858 with your tax return in a timely manner, you may face IRS penalties. If the IRS requires you to file this form, the IRS will send you a failure to file letter. At this point, you could receive a penalty of $10,000. You then have 90 days to submit Form 8858. After 90 days, if you have not submitted it, the IRS may charge you additional penalties of $10,000 for every additional month the form is late.

Not submitting this form can also impact your individual tax return. The IRS could also penalize you by reducing the amount of applicable foreign tax credits by 10%. This could eliminate your tax refund or land you with a tax bill. Additional monthly credit reductions of 5% could follow after the 90-day period.

Finally, the IRS could also charge you with criminal penalties for not submitting this form. These penalties could lead to additional fines or time in prison. Bright!Tax can help you ensure you meet all of your US tax requirements, offering you peace of mind during tax season.

US expats can catch up on taxes penalty-free with the Streamlined Filing Procedures

If you weren’t aware you needed to file tax returns as a US expat, then you could qualify for penalty relief through the Streamlined Procedures¹⁰. This is a good option to explore if you did not submit your tax returns including business disclosure forms, such as Form 8858.

The Streamlined Procedures can help US expats and other Americans, who did not realize they had to submit past returns, to catch up on their taxes without penalty.

To qualify, you must have lived outside of the US for at least 330 days of the Streamlined filing period (the previous three past-due tax years). You also must have missed the filing deadline because you were unaware of your tax filing requirements or the tax due date. 

For example, if you lived in Argentina for most of 2021 and only returned to the US for three weeks, you would meet the residency requirement for this amnesty program. If you didn’t realize you needed to file US taxes since you lived out of the country, you could qualify for the Streamlined Procedures.

Reduce the stress of filing Form 8858 and foreign business taxes by teaming up with Bright!Tax

Keeping track of your tax requirements as a US expat can feel overwhelming – and it’s even more challenging when business taxes get thrown into the mix.

Bright!Tax makes filing simple by walking you through all of the forms you need to file and helping you secure the best tax breaks and amnesty programs along the way. We’ll take the burden off of you, so you can rest easy knowing that your taxes are compliant.

References

1.  2022 Form 4868 (irs.gov)
2. 2022 Schedule C (Form 1040) (irs.gov)
3.  Yearly Average Currency Exchange Rates | Internal Revenue Service (irs.gov)
4. 2022 Instructions for Schedule F (irs.gov)
5.  2022 Instructions for Schedule G (Form 990) (irs.gov)
6.  2022 Schedule H (Form 1040) (irs.gov)
7.  2022 Schedule I (Form 1041) (irs.gov)
8.  2022 Instructions for Schedule J (2022) | Internal Revenue Service (irs.gov)
9.  2022 Schedule M (Form 990) (irs.gov)
10.  Streamlined Filing Compliance Procedures | Internal Revenue Service (irs.gov)
11.  Delinquent International Information Return Submission Procedures | Internal Revenue Service (irs.gov)

The post Tax Form 8858 and Foreign Disregarded Entities for US Expats appeared first on Bright!Tax Expat Tax Services.

Since the US has a citizenship-based taxation system, American expats must declare their worldwide income and business interests to the IRS every year. Americans who have ownership in a foreign corporation may have to file Form 5471 and report their shares, regardless of where they live. 

This blog post covers everything you need to know about filing Form 5471, from which types of US expats must file the form to the deadlines that come if you don’t comply.  

What is Form 5471? 

Form 5471, which the IRS calls “Information Return of US Persons With Respect To Certain Foreign Corporations”, is an informative return that US taxpayers with shares in a foreign corporation must file. Whether you need to file Form 5471 depends on the percentage of stock you own in a foreign corporation.  

The IRS is very strict about preventing American taxpayers from hiding any foreign assets in other countries. Form 5471 helps the IRS monitor the activity of US citizens who might be directors, officers, or shareholders in foreign corporations.

Click here to download Form 5471

Who must file Form 5471? 

Five types of American taxpayers have to file Form 5471:

• – US person that’s the owner of a Specified Foreign Corporation (SFC) 
• – US person who is an officer or director of a foreign corporation in which a US person owns more than 10% or more of the foreign corporation’s stock
• – Someone that becomes a US citizen or resident while owing 10% or more of a foreign corporation’s stock
• – A US person who had control of a foreign corporation for at least 30 days
• – A US person who owns the stock of a foreign corporation that is a controlled foreign corporation for an uninterrupted period of a minimum of 30 days and who owned that stock on the last day of the tax year

The term “US person” categories all US citizens, residents, partnerships, corporations, and estates or trusts into one group. It can include people who started the US tax year as nonresident aliens but became residents later in the year or married a US citizen. 

You may have questions about what a “controlled foreign corporation” is, which is mentioned in the fourth type of taxpayers who need to file Form 5471. According to the IRS, a company falls under the category of a controlled foreign corporation if:

“More than 50 percent of the total combined voting power of all classes of stock of such corporation entitled to vote, or more than 50 percent of the value of all its outstanding stock, is owned (directly, indirectly, or constructively) by U.S. shareholders on any day during the foreign corporation’s tax year.”

To learn about whether you qualify for Form 5471, make sure to review Form 5471 instructions.

What are the main Form 5471 schedules? 

As an overview of Form 5471, the main schedules that it includes are:

• – Form 5471 Schedule A – Stock of the Foreign Corporation
• – Form 5471 Schedule B – US Shareholders of Foreign Corporations
• – Form 5471 Schedule C – Income Statement
• – Form 5471 Schedule E – Income, War Profits, and Excess Profits: Taxes Paid or Accrued
• – Form 5471 Schedule F – Balance Sheet
• – Form 5471 Schedule G – Other Information
• – Form 5471 Schedule H – Current Earnings and Profits
• – Form 5471 Schedule I – Summary of Shareholder’s Income from Foreign Corporation
• – Form 5471 Schedule J – Accumulated Earnings and Profits of Controlled Foreign Corporations
• – Form 5471 Schedule M – Transactions Between Controlled Foreign Corporation and Shareholders or Other Related Persons
• – Form 5471 Schedule O – Organization or Reorganization of Foreign Corporation, and Acquisitions and Dispositions of its Stock
• – Form 5471 Schedule Q – Report of Controlled Foreign Corporation income by CFC income groups
• – Form 5471 Schedule R – Distributions From a Foreign Corporation

To learn more about which schedule you have to file based on your category as a filer, check out the following table from the IRS here. 

What’s the deadline for filing Form 5471? 

For individual taxpayers, the deadline for filing Form 5471 is the same deadline for filing your tax return – April 15 for those in the US, and June 15th for those who reside abroad. For corporations, the deadline is March 15th. 

What information do I need? 

To file Form 5471, you’ll need to provide your US shareholder identification details and your foreign corporation’s address. Other documents that will be necessary for Form 5471 include:

• – A detailed balance sheet for your foreign corporation’s year-end
• – Information about the corporation’s loans and operations
• – Your foreign income statement converted into USD

You’ll need to use the foreign exchange rates to convert the foreign income into dollars. 

Read more: IRS Exchange Rates for Your Tax Return — Bright!Tax Expat Tax Services

How do I file Form 5471? 

You must file Form 5471 alongside your individual tax return. 

Setting expectations – the IRS believes it should take you around 38 hours to complete Form 5471. Yes, 38 hours. However, if this is your first time filing Form 5471, and you’re still not used to the complexity of the US tax system, it could take much longer. 

What are the fines and penalties for not filing Form 5471? 

Non-compliance may cause you to have to pay a $10,000 fine for each accounting period of your foreign corporation. If you don’t file within 90 days after getting a notice from the IRS, the IRS will include an additional $10,000 in fines for each 30-day period.

The fines for not filing Form 5471 can also extend to the amount you can claim in Foreign Tax Credits. “Any person who fails to file or report all of the information required within the time prescribed will be subject to a reduction of 10% of the foreign taxes available for credit,” says the IRS in their Form 5471 instructions. 

“If the failure continues 90 days or more after the date the IRS mails notice of the failure to the U.S. person, an additional 5% reduction is made for each 3-month period, or fraction thereof, during which the failure continues after the 90-day period has expired,” continues the IRS. 

Get Help from the Right Team of Tax Experts

We know this may seem like a lot of information to take in. After all, the US sure doesn’t have the world’s most understandable and straightforward tax system.  

If you still have questions about filing Form 5471, Bright!Tax is here to help. Contact us today and one of our CPAs will follow up within a couple of hours to assess your tax situation. 

We aim to help you efficiently stay compliant with your tax obligations, with as little stress as possible. Our company has been named “Global US Expat Tax Provider of the Year” five times and has helped Americans in more than 200 countries with their taxes. 

The post Filing Form 5471: Everything You Need to Know appeared first on Bright!Tax Expat Tax Services.

Filing your taxes late often comes with penalties for each month you’re late. There are also additional penalties if you end up owing taxes to the US Government. But, if you’re a US expat, there’s a way to catch up on your tax returns without worrying about penalties stacking up. It’s called the Streamlined Procedure.

Americans living abroad who weren’t aware of the tax filing requirement or deadline could avoid penalties with the Streamlined Procedure. Part of this process includes submitting IRS Form 14653. But what exactly is this tax form and how do you qualify for this tax amnesty program? We’ll explain how Form 14653 could help you get back on track and meet your tax requirements, without worrying about IRS late fees.

What is the Streamlined Procedure?

Before filling out Form 14653, you should understand the Streamlined Procedure and all of its requirements. Short for the Streamlined Filing Compliance Procedures, this process functions as a tax amnesty program for US expats. It’s offered to help Americans living overseas catch up on their taxes, without fear of penalties. 

Through the Streamlined Procedure, you file three past due tax returns. You must also file your last six years of FBARs (Report of Foreign Bank and Financial Accounts), if required. If you own a business, you can also use this process to catch up on past-due business filings, such as the Foreign Disregarded Entities (FDE), Foreign Corporation disclosures, and foreign partnership disclosures. 

In order to qualify for the Streamlined Procedure, you must meet a few criteria. First, you must have a Taxpayer ID number (such as a Social Security Number). Next, the IRS must not have already contacted you about failing to file a previous return. Lastly, you must attest that you did not file due to non-willful conduct. This means you did not file your US taxes because you were unaware that you needed to or you did not know the deadline had passed. This is when Form 14653 comes into play.

What is Form 14653?

This IRS form must be filled out so that you can file for amnesty under the Streamlined Procedure. The official name of Form 14653 is: Certification by US Person Residing Outside of the United States for Streamlined Foreign Offshore Procedures.

Form 14653 certifies that your failure to file your taxes was not a willful act, which means you did not purposefully avoid filing. Any US expat hoping to receive tax amnesty through the Streamlined Procedure must fill out this form.

When you sign this form, you’re signing under penalty of perjury. This means you’re attesting that the information in the form is accurate. If the IRS finds inaccuracies in Form 14653, you could face fines for perjury. 

How to Complete IRS Form 14653

When you file past returns through the Streamlined Procedure, you have to submit delinquent or amended returns along with this form. Since you’ll need information from these tax returns to fill out Form 14653, it’s better to start with your past-due tax returns and then fill out this form last.

Form 14653 is three pages long and has a few distinct sections. First, you’ll start by filling out your personal information. This includes: 

• Your full legal name, as it appears on your Social Security Card
• Your taxpayer ID number (for most people, this is your SSN) 
• You phone number
• Your current mailing address

Then, you’ll list the tax return years you’re filing (in sequential order), followed by the amount of tax and any interest you owe. Lastly, you’ll total up your balances.

If you’re a legal US citizen or resident, you’ll certify if you were outside of the US for 330 days for the tax years of your delinquent returns. If you’re not a legal citizen or resident, you’ll attach an explanation of why you did not meet the substantial presence test under I.R.C. sec. 7701(b)(3). This computation must include the number of days you were in the US for all three years included in your Streamlined Procedure filing. 

At the bottom of page two, you’ll fill out the personal certification section. Here, you’ll provide the reasons why you did not file your tax returns or pay past-due taxes. You should include:

• All reasons why you did not report your income, pay taxes or submit required tax returns and other documents. The IRS asks filers to include all factors, both favorable and unfavorable. These reasons should include details about your individual background, including personal and financial factors.
• An explanation of where the funds in your foreign bank accounts came from and other details on withdrawals, deposits, and reasons for opening the account. It should also include investment and management decisions and the name and contact information of your professional advisor (if you used one).
• Separate explanations of reasons for married filers submitting jointly. 

Lastly, you’ll finish the form by certifying the statements in the form are true (to the best of your recollection) by signing and printing your name and the current date. If someone else prepares your tax forms, they will provide their information below yours. You are signing under penalty of perjury. So you should review and confirm all data is accurate before submitting it to the IRS.

While you can fill out and submit this form on your own (along with your delinquent tax returns and FBARs), if you have any questions about the Streamlined Procedure, Bright!Tax is eager to help! Our expert CPAs can guide you through each step – either through a paid consultation or our Streamlined service offering (they’ll fill out the paperwork for you!). 

What does non-willfulness mean?

It’s important to understand the IRS’s definition of non-willfulness before filling out Form 14653. In order to certify that your failure to file was non-willful, you must not have filed due to good faith misunderstanding or lack of knowledge of the tax requirements.

If you blindly ignored the tax due date, you do not qualify for tax amnesty. So, for example, if you knew you needed to file taxes as an American living in Dubai, but never looked into it when taxes were due, your failure to file would be considered willful. In this case, you would not be able to file under the Streamlined Procedure. And you would be on the hook for any penalties accrued.

However, if you moved abroad in 2021 and did not realize Americans living outside of the US needed to file US taxes, your conduct would be considered non-willful and you might qualify for the Streamlined Procedure.

How long should your certification statement be?

When writing your personal certification statement, it can be tempting to write pages to include all of the relevant contexts. However, all the IRS is looking for here are the individual factors that prevented you from filing your tax return or paying your taxes on time. 

While including all relevant information is important, be concise, when possible. You should reread your statement a couple of times to edit it and pare it down, if needed. You’ll also confirm all the information is accurate.

Partnering with an experienced CPA from Bright!Tax can help you develop a polished, well-formatted certification letter that can improve your chances of receiving amnesty through the Streamlined Procedure.

Should you consider the Streamlined Procedure?

If you have past-due tax returns you haven’t filed and you’re an American citizen living abroad, the Streamlined Procedure is worth considering. As long as you did not file due to ignorance of the requirement, this filing procedure can help you avoid penalties.

In fact, if you qualify, the IRS will waive all tax penalties you might otherwise face for the specified filing years. So, if you did not file your 2019, 2020 and 2021 taxes because you were unaware expats had to file US taxes and you qualify for the Streamlined Procedure, you would not owe the IRS penalty fees for 2019, 2020 and 2021. You would, however, still have to pay any taxes you owe the US Government.

Bright!Tax Can Help you File Form 14653

Navigating the Streamlined Procedure can be tricky. Especially since you have multiple tax returns and possibly some FBARs to file. Completing Form 14653 and fine-tuning your certification statement can also feel overwhelming.

Bright!Tax has nailed down the easiest way to help you complete the Streamlined Procedure. We also make sure Form 14653 is accurate and complete. Our simple four-step process makes it easy for you to get organized and stay involved throughout the process.

First, you’ll register and connect with your Bright!Tax CPA. Then, we’ll let you know which tax documents to upload to our secure Client Organizer. After that, an experienced CPA will prepare your US expat tax returns. Finally, we’ll send you a draft of your tax returns to review and approve. After approval, you’ll receive your final files to print, sign, and mail into the IRS. (Unfortunately, eFiling isn’t available with the Streamlined Procedure!)

Connect with Bright!Tax today to get started and to stop worrying about IRS penalties.

The post Get Caught Up with the Streamlined Procedure: How to File Form 14653 appeared first on Bright!Tax Expat Tax Services.