The biggest challenge facing Americans living and/or working abroad is the United States Internal Revenue Service. The U.S. is one of the few countries that tax its citizens abroad, and the only one that regularly locks up its people up in prison cells for violations of the tax code.
The Service’s hostility to foreign tax planning and attacks on international business has become legendary over the last five years. Criminal penalties aside, the financial risks for failing to file a report or form on time are extraordinary…some include penalties of up to $50,000 per year, per form. For this reason, many Americans are afraid to hold funds or assets abroad.
Even after determining what forms are required, an ever moving target, figuring your tax liability is like learning a foreign language. “IRS speak” is unique and convoluted…and a distant cousin to the business English you speak every day.
And, once you learn the lingo, applying that language to your situation requires advanced training in accounting and finance.
How much time will it take an average business person to learn the language, organize the accounting, and prepare the forms for a standard foreign corporation return? The IRS estimates you should spend 174 hours to complete Form 5471 and its schedules! That’s about 22 days, working 8 hours per day, while completely ignoring your business, employees, and other obligations.
Note: Time estimates are contained in the instructions for each form. For Form 5471, see page 14 of 17 at http://www.irs.gov/pub/irs-pdf/i5471.pdf
As few international entrepreneurs have the time or energy required to learn this language, some give up and stay onshore and others hand the entire mess over to their accountants and hope for the best. Those who really like to gamble, place their bets on off the shelf software costing anywhere from $25 to $150, with the expectation that the software will guide them through the maze and costly traps safely.
Think about that. Spending $25 to protect themselves from risks of $50,000+ is quite a gamble. Would you do that in any other area of your life or business?
Note: The tax attorneys and enrolled agents at Premier Offshore, Inc. have decades of combined experience in international taxation and we spend about $5,000 per year for professional level tax software.
With that in mind, the objectives of this tax guide are to
1) give you the tools to maximize profits and minimize taxes while working and living abroad,
2) provide a road map to the U.S. forms and reporting requirements, and
3) to point out the landmines of international taxation – costs and risks of failing to keep up with tax compliance.
Armed with this manual, you will be able to structure your business and plan your life abroad to your advantage…and those advantages can be significant. For example, a business owner may be able to reduce or completely eliminate U.S. income tax on his ordinary income while taking a salary tax free of up to $97,600 for 2013. This means no Federal income taxes, no State income taxes, and no employment taxes (payroll, FICA, etc., which add up to 15% in the U.S.).
While you might not become a U.S. tax expert by the end of this guide, you will be better prepared to deal with your tax attorney, CPA or accountant. You will have an understanding of the options available, the forms required, and the questions that must be asked. You will be able to determine if your current preparer is capable of handling your new and more complex tax reporting and, by being better prepared, you should cut down on the time—and fees—spent with your advisor.
In addition to this guide, there are resources available on the IRS website at www.irs.gov.
For example, IRS Publications 593 and 54 should be reviewed by all U.S. ExPats (anyone living and/or working outside of their home country).
Publication 54 is a lengthy document, which goes into the nitty-gritty of overseas taxation—for a summary of the highlights, use Publication 593. Publication 593 can be viewed athttp://www.irs.gov/publications/p593/index.html and Publication 54 is at http://www.irs.gov/publications/p54/index.html.
If you have been living abroad, or had an offshore account, for several years and not been filing your U.S. forms, this guide can help you get in to compliance. However, a complete analysis of your situation should be undertaken by a qualified tax attorney before you file any amended or delinquent tax returns or forms. I suggest you start with the section of this report entitled “2012 IRS Offshore Compliance Program,” then review the IRS website at http://www.irs.gov/uac/2012-Offshore-Voluntary-Disclosure-Program for any new information. After you understand your options, read the rest of this guide to become familiar with your filing obligations and future planning options.
Finally, this guide is focused on your U.S. Federal Taxation issues. It is not meant to help you with
(1) liability for state income taxes;
(2) estate and probate matters;
(3) local taxes of a foreign country; or
(4) the community property laws of the U.S. states or foreign countries.