Expatriate Tax Preparation – The Basics
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If you are a US taxpayer living abroad, you will want to hire a firm that specializes in expatriate tax preparation. Many Americans abroad attempt to do their own tax returns or continue to use their existing preparer that lacks extensive experience and knowledge with expatriate tax returns.
Unfortunately, this often results in a tax filing that is incomplete with missing forms and out of compliance potentially subjecting the taxpayer to risk of substantial penalties and a never-ending statute of limitations due to an incomplete return.
Expatriate Tax Preparation – Individual Tax Returns
Many professional tax preparers and online tax software packages will be aware of these forms albeit most do not have more than a rudimentary or basic knowledge and will not be able to provide much guidance or assistance for the taxpayer abroad beyond very basic situations.
- Form 2555: If you qualify, you can use this form to figure your foreign earned income exclusion and your housing exclusion or deduction. You cannot exclude or deduct more than your foreign earned income for the year.
- FBAR or FinCen Form 114: If you have a financial interest in or signature authority over a foreign financial account, including a bank account, brokerage account, mutual fund, trust, or other type of foreign financial account, exceeding certain thresholds, the Bank Secrecy Act may require you to report the account yearly to the Department of Treasury by electronically filing a Financial Crimes Enforcement Network (FinCEN) 114, Report of Foreign Bank and Financial Accounts (FBAR).
- Form 8938: This form is used to report your specified foreign financial assets if the total value of all the specified foreign financial assets in which you have an interest is more than the appropriate reporting threshold.
Complex Forms For Expatriate Tax Preparation
Most tax preparers do not support (nor have any familiarity with) and none of the online tax software options will support these common tax forms that apply to US expats.
If any of these forms apply to your expatriate tax preparation needs, you will want to make sure that your tax professional is qualified to support you in these areas as these forms are innately complex and require specialized training and knowledge.
For example, the IRS estimates that each Form 5471 will require more than 27 hours for preparation (not including recordkeeping); while each Form 8621 (i.e. for each individual foreign mutual fund held) requires 21 hours.
Instructions and published guidance from the IRS and other outside resources are very limited and incomplete and it is very common for the un-experienced to make significant errors and omissions which can delay your statute of limitations indefinitely until corrected.
- Form 5471: If you run your own business in a foreign country and have established a foreign entity separate from yourself (not a sole proprietorship), then depending on your ownership interest (and resulting category or categories applicable) and the type of entity, you generally will have a Form 5471 filing requirement.
- Form 8621 : If you have investments in foreign mutual funds, REITs, ETFs and the like, these investments typically will be classified as Passive Foreign Investment Companies (or PFIC) and subject to punitive tax rules and reporting that are extremely unfavorable.