Expat Group Asks For Relief From Expanded Tax Reporting
By all accounts, Trump’s tax reform legislation represents the largest overhaul of the U.S. federal tax system in several decades. The impact is being felt more acutely now that this year’s tax season, which is the first to apply the reforms, is well under way.
One of the initially-overlooked consequences of the reform has been the significant changes to the tax reporting rules. While the Trump administration initially advertised the reform as a simplification of the average American’s tax return, U.S. expats with overseas businesses are now finding out that the tax reform has in many ways done just the opposite – bringing a number of new forms as well as additional complexity with respect to the current forms.
A not-for-profit group called American Citizens Abroad (ACA) made a recent effort to alert the IRS and Treasury to the difficulties expats are having with the new reporting rules.
New Reporting Challenges
In a letter to the IRS and Treasury Department, the ACA focused on the additional complexities that have been added specifically to the Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations.
Interestingly, the ACA estimates that U.S. expats file over one million U.S. federal tax returns each year, with Form 5471 filings likely to be in the thousands.
The ACA points out that the instructions to the 2018 version of the Form 5471 includes an overwhelming thirteen specific law changes impacting the preparation of the form, and that the basic 2018 version of the form has expanded to 16 pages (from 8 in last year’s form), which can increase to potentially 37 pages depending on the circumstances.
It should be noted that a Form 5471 must be filed separately for each CFC, so the additional reporting multiples by the number of CFCs that must be reported. It should also be noted that many of the additional pages on the Form 5471 require new and complex calculations that integrate changes to the CFC rules, including the new GILTI regime and more nuanced foreign tax credit rules.
Request for Relief from the IRS
The ACA’s letter concludes with a request to provide relief to U.S. expats who operate a small business through a foreign corporation, by either: (1) delaying the effective date of the revised Form 5471 until the 2019 tax year for all taxpayers, or (2) applying a small-business exception (below a threshold of aggregated gross receipts of $25 million) to continue to use the pre-2018 version of the Form 5471 for at least this year’s reporting season.
While we view the likelihood of the IRS providing new exceptions to already finalized forms and Treasury regulations not to be very high, we do believe the ACA’s letter is important because it highlights the unprecedented filing challenges facing U.S. expats with businesses overseas.
When it comes to filing tax returns in the U.S., especially in today’s climate of increased reporting complexity, your best bet is to enlist the help of an Expat Tax Professional. You are welcome to contact us for more information.
By Joshua Ashman, CPA & Nathan Mintz, Esq.