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TAX CHANGES COMING IN 2016: WHAT U.S. EXPATS NEED TO KNOW

December 24, 2015

By Ephraim Moss, Esq. & Joshua Ashman, CPA

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TAX CHANGES COMING IN 2016: WHAT U.S. EXPATS NEED TO KNOW

While the past year did not produce any monumental changes to U.S. tax law, there are a number of noteworthy changes that expats should keep in mind as they enter the 2016 tax year.

First, the bad news…

  • New Passport Revocation Law

On December 4th of this year, President Obama signed a 5-year infrastructure spending bill, which adds new Section 7345 to the Internal Revenue Code, which becomes effective starting in 2016.  This new section authorizes the denial, revocation, or limiting of a delinquent taxpayer’s U.S. passport

According to the law, taxpayers with a “seriously delinquent tax debt” of $50,000 or more (which is to be adjusted for inflation) may have their passports denied, revoked, or otherwise limited.  It’s important to note that the $50,000 minimum debt amount includes interest and FBAR penalties.  With this in mind, it may not be very difficult for late taxpayers to cross the $50,000 threshold rather quickly.

And to make matters worse…

FATCA GROWS IN STRENGTH

As you may have heard or seen in the media, the United States government has ramped up its efforts to combat tax evasion through FATCA, which was enacted in 2010 as part of the HIRE Act. The objective behind FATCA is to combat offshore tax evasion by (1) requiring U.S. citizens, including those living abroad, to report their holdings in foreign financial accounts and their foreign assets on an annual basis to the IRS, and (2) requiring foreign financial institutions (“FFIs”) (which include just about every foreign bank, investment house and even some foreign insurance companies) to report to the IRS the balances in the accounts held by customers who are U.S. citizens.

In support of this effort, the U.S. has signed nearly 80 intergovernmental agreements (“IGAs”) with other countries, which are designed to promote the implementation of the FATCA.  Jurisdictions that have signed IGAs have agreed to implement local measures for gathering and disseminating such information to the IRS.

On September 24th of this year, the IRS announced that the United States had signed competent authority arrangements (“CAAs”) with Australia and the United Kingdom in furtherance of previously signed IGAs with both jurisdictions.  The CAAs with Australia and the UK, however, are the very first of their kind.  These arrangements contain specific provisions regarding exchange of information protocols.  For example, under the arrangements, financial institutions and host country tax authorities are required to utilize the digital International Data Exchange Service (IDES) to exchange FATCA data with the IRS.

This IRS announcement comes on the heels of an earlier press release by the Australian Taxation Office (ATO), which stated that it had, for the first time, transmitted FATCA data to the IRS in accordance with its IGA.  According to the ATO, more than 30,000 financial accounts valued at more than $5 billion (Australian dollars) were provided to the IRS.  In return, the U.S. stated that it would provide Australia with information on Australian-owned accounts located in the United States.

Bottom line – it’s becoming increasingly difficult for U.S. expats with international accounts to elude the reach of the IRS.  If you are tax delinquent, you can face substantial penalties, both civil and criminal, if you are caught. To avoid this fate, the IRS offers several amnesty programs that allow eligible delinquent taxpayers to come clean and potentially pay little or no penalties.

And now for some good news…

IRS LIMITS FBAR PENALTIES

In May of this year, the IRS issued interim guidance to its examiners for implementing procedures to improve the administration of the FBAR, particularly with respect to delinquent FBAR filings.  In general, a non-willful failure to report foreign bank accounts on the FBAR can result in a penalty of $10,000 per account unless there is reasonable cause for failing to file. A willful failure to file can be subject to civil penalties equal to the greater of $100,000 or 50% of the balance in each unreported account.

According to the guidance, the purpose of the FBAR penalty provisions is to establish maximum penalty amounts, leaving the IRS with the discretion to determine the appropriate FBAR penalty amount below the maximum threshold based on the facts and circumstances of each particular case.

For cases involving multiple non-willful violations, the memorandum advises IRS examiners that it may be appropriate to apply one penalty for each open year, regardless of the number of unreported foreign financial accounts.  In such case, the penalty for each year would be limited to $10,000.  For even less egregious cases, the facts and circumstances may indicate that asserting non-willful penalties for each year of delinquency may not be appropriate. In such case, the examiner may assert a single penalty for all years of delinquent FBARs, which is not to exceed $10,000.

If we still have your attention…

SOME FORM DUE DATES AND EXTENSION DATES HAVE BEEN MODIFIED

Some of the important changes made in 2015 include:

Tax Return Due Date – In 2016, the Washington, D.C. holiday Emancipation Day will be celebrated on April 15. This pushes the regular due date for filing the 2015 Form 1040 to Monday, April 18, 2016.

FBAR Due Date – Like in previous tax years, the 2015 FBAR is due by June 30th, 2016, with no extension allowed.  For tax years 2016 and onwards, however, the FBAR due date will be moved to April 15th, but with a maximum extension for a 6-month period ending on October 15th.

Form 3520 Due Date – For tax years 2016 and onwards, the due date of Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, for calendar year filers, will be April 15 with a maximum extension for a 6-month period ending on October 15.

And finally the tax rates you’ve been waiting for…

2015 TAX RATES

In October of 2014, the IRS announced annual inflation adjustments for tax year 2015 for more than 40 tax provisions, including the tax rate schedules, and other tax changes. The announcement is available at IR-2014-104, Oct. 30, 2014. Please see IRS Revenue Procedure 2014-61 for further details about these annual adjustments.

Some highlights include:

  • The tax rate of 39.6 percent affects singles whose income exceeds $413,200 ($464,850 for married taxpayers filing a joint return), up from $406,750 and $457,600, respectively. The other marginal rates – 10, 15, 25, 28, 33 and 35 percent – and the related income tax thresholds are described in the revenue procedure.
  • The standard deduction rises to $6,300 for singles and married persons filing separate returns and $12,600 for married couples filing jointly, up from $6,200 and $12,400, respectively, for tax year 2014. The standard deduction for heads of household rises to $9,250, up from $9,100.
  • The limitation for itemized deductions to be claimed on tax year 2015 returns of individuals begins with incomes of $258,250 or more ($309,900 for married couples filing jointly).
  • The personal exemption for tax year 2015 rises to $4,000, up from the 2014 exemption of $3,950. However, the exemption is subject to a phase-out that begins with adjusted gross incomes of $258,250 ($309,900 for married couples filing jointly). It phases out completely at $380,750 ($432,400 for married couples filing jointly.)
  • For 2015, the foreign earned income exclusion breaks the six-figure mark, rising to $100,800.
  • The maximum foreign housing exclusion for 2015 rises to $14,112.  Adjustments may vary from city to city and are based on the cost of living in each city.

With respect to next year (tax year 2016), the IRS recently announced the annual inflation adjustments for more than 50 tax provisions, including the tax rate schedules, and other tax changes. The October announcement is available at IR-2015-119, Oct. 21, 2015. Please see IRS Revenue Procedure 2015-53 for further details about these annual adjustments.

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