See also: part 2 – Taxes overboard! Americans reconsider the IRS at the Geneva T party
and part 1: US-Swiss treaty details may not come in time to help US citizens abroad [Update 3, 21 September: note that the IRS has announced it will delay the deadline to 15 October 2009, from 23 September – details here; correction added to point 5 below] Geneva, Switzerland (GenevaLunch) – US citizens and greencard holders living outside the US should be aware of new tax rules, but also new enforcement procedures, according to several groups and tax experts who organized a taxpayers’ information evening 2 September in Geneva: American Citizens Abroad, Democrats Abroad and Republicans abroad. Many US taxpayers living in Switzerland and elsewhere have only gradually become aware during 2009 that the IRS (US tax authority) has imposed new rules, a six-month amnesty that ends 23 September and it is taking a tougher stance with “non-compliant” taxpayers. Rumours have been thick on the ground, but hard facts few.
The situation came to a head at a highly emotional meeting in Geneva Wednesday evening 2 September, when 200 American expatriates, citizens and green card holders, gathered at Webster University to learn about recent shifts in the tax situation, what has brought it about and what the implications are.
The news will come as a surprise to many people who believe they have been compliant but who may well not be, presenters at the Geneva meeting warned.
The status quo for taxpayers abroad has indeed changed, a groundswell that began in 2007, and all the experts consulted by GenevaLunch and those at the Geneva meeting (who, under the rules set for the meeting, cannot be named) believe the IRS will become even tougher. Reasons given: new technology that gives the IRS better hunting tools, political sentiment in the US, and a poor understanding of the situation of many US citizens abroad by US lawmakers, the public and the IRS itself.
Here is what has changed
- Compliance where US taxes are concerned is now clearly defined by the IRS to mean that you have filed taxes for all years (in reality, the past six) with the IRS, but also that you have filed all FBAR forms listing your foreign bank and other financial assets abroad (see below for details), and that you have paid all taxes due.
- The situation informally accepted by the IRS for many years, that allowed non-compliant taxpayers to quietly file late or to try to negotiate a settlement with the IRS, appears to be coming to an end.
- The information the government of the country you reside in can, or will allow your foreign bank to, give to the IRS depends on each country’s treaty with the IRS. Be aware that of the 156 of these the US has negotiated, individually, many are currently being renegotiated. Get a copy of the details. In the case of Switzerland, the details of the new treaty should be published soon, but they are not yet public.
- Income tax liability: who must file? Everyone, is the short answer. If a child has more than $3,500 in assets, he or she must file. If you are married to a non-US citizen, and if your gross income is more than your exemption amount by $3,500, you have a US filing obligation, according to two of the tax consultants at the Geneva meeting.
- FBAR forms: these have existed for some time, originally created to catch money launderers as part of the anti-terrorism laws created after 2001. The government in early 2009 insisted that everyone must file them, for past years, if at any point during the year the amount was over $10,000. The form requires you to provide the numbers for all bank and other financial accounts, listing the highest balance in the account during any given quarter. [Ed. note, replying to a complaint on a forum that this information is inaccurate: to avoid any misunderstanding, the requirement to file these has been in place for years, but what has changed is enforcement, according to the Geneva meeting tax consultants).
You should also be aware of the following:
- If you want to take advantage of the foreign spouse exemption to reduce your US tax liability you must fill out form W7 but you must also go to a US embassy and register the spouse.
- Banks in Switzerland and elsewhere have counseled US clients to put their money in non-US registered mutual funds as a way of avoiding capital gains taxes, a move popular with people planning to retire outside the US, but according to tax consultant at the Geneva meeting “You’ll be taxed at the highest marginal rate, not the capital gains rate, and after 20 years you might end up with nothing. People are told this is a good investment, but it’s not!” if you are a fully compliant taxpayer.
- You are liable for capital gains taxes in the US if you have property outside the country – but many taxpayers are unaware that they could have an exchange rate gains even though they sold their property at a loss.
- If you own a foreign trust, penalties are 30-35 percent if you don’t declare them, and “a lot of these forms are for the most part not well known,” says a consultant who presented at the Geneva meeting.
- Correction 21 September: If you are a US citizen with a foreign company or partnership you have to file FBAR forms, not just for your assets as an individual but for corporate accounts from which you may benefit, and the penalty for failing to do so is $10,000 per year.
- All the rules that apply to US citizens apply to greencard holders and dual nationals.
- If you are married to a non-US citizen you must still file an FBAR form listing your bank accounts outside the US, even if these are joint accounts, to be in line with IRS requirements.
- Some people recommend “Turbo tax”, an online filing program for young people, to avoid the costliness of hiring an accountant who knows the US system as well as that of the country in which you are resident – but it remains unclear if the IRS considers this acceptable.
- A basic difference that remains, between Swiss and US taxes, is that the IRS has more than 1,000 tax forms for its deductibles-heavy system, and few Americans find they can do their own taxes when living abroad if they have a family, while the Swiss form, with few deductibles, can be filled out for a family of four with two cars, a mortgage and a minimal number of assets, online in the space of an hour.