Liz Zitzow: Far and Away: Offshore Taxation

Economic Stimulus Checks

Times read: 77

06/27/08

By Liz Zitzow -

Are you sick of calls regarding these yet? I know I am.

These cheques are a sore spot with me, in that I find the economic stimulus checks to be one of the worst ideas anyone has ever invented. This is the third time a mid-year tax cheque has been offered in fifteen years. The last two were by Presidents eager for re-election. I'm afraid it was Bush Senior who started the whole ball rolling.

The government stupidly (as far as most economists are concerned) arranged for the cheque to be received mid-year, costing the government millions of dollars in additional IRS administration costs which could have easily been avoided by just folding the stimulus amount into the 2008 Form 1040. These millions of dollars of IRS administration costs come out of our taxpaying dollars, and leave less for more important things like education and health care. At best, it's bread and circuses. At worst, it's an abuse of power by Presidents in their last year of office done solely to get a poorly educated general populace to vote that party in again.

The sad fact is that there will indeed be a line on the 2008 return to claim stimulus refunds for those who did not get them during the summer of 2008, and this will cost several more millions of dollars in further IRS administration costs as many people will try to claim twice and this takes up even more IRS manpower and computer processing time.

Here’s an idea for the people who don’t get a cheque and feel left out. Give yourself your own "stimulus cheque" by reducing one of your estimated tax payments by $300 or $600 or whatever the amount is.

On the plus side, with so many IRS agents beavering away at dealing with economic stimulus cheque inquiries, there's less time for them to be auditing our clients, so perhaps we have that to be grateful for.

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Love Your Greencard? You'd better...

Times read: 191

05/21/08

H.R. 6081, The “HEROES EARNINGS ASSISTANCE AND RELIEF TAX ACT OF 2008" has a hidden agenda that screws you, the Greencard holder, out of all your hard-earned money when you leave the US to return to your home country.

This bill passed the House 403 to 0. Zero. Everybody loves this one. And as always, the writer of the bill, Rep Grassley (NY 15th district Dem) has once again proposed taxing the crap out of people who have no choice and no vote. People who make our country what it is: The hardworking immigrants who live and build the American dream and want to spend a few years back in their home country.

See the technical explanation: http://www.house.gov/jct/x-44-08.pdf

They propose an onerous exit tax on anyone leaving the US with a net worth of over $600,000. They define "anyone" as US citizens and US greencard holders who have had their greencard for at least seven years.

However, greencards can be revoked for noncriminal actions, the most common one being going “back home” to work or to care for an elderly relative. Not only that, but greencards don’t actually confer permanent residency. They expire every ten years and if the holder of the card has not been in the US “enough” when it expires, they are automatically revoked and unrenewable. I find it extremely unfair, indeed, it beggers belief, that (a) INS can revoke a greencard just for going home for a few years and (b) as a result, they will be subject to this ghastly onerous tax. This is taxation without representation, and I believe my great, great, great, great grandfather lost a war over this (though y’all grandpappies won it).

I have written to Grassley, my congressman, and my representative numerous times over the past eight years about this issue, and yet Grassley not only ignores it, he continues to include it in every new bill he bloody well writes.

The law must exempt greencard holders from this taxation, or, if passed as is, must include a provision that makes holding a greencard truly permanent (barring criminal action).

Write to your congressperson. Speak out for the greencard holders who can not vote. If you know Grassley, explain what's wrong with his bill.


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If Disaster Strikes ...

Times read: 339

04/17/08

Welcome back from tax season! I hope you’ve all had a chance to put your feet up and give yourself a day off.

Today’s topic is “When disaster strikes ...” For our clients, it strikes when they move to another country and only get around to “getting their taxes done” around the due date. It’s bad enough for stateside people, but when you’ve moved to another country, this can cost you $10,000’s in lost tax deductions from not setting things up before you move.

Here’s a typical list of uh-ohs I see several times a year:

Client: I’ve got a two-year assignment in the UK, so I set up a bank account there ahead of time to deposit my paycheck. Smart, right?
Me: Wrong! By setting up your bank account in the UK, you’ve just turned 100% of your wages into UK taxable income. Had you set it up in Jersey, Guernsey, or the Isle of Man, you would have saved 40% in UK taxes for the pay you receive for each workday performed outside the UK.

Client: I heard UK tax rates are high, so I stayed on the US payroll and had US taxes withheld instead. Smart right?
Me: No can do. You did the work in the UK, so you actually owe tax in the UK, not the US. Now you’ll have to pay the UK tax and file for a refund of excess US tax paid. Tough luck for you that you won’t have the money to pay your UK tax until Uncle Sam releases your refund.

Client: My wages are £50,000, and I got a bonus of £200,000. I put the whole £200,000 ($400,000) into my UK pension and got an £80,000 ($160,000) tax credit on my UK tax return. Smart, right?
Me: Not really. The US/UK treaty only allows a deduction of the amount you could contribute to a similar US plan, which is usually a 401k plan and thus a measly $15,500. The rest of your income is all taxed in the US. And since you didn’t pay tax on it in the UK, you can’t take a tax credit to offset the US tax. Whammo! Big US tax bill, and no money left to pay it.

Disaster is easily avoidable when clients call first and act second. And if your client is moving to a foreign country – don’t forget to pressure them to get advice before they move on their new country’s taxation regime. Each country has its own bizarre little quirks which could save them $10,000’s by playing the home country’s quirks off against the host country’s.


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Investing Abroad

Times read: 401

03/24/08

One problem that faces Americans living abroad is how and where to invest their money. The foreign country may not recognize a US-tax-free vehicle like an ISA, and the US likewise is not going to confer tax-free status on other countries’ tax-free vehicles. The biggest concern is the local country's equivalent of mutual funds. Investing in Ireland-based unit trusts and investment trusts (equivalent to our mutual funds) results in Passive Foreign Investment Company (PFIC) taxation. The benefits of the 15% rate on dividends and capital gains is lost, and there are penalty charges that can result in a 100% effective net tax on any dividends and capital gains.

That’s why I’m so thrilled about this recent news story: http://www.aiaworldwide.com/database/news/fullStory.php?id=51908. If the US and European governments can agree that these investments, when formed within a financially reputable country, are not actually tax-avoidance vehicles, Americans will be more comfortable investing in their country of residence. Mutual recognition will allow Americans abroad to invest competitively in Europe, something they currently can not do efficiently except through direct share-holdings.


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Certified Exit Planning Advisor

Times read: 412

03/17/08

There's a new qualification in town: The Certified Exit Planning Advisor. Run by the Exit Planning Institute, it seems to be yet another get-rich-quick scheme for the organizers.

A CPA already has all the qualifications and background necessary to help a business owner plan his exit (retirement) from his business. Granted, many CPAs' practices won't focus specifically on exit planning or small and family businesses, and thus won't be well-versed in all the options available. But if you're a smart small business, you've opted to work with a CPA that specializes in small businesses - and thus also understands the exit planning that goes along with it.

Save your pennies and don't go for this license.

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Getting Caught

Times read: 417

03/02/08

Ah, the joys of living in Europe. An hour break between client meetings isn’t being spent at a commercial dime-a-dozen Starbucks. Instead I sit in the Hungarian patisserie eating a bit of, well, I don’t know what it is, but it’s got chocolate and whipped cream and cakey bits and tastes divine. Who knew the Hungarians could give the French a run for their money? There’s me here, and two ladies meeting up for coffee, and two serving gals. Only in Europe would a place having a total of three customers be able to survive year in year out.

And it is in this lovely establishment that I write this week’s installment. Today’s rant and rail is the lovely fun of hidden offshore bank accounts. It’s exceedingly difficult these days for an American to have an offshore bank account that the IRS doesn’t know about. Almost all banks all around the world now participate in extensive money laundering regulations, whereby they check the identity of the account owner and, if American, report your income to the IRS or if European, report your income to your country of residence. Savvy law-breakers set up a series of sham corporations and shell entities to distance themselves from the money so that they can continue to hide it.

In Lichtenstein, a disgruntled employee of one of their banks (famous for client confidentiality and secrecy) last week blew the whistle on some of their biggest clients. Heads rolled at major corporations throughout Germany as “secret” banking clients were revealed to be executives of major corporations.

The idea that it was ever a good or safe idea to hide one’s money is false, however. Someday it always comes to light, and at that point, must be dealt with.

A closing though: In China, tax avoidance is a capital offense. Woe betide any Chinese people caught out by our disgruntled Lichtenstein bank employee.


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New UK tax law affects Americans living in UK.

Times read: 669

02/18/08

The gist of the new tax is that anyone who is not "domiciled" in the UK and has lived in the UK for more than seven years will face either a £30,000 ($60,000) fee to avoid worldwide taxation or a voluntary inclusion of their worldwide income on their income tax return.

It may seem simple enough, but since the payment of tax becomes voluntary, and the only other option is something called a "fee" rather than a "tax", a huge debate is raging between the UK's government and the US's IRS as to whether or not this is a tax for purposes of taking tax credits under the treaty.

The obvious answer is to become tax resident in some third country. I'm expecting a goodly number of my clients will arrange to become tax-resident somewhere that has a solid tax treaty with the UK. Mind you, they can still enter and exit the UK as much as they like - even exceeding the UK's 90 days conferring residency rule - providing it's a solid treaty situation. Then Bob's your uncle; the UK loses some trillion pounds in tax all for the want to collecting an extra £250 million.

The word in this week's Economist is that faced with trillions of pounds of lost other taxes (the annual amount of VAT, income tax, and stamp duty paid by nondoms is in the billions), it would be fiscal suicide for the government to continue with the proposal in its current state. The Economist also predicted Alistair Darling would likely lose face if not his office over this fiasco.

In the meantime, my phone rings off the hook with people who are curious about the implications of this new tax.


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What's the scoop on US taxation of foreign interest?

Times read: 625

01/24/08

In this article, I learned that British bank NatWest beat the IRS for a tax refund of $66 million. WooHoo!

Basically, the US wanted to tax NatWest’s US branch for items exempt under the treaty. They duked it out for quite a while, but eventually the plucky Brits won.

The incident brought to my mind a common error I see on tax returns. Many US citizens and US residents have an offshore account; usually one opened up during a period when they lived abroad. Often that account is in a country with which we have a tax treaty. In those cases, if there is tax withheld, there is often no deduction or tax credit allowed in the US for the tax withheld – because it shouldn’t have been withheld in the first place. The US only allows a tax crdit for a foreign tax that is actually due. If you pay a tax you don’t owe, you don’t get to take a tax credit for it.

When your client is paying a withholding tax on interest income earned in a foreign country with which we have a tax treaty, you should have them file the appropriate papers with either the bank or the country to get their tax withholding refunded. Most times, this is very easy to do. For example, for a UK-based bank, it is a simple one-page declaration filed with the bank rather than the HMRC (the UK equivilent of the IRS), even simpler than our Form W8-BEN that would be filed in the reverse circumstances for a Brit with an account at a bank in America.


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Don't Forget to Report Foreign Bank Accounts

Times read: 863

01/13/08

According to Forbes, Igor Olenicoff, one of the 400 richest people in America, is paying some $52 million in back Federal taxes, interest, and penalties arising from offshore interest and investment income which he neglected to mention to the IRS. Woo hoo!

Igor isn’t alone. Many Americans think that the IRS won’t catch up to them regarding their offshore income, because there aren’t any reporting requirements for the offshore bank to tell the IRS. Not true. Just because there isn’t a 1099 issued, doesn’t mean the IRS can’t find out about it. One way the IRS finds out is the use of credit cards and debit cards that are linked to the offshore bank account, as most of these are processed by VISA and Mastercard, which use a US-based clearing system. Another way is the use of an American mailing address. Yet another way is by reviewing the transfers between a taxpayer's US bank accounts and offshore accounts.

A real problem I have with new clients is that they don’t want to tell me about those offshore accounts because they figure what the IRS doesn’t know, they don’t need to know. It’s our job to stress to our clients the importance of being honest and reporting the income.

The next time you meet with a client who has relatives and family abroad, drill them as to whether they have signature authority over any overseas accounts, even if they don’t own the underlying asset. If they do, report the interest on Schedule B and file Form TD F 90-22.1 if the offshore accounts are over $10,000. You can then let your client know you saved them $100,000’s in penalties for failure to file Form TD F 90-22.1, and voila! You’re the hero who saved the day.


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Happy New Year.

Times read: 564

01/08/08

Back from my holidays now.

And I see that Huckabee's in the lead, with his flat tax. As a tax accountant, that would put me and 200,000 H&R Block employees out of work in fairly short order.

I have to wonder how he thinks a National Sales Tax won't end up with more cheating than the current system. The compliance rate for individuals is close to 98%, thanks in no small part to W2s, 1099s, and a host of other clever tracking mechanisms. Meanwhile, compliance rates on small businesses - primarily ones that get paid in cash - is closer to 60%. It seems illogical to me to shift the tax reporting and tax filing burden from those who do pay to those who don't.

And another New Year's thought: The so-called "Tax Gap". The tax gap includes all the money the IRS is trying to collect but hasn't yet done so. This includes a large number of individuals who haven't filed a 1040 for some years, for whom the IRS computes a balance due on their behalf with the W2s and 1099s that they have to hand. A typical assessment includes tax at regular rates (not capital gains rates) on the gross sales reported on a 1099-B. In actuality, the taxpayer will have a substantial cost basis to credit against the sale, and the sale is likely to be eligible for the 15% capital gains rate. I saw one assessment off by over $1,000,000 a few years ago.

These figures are included in the tax gap, making the tax gap overstated by an unknown amount. The tax gap smaller than advertised. How much smaller? Who knows?

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Last Minute Rushes

Times read: 612

12/12/07

Being overseas, most of our clients have a final drop dead deadline of 15 Dec rather than 15 Oct.

And I've got way too late filers this year!

Next year, I’d like more clients to arrive earlier in the year. Here are the improvements I’ll be making for next year so that I’m not doing dozens of returns when the deadline hits:

1) Reminder calls. Each client will get a reminder email, letter, or call monthly until their information arrives. The reminders will begin when we know their last information has arrived; for example, a client waiting for an October K1 won’t need a reminder before September.

2) We have a guarantee system: If we receive our client’s organizer by date X, we will complete by date Y. The guarantee usually works to get most clients information in, but some don’t always read the organizer. The reminders will include a reminder that our guarantee to complete by the deadline only applies if they send in their information early.

3) Restructure our fees to allow reduced prices for early filers and slow period filers. Any client who has all their info in Jan or Feb should get a discount. Any client who sends all their information on 30 Nov and expects it to be done by 15 Dec is insane.

4) Too many returns this month? This is why I usually put off doing reminders. We’ll still do our reminder calls, but let them know there’s a queue ahead of them.

5) More staff. It’s time to hire some more support staff to do the reminders and handle the voluminous incoming information that will result.

A lot of companies, when faced with lots of tax work to do, hire tax preparers or accountants to do the work. But these are very expensive employees. If someone can be trained to do a task in a day, it's a task that doesn't require an accountant to do. Chances are, when there's too much work to do most companies have enough accountants to handle it. What they don't have are people to do the repetitive non-accounting tasks that are filling up the accountant's day.

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New law makes figuring out interaction between US & UK taxes a pain.

Times read: 538

12/04/07

Whoa! What a week it's been. And it's only Tuesday.

Yesterday, I met with nearly 40 other dual US/UK tax preparers, lawyers, and other interested parties to discuss a nasty new UK tax law that will affect any American or greencard holder who's been living in the UK for more than seven years.

Currently, a "nondomiciled" person resident in the UK pays tax only on UK source income. Most Americans living in the UK are considered "nondoms". The US/UK tax treaty was signed and arranged with this fact in mind.

The proposed new law would require that any "nondomciiled" person resident in the UK for more than seven years must either pay a £30,000 flat fee or else pay tax on their worldwide income. The question is whether opting to pay the £30,000 would constitute a tax for purposes on the treaty. If they opt to pay tax on their worldwide income, as it is an optional income tax (they could opt to pay the £30,000 instead), is this an allowable tax under treaty? Also in question is how this £30,000 would flow through as a tax credit, if at all, to the US return. Well, there were a lot of swings and roundabouts, no conclusions, and a general feeling that they're gonna get you no matter which way you turn.

This is a very gray area, with no precedents yet. Most people earning a typical middle class income aren't going to want to pay to have a revenue ruling on the situation. We're going to have to make an educated best guess (unhappily, slapped with our new requirement to be more likely than not) as to what the IRS may or may not do with taxpayers facing this new UK tax.

Today, I met with five prospective clients and got them to sign on the dotted line for work to be prepared in January. I have yet to crack open a file and crunch any numbers.

Luckily tonight, the hubby isn't coming home for dindins, so that's another three hours of pure number-crunching. And tomorrow's clear of appointments, so that's a good solid eight hours to crunch as well.

My 17 Dec deadline is looming. 17 Dec is my 15 Apr. Overseas filers have until 15 Dec, rather than 15 Oct. And 15 Dec is a Saturday, giving me until Monday 17 Dec. Depending on how many last-minute people finally swing their stuff at me, I'm either going to be totally exhausted or completely wiped out by the 17th. I don't think "relaxed and sipping a chilled wine" is in the cards this year, at least not until I get on the plane at 6 pm and head for the states for the holidays.

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Across the pond

Times read: 495

12/04/07

Well, howdy y’all, from across the pond.

I was born a New Englander, from a long, long line of Yankee citizens on my mother’s side. I moved to the UK on a whim. I was job hunting at the time, and the only limit I put on my Monster.com search was English as the primary language. When an opening came up that screamed my name, I thought it was amazing that anyone in London needed a full-time tax accountant! Of course, I applied. That was some eight or nine years ago. Now I have my own specialist boutique tax practice, handling complex individual tax filings for American citizens living abroad. My typical client is a banker, or owns his or her own company, or perhaps has a substantial trust fund.

We’re all quite well aware that over here we say “lift” instead of “elevator”. And anyone who’s spent some time here knows that there’s a bunch of other confusing words over here. Just watch the reactions you get when you say “Fanny Farmer Cookbook”.

It should therefore come as no surprise to find out that words we use every day, like “income” and “capital gains”, have subtly different meanings as well. In the US, when we say “income”, we generally also mean to include as a subset the category of income known as “capital gains”. In the United Kingdom, the two concepts are considered utterly separate. If you ask for a British client’s income from their UK tax accountant, you’ll get their rental income, but you might never find out about the sale of the residential rental property.

Another curious difference is the number of countries that have a different tax year to the US. This can make converting from foreign account reports to US GAAP and IRS regulations even more difficult. When an Australian person is talking about his or her 2006 Australian tax return, that’s a fiscal year end of 30 June 2006. The United Kingdom is even odder with an end date of 5 April 2006.

In the months to come, I’ll be mouthing off about how poorly conceived tax laws harm innocent people. I’ll answer your tough questions on multinational issues. And I’ll let you in on my secrets to running a successful tax practice.

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